-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W1XRYkpmVuLQPFLk+1DWQGuVmtD4FCgUCMwPN3tNWvV7IAxxKk+l+K1JZ6LBfgKM 12JFLOb9R38YnyeTw+VTGg== 0000899243-01-000428.txt : 20010224 0000899243-01-000428.hdr.sgml : 20010224 ACCESSION NUMBER: 0000899243-01-000428 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 29 FILED AS OF DATE: 20010221 EFFECTIVENESS DATE: 20010221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH AMERICAN FUNDS CENTRAL INDEX KEY: 0000848103 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-27958 FILM NUMBER: 1551405 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-05797 FILM NUMBER: 1551406 BUSINESS ADDRESS: STREET 1: CYPRESS TREE INVESTMENTS STREET 2: 286 CONGRESS ST CITY: BOSTON STATE: MA ZIP: 02210 BUSINESS PHONE: 6172104520 MAIL ADDRESS: STREET 1: CYPRESS TREE INVESTMENTS STREET 2: 286 CONGRESS ST CITY: BOSTON STATE: MA ZIP: 02210 FORMER COMPANY: FORMER CONFORMED NAME: NORTH AMERICAN SECURITY TRUST DATE OF NAME CHANGE: 19920703 485BPOS 1 0001.txt NORTH AMERICAN FUNDS PROSPECTUSES REGISTRATION NOS. 33-27958, 811-5797 As filed with the Securities and Exchange Commission on February 21, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] PRE-EFFECTIVE AMENDMENT NO. ____ [_] POST-EFFECTIVE AMENDMENT NO. 35 [X] AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] AMENDMENT NO. 37 [X] NORTH AMERICAN FUNDS (Exact Name of Registrant as Specified in Charter) 286 Congress Street Boston, Massachusetts 02210 (800) 872-8037 (Address of Principal Executive Offices) John I. Fitzgerald, Esq. General Counsel North American Funds 286 Congress Street Boston, MA 02210 (Agent for Service) --------------- Copy to: Nori L. Gabert American General Financial Group 2929 Allen Parkway Houston, TX 77019 It is proposed that this filing will become effective (check appropriate box) [_] immediately upon filing pursuant to paragraph (b) [X] on (March 1, 2001) pursuant to paragraph (b) [_] 60 days after filing pursuant to paragraph (a)(1) [_] on (date) pursuant to paragraph (a)(1) [_] 75 days after filing pursuant to paragraph (a)(2) [_] on (date) pursuant to paragraph (a)(2) of rule 485. If appropriate, check the following box: [_] This post-effective amendment designates a new effective date for a previously filed post-effective amendment. PROSPECTUS North American Funds A specialized family of mutual funds managed by experts with your dreams in mind. [(background graphics is a listing of all subadvisors)] MARCH 1, 2001 CLASS A SHARES CLASS B SHARES CLASS C SHARES The Securities and Exchange Commission has not approved or disapproved of these securities or passed on the American adequacy or accuracy of this prospectus. Any representation General to the contrary is a criminal offense. Financial Group U.S. Equity Funds Growth & Income Fund Large Cap Growth Fund Mid Cap Growth Fund Mid Cap Value Fund Science & Technology Fund Small Cap Growth Fund Small Cap Index Fund Socially Responsible Fund Stock Index Fund International/Global Equity Funds Global Equity Fund International Equity Fund International Small Cap Fund Balanced Funds Balanced Fund LifeStyle Funds Aggressive Growth LifeStyle Fund Conservative Growth LifeStyle Fund Moderate Growth LifeStyle Fund Income Funds Core Bond Fund High Yield Bond Fund Municipal Bond Fund Strategic Income Fund U.S. Government Securities Fund Money Market Funds Money Market Fund Municipal Money Market Fund [LOGO] Table of Contents Organization of Information This Prospectus includes information about 23 different Funds. . Section I includes a summary of each Fund. . Section II includes additional information about the Funds' investment strategies, additional risk information and information about the Funds' management. . Section III includes information about how to invest and manage your North American Funds account. . Section IV includes our privacy notice and other information. Section I: Summaries of the Funds............. Page 1 . Investment Objective . Principal Investment Strategies . Main Risks . Investment Performance . Description of Main Risks North American Funds U.S. Equity Funds Growth & Income Fund Page 2 Large Cap Growth Fund Page 3 Mid Cap Growth Fund Page 4 Mid Cap Value Fund Page 5 Science & Technology Fund Page 6 Small Cap Growth Fund Page 8 Small Cap Index Fund Page 9 Socially Responsible Fund Page 10 Stock Index Fund Page 11 International/Global Equity Funds Global Equity Fund Page 12 International Equity Fund Page 13 International Small Cap Fund Page 14 Balanced Funds Balanced Fund Page 15 Lifestyle Funds Aggressive Growth LifeStyle Fund Page 16 Conservative Growth LifeStyle Fund Page 18 Moderate Growth LifeStyle Fund Page 20 Income Funds Core Bond Fund Page 22 High Yield Bond Fund Page 24 Municipal Bond Fund Page 25 Strategic Income Fund Page 26 U.S. Government Securities Fund Page 27 Money Market Funds Money Market Fund Page 28 Municipal Money Market Fund Page 29 Section II: Other Information About Each Fund.......................................... Page 33 . Fees and Expenses . More Information About Investment Strategies . Other Risks of Investing . Fund Management Section III: Investing in the Funds........... Page 55 This section includes the information you need about how to invest and how to redeem shares. It also includes other important information about sales charges, pricing of fund shares, dividends and distributions, taxes and account privileges. Section IV: Privacy Notice and Other Information................................... Page 64
Additional Information If you'd like information additional to that included in this Prospectus, the back cover lists a number of places to call or to visit for additional materials. Section I: Fund Summaries North American Funds (the "Trust") is a group of mutual funds that includes 24 separate investment portfolios, or Funds, 23 of which are described in this prospectus. Each Fund has a specific investment objective. Each Fund also has a subadvisor, a firm responsible for making investment decisions for the Fund. The summaries on the next 28 pages describe each Fund's investment objective and principal investment strategies, list the main risks (in alphabetical order) of investing in the Fund, and show the Fund's past investment performance. Explanations of the main risks of investing in each Fund start on page 30. Below the Funds' descriptions are a bar chart and a table. The bar chart shows each Fund's annual return of one class of shares for each full calendar year in the life of the Fund. The bar chart does not reflect any sales charges that you may be required to pay upon purchase or redemption of a Fund's shares. Any sales charge will reduce your return. The table (the Average Annual Total Return Table) following each bar chart shows how that Fund's average annual returns for each class of shares for the last one, five and ten years (or since the Fund began, for newer Funds) com- pared to returns of a broad-based securities market index. The table reflects sales charges, including the maximum initial sales charge for Class A shares, and the maximum applicable Deferred Sales Charge for Class B shares and Class C shares. Certain Funds do not show performance information for Class C shares because a full calendar year of performance information does not exist with respect to Class C shares of such Funds. Each Fund's bar chart and table provide indications of the historical risk/return of an investment in the Fund. It is important to remember that past performance does not predict future per- formance and that, as with any investment, it is possible to lose money by investing in the Funds. An investment in any of the Funds is not a deposit in a bank and is not insured by the Federal Deposit Insurance Corporation or any other government agency. - ------ 1 Growth & Income Fund Investment Goal and Strategies The investment objective of the Growth & Income Fund is to provide long-term growth of capital and income consistent with prudent investment risk. Wellington Management Company, LLP ("Wellington Management"), the Fund's subadvisor, pursues this objective by investing mostly in a diversified portfolio of common stocks of U.S. issuers that Wellington Management believes are of high quality. High quality companies are companies that Wellington Management believes have solid balance sheets, strong management teams, consistent earnings growth and market leadership in their industry. The Fund will typically invest in dividend-paying stocks of larger companies. The Fund may invest up to 20% of its total assets in foreign securities. To select stocks for the Fund, Wellington Management assesses a company and its business environment, management, balance sheet, income statement, anticipated earnings and dividends, and other related measures of fundamental value. Wel- lington Management will also monitor and evaluate the economic and political climate and the principal securities markets of the country in which each com- pany is located. The Fund may participate in the initial public offering ("IPO") market, and a portion of the Fund's returns may be attributable to the Fund's investments in IPOs. There is no guarantee that as the Fund's assets grow it will be able to experience significant improvement in performance by investing in IPOs. Main Risks . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally, including, in particular, the risks associated with value stocks and the risk that the stocks the Fund buys may stop paying dividends) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. Wellington Management has been the subadvisor to the Fund since its inception. The bar chart shows year-to- year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR C SHARES Annual Total Return 1992...........8.29% 1993...........9.20% 1994...........2.11% 1995..........26.78% 1996..........20.90% 1997..........31.64% 1998..........25.39% 1999..........16.74% 2000......... -8.86% BEST QUARTER: QUARTER ENDED 12/31/98 20.06% WORST QUARTER: QUARTER ENDED 9/30/98 -9.81% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Life of Fund Life of Fund Past One Year Past Five Years (Class A & B) (Class C) - --------------------------------------------------------------------------- Class A -13.60% 15.58% 16.08% - --------------------------------------------------------------------------- Class B -13.46% 16.04% 16.47% - --------------------------------------------------------------------------- Class C -9.77% 16.25% 14.16% - --------------------------------------------------------------------------- S&P 500 -9.10% 18.33% 21.92% 16.40% Index(TM)
- -------------------------------------------------------------------------------- Inception dates: Class A and Class B - 4/1/94; Class C - 5/1/91 ------- 2 Large Cap Growth Fund (formerly Growth Equity Fund) Investment Goal and Strategies The investment objective of the Large Cap Growth Fund is to seek long-term cap- ital growth. To achieve this goal, Founders Asset Management LLC ("Founders"), the Fund's subadvisor, invests at least 65% of the Fund's total assets in the common stocks of well-established, high-quality growth companies whose earnings are expected by Founders to increase faster than the market average. These companies tend to have strong performance records, solid market posi- tions, reasonable financial strength, and continuous operating records of three years or more. Main Risks . Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally, including, in particular, the risks associated with growth stock and investing in IPOs) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Sector Risk (the risk that securities of companies within specific sectors of the economy can perform differently than the overall market) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. Founders has been the subadvisor to the Fund since its inception. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..........25.37% 1998..........25.13% 1999..........38.37% 2000.........-27.69% BEST QUARTER: QUARTER ENDED 12/31/99 31.53% WORST QUARTER: QUARTER ENDED 12/31/00 -24.47% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Life of Fund Past One Year (Since 3/4/96) - ------------------------------------------------- Class A -31.85% 11.23% - ------------------------------------------------- Class B -31.76% 11.63% - ------------------------------------------------- Class C -28.89% 11.89% - ------------------------------------------------- S&P 500 Index(TM) -9.10% 17.96%
- -------------------------------------------------------------------------------- - ------ 3 Mid Cap Growth Fund (formerly Small/Mid Cap Fund) Investment Goal and Strategies The investment objective of the Mid Cap Growth Fund is to seek long-term capi- tal appreciation. INVESCO Funds Group, Inc. ("INVESCO"), the Fund's subadvisor, invests primarily in common stocks of mid-sized companies--those with market capitalizations ranging from approximately $2 billion to $15 billion at the time of purchase--but also has the flexibility to invest in other types of securities including preferred stocks, convertible securities and bonds. The core of the Fund's portfolio will be invested in securities of established com- panies that are leaders in attractive growth markets with a history of strong returns. The remainder of the portfolio will be invested in securities of com- panies that show accelerating growth, driven by product cycles, favorable industry or sector conditions and other factors that the subadvisor believes will lead to rapid sales or earnings growth. The Fund's strategy relies on many short-term factors including current information about a company, investor interest, price movements of a company's securities and general market and mon- etary conditions. Consequently, the Fund's investments will usually be bought and sold frequently, which may cause the Fund to incur higher trading costs and/or to have a relatively high amount of short-term capital gains, which are generally taxable to you at your ordinary income tax rate. The Fund may invest up to 25% of its total assets in foreign securities and will be subject to certain risks as a result of these investments. The Fund may also purchase ADRs, U.S. dollar-denominated securities of foreign issuers or Canadian securities that are not included in the 25% foreign securities limita- tion. Main Risks . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally, including, in particular, the risks associated with invest- ing in smaller companies) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. INVESCO assumed subadvisory duties March 13, 2000. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..........15.89% 1998..........29.65% 1999..........32.20% 2000.........-13.03% BEST QUARTER: QUARTER ENDED 12/31/99 30.15% WORST QUARTER: QUARTER ENDED 12/31/00 -24.88% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Life of Fund Past One Year (3/4/96) - ---------------------------------------------------- Class A -18.03% 11.75% - ---------------------------------------------------- Class B -17.94% 12.05% - ---------------------------------------------------- Class C -14.51% 12.34% - ---------------------------------------------------- Russell 2000 Index(TM) -3.02% 15.33%
- -------------------------------------------------------------------------------- ------ 4 Mid Cap Value Fund Investment Goal and Strategies The investment objective of the Mid Cap Value Fund is to seek capital growth. Neuberger Berman Management, Inc. ("NBM"), the Fund's subadvisor, pursues this objective by investing at least 65% of the Fund's total assets in equity secu- rities of medium capitalization companies using a value-oriented investment approach. Medium capitalization companies include companies with the characteristics of companies included in the Russell MidcapTM Index. As of December 31, 2000, the largest company included in the Russell MidcapTM Index had an approximate mar- ket capitalization of $23.6 billion, while the average market capitalization was approximately $7.8 billion. NBM chooses securities it believes are undervalued based on strong fundamen- tals, including a low price-to-earnings ratio, consistent cash flow, and the company's track record through all parts of the market cycle. When selecting securities for this Fund, NBM also considers other factors, including ownership by a company's management of the company's stock and the dominance of a company in its particular field. Up to 35% of the Fund's total assets may be invested in other equity securities, including common and preferred stocks, convertible securities, and related equities. The Fund may invest in derivatives. The Fund may participate in the initial public offering ("IPO") market, and a portion of the Fund's returns may be attributable to the Fund's investments in IPOs. There is no guarantee that as the Fund's assets grow it will be able to experience significant improvement in performance by investing in IPOs. Main Risks . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally including, in particular, the risks of investing in IPOs) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. NBM has been the subadvisor to the Fund since its inception. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, and investment strategies and policies as does the Fund, and was also subadvised by NBM. CALENDAR YEAR TOTAL RETURNS FOR C SHARES Annual Total Return 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........23.96% 2000..........29.55% BEST QUARTER: QUARTER ENDED 6/30/99 16.58% WORST QUARTER: QUARTER ENDED 9/30/99 -11.34% - -------------------------------------------------------------------------------- Average Annual Returns as of 12/31/00 Life of Fund Life of Fund Past One Year (Class A & B) (Class C) - ---------------------------------------------------------------- Class A 22.10% 25.23% - ---------------------------------------------------------------- Class B 23.57% 25.98% - ---------------------------------------------------------------- Class C N/A 14.42%+ - ---------------------------------------------------------------- Russell Midcap Value 19.18% 11.67% 17.27%+ Index(TM)
- -------------------------------------------------------------------------------- Inception dates: Class A and Class B - 11/02/98; Class C - 7/31/00 + Not annualized - ------ 5 Science & Technology Fund Investment Goal and Strategies The objective of the Science & Technology Fund is long-term capital apprecia- tion. The Fund's subadvisor, T. Rowe Price Associates, Inc. ("T. Rowe Price"), pur- sues this objective by investing at least 65% of the Fund's total assets in the common stocks of companies expected to benefit from the development, advancement, and use of science and technology. Some of the industries that are likely to be included in the portfolio are: . electronics, including hardware, software, and components . communications . e-commerce . information services . media . life sciences and health care . environmental services . chemicals and synthetic materials . defense and aerospace Stock selection reflects a growth approach and is based on intensive research that assesses a company's fundamental prospects for above average earnings. Holdings can range from small companies developing new technologies to blue chip firms with established track records of developing and marketing technol- ogy. Investments may also include companies that are expected to benefit from technological advances even if they are not directly involved in research and development. The Fund may invest up to 30% of its assets in foreign securities, including American Depositary Receipts ("ADRs") and other dollar-denominated foreign securities. The Fund may also invest in other equity-related securities of science and technology companies, including convertible debt securities and convertible preferred stock. In addition, the Fund may invest in money market securities in order to have cash available for redemptions. The Fund may invest in derivatives. The Fund may participate in the initial public offering ("IPO") market, and a portion of the Fund's returns may be attributable to the Fund's investments in IPOs. There is no guarantee that as the Fund's assets grow it will be able to experience significant improvement in performance by investing in IPOs. The Fund's investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and a higher amount of short-term capital gains, which are generally taxable to you at your ordi- nary income tax rate. Main Risks . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally including, in particular, the risks of investing in IPOs) . Foreign Investment Risk (the risk that the value of the Fund's foreign investments will decline as a result of foreign political, social or economic changes) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regu- lar basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Science & Technology Company Risk (the risk that the prices of securities of science and technology companies will be particularly volatile) . Unseasoned Company Risk (the level of risk will rise to the extent that the Fund has significant exposure to smaller or unseasoned companies (those with less than a three-year operating history, which may not have established products or more experienced management)) ------ 6 Fund Performance and Prior Performance of Similar Accounts The Fund commenced operations on March 1, 2000 and was reorganized on July 7, 2000, when a corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") was reorganized into the Fund. The performance information shown below in the table reflects the Fund's return of Class A and Class B shares since the inception date of the AGSPC2 Fund on March 1, 2000, and for Class C shares since July 12, 2000. The performance information shown below in the bar chart and the table is for the North American--T. Rowe Price Science & Technology Fund and the T. Rowe Price Science & Technology Fund, and not that of the Fund, or the AGSPC2 Fund, which had not completed a full year of operations on October 31, 2000. The North American--T. Rowe Price Science & Technology Fund is sold as an annu- ity only to registered and unregistered separate accounts of The Variable Annu- ity Life Insurance Corporation ("VALIC") and its affiliates or employee thrift plans maintained by VALIC or American General Corporation. The returns shown reflect investment management fees and other Fund expenses, and do not reflect any charges included in the annuity contract or variable life insurance policy for mortality and expenses guarantees, administrative fees or surrender charges. The T. Rowe Price Science & Technology Fund is sold to the general public. The Fund's investment objective, policies, and strategies are substantially similar to those employed by T. Rowe Price Associates, Inc. for the North Amer- ican--T. Rowe Price Science & Technology Fund, and for the T. Rowe Price Sci- ence & Technology Fund. Investments made by the Fund, may not be the same as those made by the North American--T. Rowe Price Science & Technology Fund or the T. Rowe Price Science & Technology Fund. Each of the funds will have different performance results, due to factors such as the cash flow in and out, different fees and expenses, and diversity in portfolio size and positions. Past performance shown is no guarantee of similar future performance for the Fund. The bar charts show the annual returns and performance for each full calendar year since inception of the North American--T. Rowe Price Science & Technology Fund, and for the past ten years for the T. Rowe Price Science & Technology Fund, assuming reinvestment of dividends and distributions. Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..............0% 1995..........61.66% 1996..........13.81% 1997...........2.61% 1998..........42.13% 1999.........100.95% 2000.........-34.13% . North American - T. Rowe Price Science & Technology Fund BEST QUARTER: QUARTER ENDED 12/31/98 48.04% WORST QUARTER: QUARTER ENDED 12/31/00 -31.83% Annual Total Return 1991..........60.17% 1992..........18.76% 1993..........24.25% 1994..........15.79% 1995..........55.53% 1996..........14.23% 1997...........1.71% 1998..........42.35% 1999.........100.99% 2000.........-34.19% . T. Rowe Price Science & Technology Fund BEST QUARTER: QUARTER ENDED 12/31/98 47.69% WORST QUARTER: QUARTER ENDED 12/31/00 -32.28% - --------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/00 1 Year 5 Years 10 Years Since Inception - -------------------------------------------------------------------- Class A N/A N/A N/A -19.20%+ - -------------------------------------------------------------------- Class B N/A N/A N/A -19.70%+ - -------------------------------------------------------------------- Class C N/A N/A N/A -7.78%+ - -------------------------------------------------------------------- North American - T. Rowe Price Science & Technology Fund -34.13% 17.05% N/A 25.13% (4/29/94) - -------------------------------------------------------------------- T. Rowe Price Science & Technology Fund -34.19% 16.95% 25.00% 20.47% (9/30/87) - -------------------------------------------------------------------- S&P 500 Index Class A & B N/A N/A N/A -4.27% - -------------------------------------------------------------------- Class C N/A N/A N/A -11.56% - -------------------------------------------------------------------- North American- T. Rowe Price Science & Technology Fund -9.10% 18.33% 17.46% 17.47% (4/29/94) - -------------------------------------------------------------------- T. Rowe Price Science & Technology Fund -9.10% 18.33% 17.46% 11.10% (9/30/87)
- -------------------------------------------------------------------------------- Inception dates: Class A and Class B - 3/1/00; Class C - 7/12/00 + Not annualized - ------ 7 Small Cap Growth Fund (formerly Emerging Growth Fund) Investment Goal and Strategies The investment objective of the Small Cap Growth Fund is maximum capital appre- ciation. Credit Suisse Asset Management, LLC ("Credit Suisse") the Fund's subadvisor, pursues this objective by investing at least 65% of its total assets in equity securities of small U.S. companies. The Fund considers a "small" company to be one whose market capitalization is within the range of capitalizations in the Russell 2000 Index. As of December 31, 2000, market cap- italizations of Russell 2000 companies ranged from $3.3 million to $6.1 billion. The Fund may also invest in emerging growth companies--small or medium-sized companies with growth characteristics such as positive earnings and potential for accelerated growth. The Fund may also invest in investment grade bonds, and, to a certain extent, in foreign securities. The Fund is not "diversified," which means that it may invest in a relatively small number of issuers of securities, and its value may be affected very sig- nificantly by the change in value of a single security. The Fund may participate in the initial public offering ("IPO") market, and a portion of the Fund's returns may be attributable to the Fund's investments in IPOs. There is no guarantee that as the Fund's assets grow it will be able to experience significant improvement in performance by investing in IPOs. The Fund's investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and/or a higher amount of short-term capital gains, which are generally taxable to you at your ordi- nary income tax rate. Main Risks . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally, including, in particular, the risks associated with invest- ing in smaller companies and in IPOs) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Non-Diversification Risk (the risk that investing in a smaller number of secu- rities increases investment risks) . Sector Risk (the risk that securities of companies within specific sectors of the economy can perform differently than the overall market) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. Credit Suisse has been the subadvisor to the Fund since its inception. The bar chart shows year-to- year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........73.13% 2000..........-1.17% BEST QUARTER: QUARTER ENDED 12/31/99 45.94% WORST QUARTER: QUARTER ENDED 9/30/98 -22.58% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Life of Fund Past One Year (since 1/6/98) - --------------------------------------------------------- Class A -6.85% 17.71% - --------------------------------------------------------- Class B -6.76% 18.00% - --------------------------------------------------------- Class C -3.00% 18.93% - --------------------------------------------------------- Russell 2000 Growth -22.43% 4.29% Index(TM)
- -------------------------------------------------------------------------------- ------ 8 Small Cap Index Fund Investment Goal and Strategies The Small Cap Index Fund seeks to provide investment results that are similar to the total return of the Russell 2000(TM) Index (the "Index"). American Gen- eral Investment Management, L.P. ("AGIM") acts as the subadvisor to the Fund. The Index is a sub-index of the Russell 3000(TM) Index, which follows the 3,000 largest U.S. companies based on total market capitalization. The Index measures the performance of the 2,000 smallest companies in the Russell 3000(TM) Index, and represents about 8% of the total market capitalization of the Russell 3000(TM) Index. The average market capitalization in the Index was $1.09 bil- lion as of December 31, 2000. As of the same date, the largest company in the Index had a market capitalization of nearly $6.12 billion. Generally, an index fund tries to mirror the target index and its performance. An index fund's performance will not exactly match that of an index because the index fund incurs operating expenses and other investment overhead as part of its normal operations. The index is an unmanaged group of securities, so it does not have these expenses. These differences between an index fund and its index are called tracking differences. The tracking differences are reviewed monthly by AGIM for the Fund. If the Fund does not accurately track an index, AGIM will rebalance the Fund's portfolio by selecting securities which will provide a more representative sampling of the securities in the index as a whole or the sector diversification within the index, as appropriate. Financial futures will be used to hedge cashflows and maintain liquidity in the Fund's portfolio. Main Risks . Derivatives Risk (the risk that the value of the Fund's derivative investments will decline as a result of imperfect correlation or improper valuation). Although financial futures track the underlying Index fairly closely there is the risk that, at times, their results will diverge from the Index. . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally, including, in particular, the risks associated with invest- ing in smaller companies) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, and investment strategies and policies as does the Fund, and was also managed by the same portfolio managers. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........18.35% 2000..........-6.93% BEST QUARTER: QUARTER ENDED 12/31/99 17.15% WORST QUARTER: QUARTER ENDED 12/31/00 -7.10% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Life of Fund Life of Fund Past One Year (Class A & B) (Class C) - ------------------------------------------------------------- Class A -12.28% 6.22% - ------------------------------------------------------------- Class B -12.34% 6.62% - ------------------------------------------------------------- Class C N/A -6.83%+ - ------------------------------------------------------------- Russell 2000 Index(TM) -3.02% 13.45% -6.63%+
- -------------------------------------------------------------------------------- Inception dates: Class A and Class B - 11/2/98, Class C - 8/23/00 + Not annualized - ------ 9 Socially Responsible Fund Investment Goal and Strategies The investment objective of the Socially Responsible Fund is to seek to obtain growth of capital. To achieve this objective, American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor, invests at least 80% of the Fund's total assets in the equity securities of companies meeting social criteria estab- lished for the Fund. To find out which companies meet the Fund's social crite- ria, AGIM relies on industry classifications and research services such as the Investor Responsibility Research Center. The Fund does not invest in companies that are significantly engaged in: . the production of nuclear energy; . the manufacture of weapons or delivery systems; . the manufacture of alcoholic beverages or tobacco products; . the operation of gambling casinos; or . business practices or the production of products that significantly pollute the environment. Up to 20% of the Fund's total assets may be invested in high quality money mar- ket securities and warrants, or in other types of equity securities of compa- nies meeting social criteria, including American Depositary Receipts, foreign securities, preferred stock, and convertible securities. The Fund may invest in derivatives. Main Risks . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Social Criteria Risk (the risk that securities of companies meeting the Fund's social criteria will underperform the market generally) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, and investment strategies and policies as does the Fund, and was also managed by the same portfolio managers. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........18.30% 2000.........-10.41% BEST QUARTER: QUARTER ENDED 12/31/99 14.11% WORST QUARTER: QUARTER ENDED 12/31/00 -7.25% - -------------------------------------------------------------------------------- Average Annual Returns as of 12/31/00
Life of Fund Life of Fund Past One Year (Class A & B) (Class C) - ------------------------------------------------------------- Class A -15.56% 4.63% - ------------------------------------------------------------- Class B -15.46% 5.02% - ------------------------------------------------------------- Class C N/A -8.03%+ - ------------------------------------------------------------- S&P 500 Index(TM) -9.10% 10.21% -8.92%+
- -------------------------------------------------------------------------------- Inception dates: Class A and Class B - 11/2/98; Class C - 7/28/00 + Not annualized ------- 10 Stock Index Fund Investment Goal and Strategies The Stock Index Fund seeks to provide investment results that are similar to the total return of the S&P 500 Index (the "Index"). American Investment Man- agement, L.P. ("AGIM") acts as the subadvisor to the Fund. The Index is composed of 500 common stocks which are chosen by Standard & Poor's Corporation ("S&P"). The Index approximates the general distribution of industries in the U.S. economy, and captures the price performance of a large cross-section of the publicly traded stock market. The Index is capitalization- weighted, meaning that it holds each stock in proportion to its total value in the stock market. Generally, an index fund tries to mirror the target index and its performance. An index fund's performance will not exactly match that of an index because the index fund incurs operating expenses and other investment overhead as part of its normal operations. The index is an unmanaged group of securities, so it does not have these expenses. These differences between an index fund and its index are called tracking differences. The tracking differences are reviewed monthly by AGIM for the Fund. If the Fund does not accurately track an index, AGIM will rebalance the Fund's portfolio by selecting securities which will provide a more representative sampling of the securities in the index as a whole or the sector diversification within the index, as appropriate. Financial futures will be used to hedge cashflows and maintain liquidity in the Fund's portfolio. Main Risks . Derivatives Risk (the risk that the value of the Fund's derivative investments will decline as a result of imperfect correlation or improper valuation). Although financial futures track the underlying Index fairly closely there is the risk that, at times, their results will diverge from the Index. . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, and investment strategies and policies as does the Fund, and was also managed by the same portfolio managers. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........20.39% 2000..........-9.92% BEST QUARTER: QUARTER ENDED 12/31/99 14.39% WORST QUARTER: QUARTER ENDED 12/31/00 -7.97% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Life of Fund Life of Fund Past One Year (Class A & B) (Class C) - ------------------------------------------------------------- Class A -15.10% 6.07% - ------------------------------------------------------------- Class B -14.97% 6.22% - ------------------------------------------------------------- Class C N/A -13.38%+ - ------------------------------------------------------------- S&P 500 Index(TM) -9.10% 10.21% -12.56%+
- -------------------------------------------------------------------------------- Inception dates: Class A and Class B - 11/2/98; Class C - 7/17/00 + Not annualized - ------- 11 Global Equity Fund Investment Goal and Strategies The investment objective of the Global Equity Fund is long-term capital appre- ciation. To achieve this objective, Founders Asset Management, LLC ("Found- ers"), the Fund's subadvisor, invests in a globally diversified portfolio of equity securities. The Fund normally invests at least 65% of total assets in equity securities of growth companies in a variety of markets throughout the world. The Fund may purchase securities in any foreign country, as well as the United States, and emphasizes common stocks of both emerging and established growth companies that generally have proven performance records and strong market positions. The Fund's portfolio will always invest at least 65% of its total assets in three or more countries. The Fund will not invest more than 50% of its total assets in the securities of any one foreign country. The Fund may participate in the initial public offering ("IPO") market, and a portion of the Fund's returns may be attributable to the Fund's investments in IPOs. There is no guarantee that as the Fund's assets grow it will be able to experience significant improvement in performance by investing in IPOs. Main Risks . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally, including, in particular, the risks associated with invest- ments in growth stocks and in IPOs) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Sector Risk (the risk that securities of companies within specific sectors of the economy can perform differently than the overall market) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. Founders assumed subadvisory duties March 13, 2000. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR C SHARES Annual Total Return 1991............11.34% 1992............-2.87% 1993............29.56% 1994.............1.20% 1995.............6.43% 1996............10.71% 1997............19.98% 1998............10.59% 1999.............2.33% 2000...........-30.97% BEST QUARTER: QUARTER ENDED 12/31/99 15.23% WORST QUARTER: QUARTER ENDED 9/30/98 -14.54% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Past Past Life of Fund Life of Fund One Year Five Years Ten Years (Class A & B) (Class C) - --------------------------------------------------------------------------- Class A -34.61% 0.11 % 0.82% - --------------------------------------------------------------------------- Class B -34.41% 0.35% 1.16% - --------------------------------------------------------------------------- Class C -30.67% 0.74% 4.59% 4.53% - --------------------------------------------------------------------------- MSCI WORLD -13.18% 12.12% 10.22% 11.16% 10.04% Index(TM)
- -------------------------------------------------------------------------------- Inception dates: Class A and Class B - 4/1/94; Class C - 11/1/90 ------- 12 International Equity Fund Investment Goal and Strategies The investment objective of the International Equity Fund is to seek long-term capital appreciation. Morgan Stanley Asset Management ("MSAM"), the Fund's subadvisor, pursues this objective by investing primarily, in accordance with country and sector weightings determined by MSAM, in equity securities of non- U.S. issuers which, in the aggregate, replicate broad market indices. MSAM seeks to maintain a diversified portfolio of international equity securi- ties based on a top-down approach that emphasizes country and sector selection and weighting rather than individual stock selection. MSAM capitalizes on the significance of country and sector selection in international equity portfolio returns by over- and underweighting countries and/or sectors based primarily on three factors: (i) valuation, (ii) fundamental change, and (iii) market momentum/technicals. The Fund may use various instruments that derive their values from those of specified securities, indices, currencies or other points of reference for both hedging and non-hedging purposes. Derivatives may include futures, options, forward contracts, swaps, and structured notes. These derivatives, including those used to manage risk, are themselves subject to risks of the different markets in which they trade and, therefore, may not serve their intended purposes. The Fund's investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and a higher amount of short-term capital gains, which are generally taxable to you at your ordinary income tax rate. Main Risks . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Derivatives Risk (the risk that the value of the Fund's derivative investments will decline as a result of imperfect correlation or improper valuation). In particular, the Fund may, but is not required to, buy or sell foreign curren- cies and options and futures contracts on foreign currencies for hedging pur- poses in connection with its foreign investments. . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Sector Risk (the risk that securities of companies within specific sectors of the economy can perform differently than the overall market) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. MSAM assumed subadvisory duties April 1, 1999. The bar chart shows year- to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..........12.12% 1997..........-0.47% 1998...........8.19% 1999..........28.29% 2000.........-15.71% BEST QUARTER: QUARTER ENDED 12/31/98 20.89% WORST QUARTER: QUARTER ENDED 9/30/98 -20.56% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Life of Fund Past One Year Past Five Years (since 1/9/95) - --------------------------------------------------------------- Class A -20.55% 4.24% 4.85% - --------------------------------------------------------------- Class B -20.52% 4.42% 5.12% - --------------------------------------------------------------- Class C -17.32% 4.69% 5.21% - --------------------------------------------------------------- MSCI EAFE -14.17% 7.13% 7.81% Index(TM)
- -------------------------------------------------------------------------------- - ------- 13 International Small Cap Fund Investment Goal and Strategies The investment objective of the International Small Cap Fund is to seek capital appreciation. To achieve this objective, Founders Asset Management, LLC ("Founders"), the Fund's subadvisor, invests primarily in equity securities of foreign small-cap companies. Foreign small-cap companies are generally those with market capitalizations of less than $1.5 billion. This range may fluctuate depending on changes in the value of the stock market as a whole. These companies are located in both established and emerging economies throughout the world. At least 65% of the Fund's total assets will normally be invested in foreign securities from a minimum of three countries. The Fund may invest in larger foreign companies or in U.S. based companies if they represent better prospects for capital appreciation. The Fund may invest without limit in American Depositary Receipts and American Depositary Shares (collectively, "ADRs"). ADRs are receipts representing shares of a foreign corporation held by a U.S. bank that entitle the holder to all dividends and capital gains on the underlying foreign shares. ADRs are denominated in U.S. dollars and trade in the U.S. securities markets. The Fund may also invest in derivatives. The Fund may participate in the initial public offering ("IPO") market, and a portion of the Fund's returns may be attributable to the Fund's investments in IPOs. There is no guarantee that as the Fund's assets grow it will be able to experience significant improvement in performance by investing in IPOs. The Fund's investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and a higher amount of short-term capital gains, which are generally taxable to you at your ordinary income tax rate. The Fund's current and future portfolio turnover rates may differ significantly from their historical turnover rate. In particular, the Fund's turnover rates for 2000 and future years are expected to continue to be significantly higher than the Fund's pre-2000 rate due to the manager's investment style. Main Risks . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally, including, in particular, the risks associated with invest- ing in smaller companies and in IPOs) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Sector Risk (the risk that securities of companies within specific sectors of the economy can perform differently than the overall market) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. Founders has been the subadvisor to the Fund since its inception. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..........-0.36% 1998..........10.18% 1999..........94.45% 2000.........-29.45% BEST QUARTER: QUARTER ENDED 12/31/98 64.58% WORST QUARTER: QUARTER ENDED 9/30/98 -21.20% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Life of Fund Past One Year (since 3/4/96) - -------------------------------------------------------------- Class A -33.50% 9.75% - -------------------------------------------------------------- Class B -33.54% 9.97% - -------------------------------------------------------------- Class C -30.67% 10.33% - -------------------------------------------------------------- MSCI All Country World(TM) ex- -13.37% 7.62% U.S. Index
- -------------------------------------------------------------------------------- ------- 14 Balanced Fund Investment Goal and Strategies The investment objective of the Balanced Fund is current income and capital appreciation. To achieve this goal, INVESCO Funds Group, Inc. ("INVESCO"), the Fund's subadvisor, invests in a combination of common stocks and fixed-income securities, including preferred stocks, convertible securities and bonds. The Fund normally invests the majority of its total assets in U.S. and foreign com- mon stocks and approximately 25% of its total assets in investment grade debt securities. The portion of the Fund's portfolio invested in equity securities emphasizes companies INVESCO believes to have better-than-average earnings growth potential, as well as companies within industries that INVESCO believes are well-positioned for the current and expected economic climate. Since cur- rent income is a component of total return, INVESCO also considers companies' dividend payout records. Most of these holdings are traded on national stock exchanges or in the over-the-counter market. The Fund's investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and a higher amount of short-term capital gains, which are generally taxable to you at your ordinary income tax rate. Main Risks . Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations) . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. INVESCO assumed subadvisory duties March 13, 2000. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index for common stocks and one for fixed-income securities. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR C SHARES Annual Total Return 1991..........21.45% 1992..........12.98% 1993..........10.07% 1994..........-2.80% 1995..........23.53% 1996..........10.15% 1997..........16.30% 1998..........13.12% 1999..........-3.78% 2000..........-0.52% BEST QUARTER: QUARTER ENDED 6/30/97 64.58% WORST QUARTER: QUARTER ENDED 12/31/00 -7.62% - ------------------------------------------ Average Annual Total Returns as of 12/31/00
Past Past Past 10 Life of Fund Life of Fund One Year Five Years Years (Class A & B) (Class C) - ---------------------------------------------------------------------- Class A -5.52% 6.23% 7.81% - ---------------------------------------------------------------------- Class B -5.18% 6.55% 8.15% - ---------------------------------------------------------------------- Class C -1.52% 6.76% 9.66% 7.39% - ---------------------------------------------------------------------- S&P 500 -9.10% 18.33% 17.46% 17.44% 12.36% Index(TM) - ---------------------------------------------------------------------- Lehman Brothers 11.63% 6.46% 7.95% 6.62% 8.04% Aggregate Bond Index(TM)
- ------------------------------------------ Inception dates: Class A and Class B - 4/1/94; Class C - 8/28/89 - ------- 15 Aggressive Growth LifeStyle Fund Investment Goal and Strategies American General Investment Management, L.P., the Fund's subadvisor, seeks growth through investments in a combination of the North American Funds ("Un- derlying Funds"). This Fund is suitable for investors seeking the potential for capital growth that a fund investing predominately in equity securities may offer. Asset allocation among the equity securities of international companies, large capitalization companies, medium capitalization companies, small capitalization companies and bonds is the most critical investment decision that you make as an investor. Selecting the appropriate combination should be based on your per- sonal investment goals, time horizons and risk tolerance. The chart below reflects the projected asset allocation ranges for this Fund. This Fund is managed so that it can serve as a complete investment program for you or as a core part of your larger portfolio. The Underlying Funds have been selected to represent a reasonable spectrum of investment options for the Fund. AGIM has based the target investment percentages for the Fund on the degree to which it believes the Underlying Funds, in combination, to be appropriate for the Fund's investment objective. AGIM may change the asset allocation ranges and the particular Underlying Funds in which the Fund may invest from time to time. The Fund is a non-diversified investment company under the Investment Company Act of 1940 because it invests in a limited number of the Underlying Funds. However, the Underlying Funds themselves are diversified companies. Main Risks The securities that Underlying Funds invest in also involve various risks: . Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations) . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Derivatives Risk (the risk that the Fund's derivative investments will decline as a result of imperfect correlation or improper valuation) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Non-Diversification Risk (the risk that investing in a smaller number of secu- rities increases investment risks) International Equity Securities 15%-35% Domestic Equity Securities 60%-80% Bonds 5%-15% ------- 16 Aggressive Growth LifeStyle Fund Investment Goal and Strategies The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of its benchmark and a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, and investment strategies and policies as does the Fund, and was also managed by the same portfolio managers. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........28.92% 2000..........-4.62% BEST QUARTER: QUARTER ENDED 12/31/98 20.47% WORST QUARTER: QUARTER ENDED 12/31/00 -8.23% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Life of Fund Life of Fund Past One Year (Class A & B) (Class C) - ------------------------------------------------------------------------------- Class A -10.10% 10.90% - ------------------------------------------------------------------------------- Class B -9.59% 12.19% - ------------------------------------------------------------------------------- Class C: N/A -7.35%+ - ------------------------------------------------------------------------------- Aggressive Growth LifeStyle Blended Benchmark Index -6.93% 11.92% -1.24%+ - ------------------------------------------------------------------------------- S&P 500 Index(TM) -9.10% 10.21% -10.06%+
- -------------------------------------------------------------------------------- Inception dates: Class A and Class B - 11/02/98; Class C - 8/10/00 + Not annualized - ------- 17 Conservative Growth LifeStyle Fund Investment Goal and Strategies American General Investment Management, L.P., the Fund's subadvisor, seeks cur- rent income and low to moderate growth of capital through investments in a com- bination of the North American Funds ("Underlying Funds"). This Fund is suit- able for investors who wish to invest in equity securities, but who are not willing to assume the market risks of either the Aggressive Growth LifeStyle Fund or the Moderate Growth LifeStyle Fund. Asset allocation among the equity securities of international companies, large capitalization companies, medium capitalization companies, small capitalization companies and bonds is the most critical investment decision that you make as an investor. Selecting the appropriate combination should be based on your per- sonal investment goals, time horizons and risk tolerance. The chart below reflects the projected asset allocation ranges for this Fund. This Fund is managed so that it can serve as a complete investment program for you or as a core part of your larger portfolio. The Underlying Funds have been selected to represent a reasonable spectrum of investment options for the Fund. AGIM has based the target investment percentages for the Fund on the degree to which it believes the Underlying Funds, in combination, to be appropriate for the Fund's investment objective. AGIM may change the asset allocation ranges and the particular Underlying Funds in which the Fund may invest from time to time. The Fund is a non-diversified investment company under the Investment Company Act of 1940 because it invests in a limited number of the Underlying Funds. However, the Underlying Funds themselves are diversified companies. Main Risks The securities that Underlying Funds invest in also involve various risks: . Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations) . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Derivatives Risk (the risk that the Fund's derivative investments will decline as a result of imperfect correlation or improper valuation) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Non-Diversification Risk (the risk that investing in a smaller number of secu- rities increases investment risks) International Equity Securities 5%-15% Domestic Equity Securities 20%-50% Bonds 45%-65% ------- 18 Conservative Growth LifeStyle Fund Investment Goal and Strategies The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of its benchmark and a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, and investment strategies and policies as does the Fund, and was also managed by the same portfolio managers. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........13.70% 2000...........1.90% BEST QUARTER: QUARTER ENDED 12/31/98 10.88% WORST QUARTER: QUARTER ENDED 12/31/00 -3.35% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Life of Fund Life of Fund Past One Year (Class A & B) (Class C) - ------------------------------------------------------------------------- Class A -3.96% 7.28% - ------------------------------------------------------------------------- Class B -3.19% 8.55% - ------------------------------------------------------------------------- Class C N/A -2.59%+ - ------------------------------------------------------------------------- Conservative Growth LifeStyle Blended Benchmark Index -6.93% 8.61% -0.83%+ - ------------------------------------------------------------------------- S&P 500 Index(TM) -9.10% 10.21% -10.61%+
- -------------------------------------------------------------------------------- Inception dates: Class A and Class B - 11/02/98; Class C - 7/20/00 + Not annualized - ------- 19 Moderate Growth LifeStyle Fund Investment Goal and Strategies American General InvestmentManagement, L.P., the Fund's subadvisor, seeks growth and current income through investments in a combination of the North American Funds ("Underlying Funds"). This Fund is suitable for investors who wish to invest in equity securities, but who are not willing to assume the sub- stantial market risks of the Aggressive Growth LifeStyle Fund. Asset allocation among the equity securities of international companies, large capitalization companies, medium capitalization companies, small capitalization companies and bonds is the most critical investment decision that you make as an investor. Selecting the appropriate combination should be based on your per- sonal investment goals, time horizons and risk tolerance. The chart below reflects the projected asset allocation ranges for this Fund. This Fund is managed so that it can serve as a complete investment program for you or as a core part of your larger portfolio. The Underlying Funds have been selected to represent a reasonable spectrum of investment options for the Fund. AGIM has based the target investment percentages for the Fund on the degree to which it believes the Underlying Funds, in combination, to be appropriate for the Fund's investment objective. AGIM may change the asset allocation ranges and the particular Underlying Funds in which the Fund may invest from time to time. The Fund is a non-diversified investment company under the Investment Company Act of 1940 because it invests in a limited number of the Underlying Funds. However, the Underlying Funds themselves are diversified companies. Main Risks The securities that Underlying Funds invest in also involve various risks: . Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations) . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Derivatives Risk (the risk that the Fund's derivative investments will decline as a result of imperfect correlation or improper valuation) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Non-Diversification Risk (the risk that investing in a smaller number of secu- rities increases investment risks) International Equity Securities 10%-20% Domestic Equity Securities 35%-65% Bonds 25%-45% ------- 20 Moderate Growth LifeStyle Fund Investment Goal and Strategies The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of its benchmark and a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, and investment strategies and policies as does the Fund, and was also managed by the same portfolio managers. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........18.66% 2000..........-0.62% BEST QUARTER: QUARTER ENDED 12/31/99 14.20% WORST QUARTER: QUARTER ENDED 12/31/00 -5.24% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Life of Fund Life of Fund Past One Year (Class A & B) (Class C) - --------------------------------------------------------------------- Class A -6.33% 8.64% - --------------------------------------------------------------------- Class B -5.75% 9.97% - --------------------------------------------------------------------- Class C N/A -6.06%+ - --------------------------------------------------------------------- Moderate Growth LifeStyle Blended Benchmark Index -6.93% 8.78% -5.06%+ - --------------------------------------------------------------------- S&P 500 Index(TM) -9.10% 10.21% -10.55%+
- -------------------------------------------------------------------------------- Inception dates: Class A and Class B - 11/02/98; Class C - 7/12/00 + Not annualized - ------- 21 Core Bond Fund (formerly Investment Quality Bond Fund) Investment Goal and Strategies The investment objective of the Core Bond Fund is to provide a high level of current income consistent with the maintenance of principal and liquidity. American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor, invests at least 65% of the Fund's total assets in medium to high quality fixed-income securities, or in securities issued or guaranteed by the U.S. Gov- ernment, mortgage-backed, or asset-backed securities (U.S. Government securi- ties are securities issued or guaranteed by the U.S. Government which are sup- ported by the full faith and credit of the U.S. Government, or by the right of the issuer to borrow from the U.S. Treasury, or by the credit of the issuing government agency, or by the authority of the U.S. Government to purchase obli- gations of the agency). A portion of the 65% may be invested in U.S. dollar- denominated fixed-income securities issued by foreign issuers, although the Fund currently intends to limit these investments to no more than 40% of its total assets. These fixed-income securities will be rated investment grade or higher at the time of purchase. AGIM is not required to dispose of a security if its rating is downgraded, however. Up to 35% of the Fund's total assets may be invested in interest-bearing short- term investments, such as commercial paper, bankers' acceptances, bank certifi- cates of deposit, or other cash equivalents and cash. Main Risks . Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations, including, in particular, the risks associated with junk bonds) . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) ------- 22 Core Bond Fund (formerly Investment Quality Bond Fund) Investment Goal and Strategies The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. AGIM assumed subadvisory duties March 13, 2000. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. Effective March 1, 2001, the Fund has selected the Lehman Brothers Aggregate Index as its benchmark for index comparison purposes, rather than the index comprised 50% Lehman Brothers Corporate/50% Lehman Brothers Government. The Lehman Brothers Aggregate Index better matches the securities in which the Fund may invest, and will better align the goals of the Fund with its benchmark index, by focusing on those medium to high grade fixed-income securities in the Fund's portfolio. The Lehman Brothers Aggregate Index is a broad market index that represents securities that are U.S. domestic, taxable, and dollar denominated. The index covers the U.S. fixed rate bond market rated investment grade or higher by Moody's Investor Service, Standard & Poor's Corporation or Fitch Investors Services, in that order, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. The Lehman Brothers Government Index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more and publicly issued debt of U.S. Government agencies, quasi-federal corporations, and corporate or foreign debt. The Lehman Brothers Corporate Index includes publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the maturity, liquidity and quality requirements. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991..............0% 1992...........8.27% 1993...........9.29% 1994..........-5.43% 1995..........18.79% 1996...........2.71% 1997...........9.28% 1998...........7.61% 1999..........-2.55% 2000...........7.94% BEST QUARTER: QUARTER ENDED 6/30/95 6.23% WORST QUARTER: QUARTER ENDED 3/31/94 -4.53% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Life of Fund Life of Fund Past One Year Past Five Years (Class A) (Class B & C) - -------------------------------------------------------------------------------- Class A 2.81% 3.78% 6.22% - -------------------------------------------------------------------------------- Class B 2.16% 3.84% 5.43% - -------------------------------------------------------------------------------- Class C 6.16% 4.18% 5.43% - -------------------------------------------------------------------------------- Lehman Brothers 11.63% 6.46% 7.80% 7.39% Aggregate Index - -------------------------------------------------------------------------------- 50% Lehman Brothers 11.32% 6.11% 7.97% 7.32% Corporate Index and 50% Lehman Brothers Government Index
- -------------------------------------------------------------------------------- Inception dates: Class A - 5/1/91; Class B and Class C - 4/1/94 - ------- 23 High Yield Bond Fund Investment Goal and Strategies The High Yield Bond Fund seeks the highest possible total return consistent with conservation of capital through investment in a diversified portfolio of high yielding, high risk fixed-income securities. To achieve this objective, American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor, invests at least 65% of the Fund's total assets in below-investment grade U.S. and foreign junk bonds. These high yield- ing, high risk fixed-income securities are rated below Baa3 by Moody's and BBB- by S&P or comparable investment quality at the time of purchase. Up to 15% can be rated below Caa3 by Moody's or CCC- by S&P or comparable investment quality at the time of purchase. The Fund may also invest up to 35% of total assets in below-investment grade foreign fixed-income securities. Main Risks . Credit Risk (the risk that the issuers in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations, including, in particular, the risks associated with junk bonds) . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, investment strategies and policies as does the Fund, and was also subadvised by AGIM. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999...........4.05% 2000..........-6.59% BEST QUARTER: QUARTER ENDED 3/31/99 3.89% WORST QUARTER: QUARTER ENDED 12/31/00 -6.86% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Life of Fund Life of Fund Past One Year (Class A & B) (Class C) - ------------------------------------------------------------- Class A -11.02% -3.03% - ------------------------------------------------------------- Class B -12.04% -3.46% - ------------------------------------------------------------- Class C N/A -8.21%+ - ------------------------------------------------------------- Salomon Smith -5.68% 0.32% -6.04%+ Barney High Yield Market Index(TM)
- -------------------------------------------------------------------------------- Inception dates: Class A and Class B - 11/02/98; Class C - 8/21/00 + Not annualized ------- 24 Municipal Bond Fund Investment Goal and Strategies The investment objective of the Municipal Bond Fund is to achieve a high level of current income that is exempt from regular federal income taxes. The Fund is also particularly concerned with preserving capital. American General Investment Management, L.P. ("AGIM") is the Fund's subadvisor. The Fund will invest at least 80% of total assets in investment grade municipal fixed-income securities, such as municipal bonds, municipal notes, and other municipal obligations. Investment grade bonds are those rated at least Baa3 by Moody's or BBB- by S&P or Fitch, or of comparable quality at the time of purchase. The municipal notes are short-term obligations rated high quality or better by Moody's, S&P, or Fitch. The Fund may invest up to 20% of total assets in taxable fixed-income securities, including money market instruments, U.S. Government obligations, and other investment grade securities rated as above. Main Risks . Credit Risk (the risk that the issuers in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor obli- gations) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. AGIM assumed subadvisory duties March 13, 2000. The bar chart shows year- to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991................0% 1992................0% 1993................0% 1994............-9.21% 1995............18.43% 1996.............4.14% 1997.............9.65% 1998.............3.97% 1999............-3.32% 2000............10.87% BEST QUARTER: QUARTER ENDED 3/31/95 7.39% WORST QUARTER: QUARTER ENDED 3/31/94 -7.58% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Life of Fund Life of Fund Past One Year Past Five Years (Class A) (Class B & C) - ------------------------------------------------------------------------------------- Class A 5.61% 3.92% 4.25% - ------------------------------------------------------------------------------------- Class B 4.96% 3.73% 5.15% - ------------------------------------------------------------------------------------- Class C 8.94% 4.07% 5.15% - ------------------------------------------------------------------------------------- Lehman Brothers Municipal Bond Index(TM) 11.69% 5.84% 6.04% 6.86%
- -------------------------------------------------------------------------------- Inception dates: Class A - 7/6/93; Class B and Class C - 4/1/94 - ------- 25 Strategic Income Fund Investment Goal and Strategies The investment objective of the Strategic Income Fund is to seek a high level of total return consistent with preservation of capital. To achieve this goal, American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor, invests at least 65% of the Fund's total assets in a broad range of fixed- income securities, including investment grade bonds (rated Baa or higher by Moody's and BBB or higher by S&P at the time of purchase), U.S. Government and agency obligations, mortgage-backed securities, and U.S. and foreign high-risk, high-yield bonds (rated C or higher by Moody's and CC or higher by S&P, or of comparable investment quality at time of purchase, commonly known as "junk bonds"). Up to 25% of the Fund's total assets may be invested in foreign emerg- ing market debt, and up to an additional 25% in non-U.S. dollar bonds. The Fund may invest up to 20% of total assets in equity securities, such as common and pre- ferred stocks, convertible securities, and warrants. Main Risks . Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations including, in particular, the risks associated with junk bonds) . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes, including, in particular, the risks associated with investments in developing countries, as these countries are generally more volatile than the markets of developed countries) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. AGIM assumed subadvisory duties March 13, 2000. The bar chart shows year- to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991................0% 1992................0% 1993................0% 1994............-6.79% 1995............18.57% 1996............14.82% 1997............10.76% 1998.............0.72% 1999............ 1.36% 2000.............3.20% BEST QUARTER: QUARTER ENDED 6/30/95 8.22% WORST QUARTER: QUARTER ENDED 3/31/94 -5.76% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past One Year Past Five Years Life of Fund Life of Fund (Class A) (Class B & C) - ------------------------------------------------------------------------------------ Class A -1.70% 5.00% 5.09% - ------------------------------------------------------------------------------------ Class B -2.56% 5.02% 6.23% - ------------------------------------------------------------------------------------ Class C 1.43% 5.35% 6.23% - ------------------------------------------------------------------------------------ Lehman Brothers Aggregate Bond Index(TM) 11.63% 6.46% 6.47% 7.39%
- -------------------------------------------------------------------------------- Inception dates: Class A - 11/1/93; Class B and Class C - 4/1/94 ------- 26 U.S. Government Securities Fund Investment Goal and Strategies The investment objective of the U.S. Government Securities Fund is to obtain a high level of current income consistent with preservation of capital and main- tenance of liquidity. American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor, pursues this objective by emphasizing investments in debt obligations and mortgage-backed securities, issued or guaranteed by the U.S. Government or its agencies (including the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association). The Fund may also invest in derivative invest- ments (such as privately-issued mortgage obligations collateralized by such securities), dollar rolls and related repurchase agreements. The Fund's investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and a higher amount of short-term capital gains, which are generally taxable to you at your ordinary income tax rate. Main Risks . Credit Risk (the risk that the issuers in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. AGIM assumed subadvisory duties March 13, 2000. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The bar chart does not reflect any sales charge that you may be required to pay upon purchase or redemption of the Fund's shares. Any sales charge would reduce your return. The table compares the Fund's average annual returns to those of a broad-based securities market index. The table shows returns with the maximum sales charge and deferred sales charge, if any, deducted. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. Effective March 1, 2001, the Fund has selected the Lehman Intermediate Government Index as its benchmark for index comparison purposes, rather than the Merrill Lynch 1-10 Year Government Index. The Lehman Intermediate Government Index better matches the securities in which the Fund may invest, and will better align the goals of the Fund with its benchmark index, by focusing on these debt obligations held in the Fund's portfolio. The Lehman Intermediate Government Index is a broad market index that includes public obligations of the U.S. Treasury in the intermediate maturity range. The Merrill Lynch 1-10 Year Government Index is a broad market index that includes securities issued in the U.S. market including government bonds, corporate bonds, mortgage pass through securities, and asset-backed securities. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991............13.36% 1992.............6.63% 1993.............7.64% 1994............-1.59% 1995............15.28% 1996.............3.04% 1997.............7.99% 1998.............6.86% 1999............-0.96% 2000.............9.88% BEST QUARTER: QUARTER ENDED 6/30/95 5.42% WORST QUARTER: QUARTER ENDED 3/31/94 -1.65% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Past Past Life of Fund Life of Fund One Year Five Years 10 Years (Class A) (Class B & C) - -------------------------------------------------------------------------- Class A 4.66% 4.25% 6.16% 6.42% - -------------------------------------------------------------------------- Class B 3.90% 4.25% N/A 5.42% - -------------------------------------------------------------------------- Class C 7.90% 4.59% N/A 5.42% - -------------------------------------------------------------------------- Merrill 10.19% 6.14% 7.18% 7.27% 6.84% Lynch 1-10 Year Government Index(TM) - -------------------------------------------------------------------------- Lehman 10.47% 6.19% 7.19% 7.54% 6.67% Intermediate Government Index(TM)
- -------------------------------------------------------------------------------- Inception dates: Class A - 8/28/89; Class B and Class C - 4/1/94 - ------- 27 Money Market Fund Investment Goal and Strategies The investment objective of the Money Market Fund is to obtain maximum current income consistent with preservation of principal and liquidity. American Gen- eral Investment Management, L.P. ("AGIM") is the Fund's subadvisor. The Fund invests in short-term money market securities to provide you with liquidity, protection of your investment and current income. In accordance with Rule 2a-7 of the Investment Company Act, such securities must mature in 13 months or less and the Fund must have a dollar-weighted average portfolio maturity of 90 days or less. The investments of the Fund may include securities issued or guaran- teed by the U.S. Government (and its agencies or instrumentalities), certifi- cates of deposit and other obligations of domestic banks that have total assets in excess of $1 billion, commercial paper sold by corporations and finance com- panies, corporate debt obligations with remaining maturities of 13 months or less, repurchase agreements, money market instruments of foreign issuers pay- able in U.S. dollars (limited to no more than 20% of the Fund's net assets), asset-backed securities, loan participations, adjustable rate securities, vari- able rate demand notes, and Rule 144A securities. The Fund may invest in investment companies, real estate securities, and reverse repurchase agree- ments. Main Risks . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . An investment in the Money Market Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. AGIM assumed subadvisory duties March 13, 2000. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The table compares the Fund's average annual returns to those of a broad-based securities market index. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991.............5.97% 1992.............3.42% 1993.............2.76% 1994.............3.88% 1995.............5.66% 1996.............5.08% 1997.............5.19% 1998.............5.05% 1999.............4.62% 2000.............5.79% BEST QUARTER: QUARTER ENDED 6/30/91 1.64% WORST QUARTER: QUARTER ENDED 6/30/93 0.66% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Past Five Past 10 Life of Fund Life of Fund One Year Years Years (Class A) (Class B & C) - ---------------------------------------------------------------------------------- Class A 5.79% 5.15% 4.74% 4.88% - ---------------------------------------------------------------------------------- Class B 5.79% 5.15% N/A 5.15% - ---------------------------------------------------------------------------------- Class C 5.78% 5.15% N/A 5.15%
- -------------------------------------------------------------------------------- Inception dates: Class A - 8/28/89; Class B and Class C - 4/1/94 To obtain the Fund's current 7-day yield, please call 1-800-872-8037. ------- 28 Municipal Money Market Fund Investment Goal and Strategies The Fund seeks liquidity, protection of capital and current income through investments in short-term money market securities that are exempt from regular federal income taxation. To achieve this objective, American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor, invests in short-term money market securities to provide you with liquidity, protection of your investment and current income that is exempt from federal income tax. AGIM uses 95% of the Fund's total assets to buy short-term securities that are rated within the highest rating category for short-term fixed-income securities by at least two nationally rec- ognized rating services or unrated securities of comparable investment quality. These eligible securities must mature, after giving effect to any demand fea- tures, in 13 months or less and the Fund must have a dollar-weighted average portfolio maturity of 90 days or less. These practices are mandated by Rule 2a- 7 of the 1940 Act and are designed to reduce risk and minimize fluctuation in the share price. If the Fund invests in municipal securities issued for certain private purposes, a portion of the Fund's dividends may be subject to the alternative minimum tax. The investments this Fund may buy include: . Municipal fixed-income securities with remaining maturities of 13 months or less . Commercial paper sold by municipalities rated at least MIG1 or MIG2 by Moody's or A1 or A2 by S&P . Variable rate demand notes . Auction rate preferred stock and other adjustable rate obligations that are exempt from federal income taxation . Rule 144A securities (liquid) Main Risks . Credit Risk (the risk that the issuers in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . An investment in the Municipal Money Market Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any other government agen- cy. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. The bar chart shows year-to-year changes in the Fund's performance of one of the Fund's classes of shares. The table compares the Fund's average annual returns to those of a broad-based securities market index. The Fund's past performance does not necessarily indicate how it will perform in the future. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, and investment strategies and policies as does the Fund, and was also subadvised by AGIM. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999...........2.28% 2000...........3.15% BEST QUARTER: QUARTER ENDED 6/30/00 0.86% WORST QUARTER: QUARTER ENDED 3/31/99 0.44% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Life of Fund Life of Fund One Year (Class A & B) (Class C) - ----------------------------------------------- Class A 3.15% 2.68% - ----------------------------------------------- Class B 2.70% 2.06% - ----------------------------------------------- Class C N/A 1.26%+
- -------------------------------------------------------------------------------- Inception dates: Class A and Class B - 11/02/98; Class C - 8/10/00 + Not annualized To obtain the Fund's current 7-day yield, please call 1-800-872-8037. - ------- 29 Descriptions of Main Risks The value of your investment in a Fund can change for many reasons, and may decrease. The primary reasons for possible decreases in a Fund's value are called "Main Risks," and are explained in this section. Section II of the Prospectus includes more information about other risks that could affect the Funds' values. Credit Risk Credit risk is the risk that the issuer or the guarantor (the entity that agrees to pay the debt if the issuer cannot) of a debt or fixed income securi- ty, or the counterparty to a derivatives contract or a securities loan, will not repay the principal and interest owed to the investors or otherwise honor its obligations. There are different levels of credit risk. Debt securities rated in one of the four highest rating categories by a rating agency (and com- parable unrated securities) are known as "investment grade." Debt securities rated below the four highest rating categories by a rating agency (and compara- ble unrated securities) are known as "lower-rated" or "junk bonds." Funds that invest in lower-rated securities have higher levels of credit risk. Lower-rated or unrated securities of equivalent quality have very high levels of credit risk. Securities that are highly rated have lower levels of credit risk. Funds may be subject to greater credit risk because they may invest in debt securities issued in connection with corporate restructurings by highly leveraged (indebted) issuers and in debt securities not current in the payment of interest or principal, or in default. Funds that invest in foreign securities are also subject to increased credit risk because of the difficulties of requiring foreign entities, including issuers of sovereign (national) debt, to honor their contractual commitments, and because a number of foreign governments and other issuers are already in default. Currency Risk Funds that invest in securities that are denominated in and/or are receiving revenues in foreign currencies are subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar. In the case of hedging positions, it is the risk that the U.S. dollar will decline in value relative to the currency hedged. Derivatives Risk Derivatives are financial contracts whose value depends on, or is derived from, the change in value of an underlying asset or index. When the value of the underlying security or index changes, the value of the derivative changes as well. As a result, derivatives can lose all of their value very quickly. Deriv- atives involve credit risk if the other party to the derivative should fail to meet its obligations to the Fund. Additional risks associated with derivatives include imperfect correlation (between the values of the derivative and the underlying investment) and improper valuation. Derivatives risk for some Funds will be increased by their investments in structured securities. Equity Risk Equity securities, such as a company's common stock, may fall in value in response to factors relating to the issuer, such as management decisions or falling demand for a company's goods or services. Additionally, factors affect- ing a company's particular industry, such as increased production costs, may affect the value of its equity securities. Equity securities also rise and fall in value as a result of factors affecting entire financial markets, such as political or economic developments, or changes in investor psychology. Growth stocks are the stocks of companies that have earnings that are expected to grow relatively rapidly. As a result, the values of growth stocks may be more sensitive to changes in current or expected earnings than the values of other stocks. Value stocks are the stocks of companies that are undervalued, or are inexpen- sive, relative to the value of the company and its business as a whole. These companies may have experienced recent troubles that have caused their stocks to be out of favor with investors. If the market does not recognize the value of the company over time, ------- 30 the price of its stock may fall, or simply may not increase as expected. Market capitalization refers to the total value of a company's outstanding stock. Smaller companies are more likely than larger companies to have limited product lines, smaller markets for their products and services, and they may depend on a small or inexperienced management group. Small company stocks may not trade very actively, and their prices may fluctuate more than stocks of larger companies. Stocks of smaller companies may be more vulnerable to nega- tive changes than stocks of larger companies. Smaller companies also may have more limited financial resources, inexperienced management and unproven prod- ucts or services. The risks associated with equity securities are typically higher for equity securities purchased in initial public offerings ("IPOs"). Issuers in IPOs typ- ically have a limited operating history, and the prices of equity securities are often very volatile for some time following an IPO. Foreign Investment Risk There are risks associated with investing in foreign securities. These risks include unforeseen changes in tax laws, political changes, and changes in for- eign currency values and exchange rates. There may be less publicly available information about foreign issuers. Foreign issuers, including foreign branches of U.S. banks, are subject to different accounting and reporting requirements, which are generally less extensive than the requirements for domestic issuers. Foreign stock markets generally have substantially less volume than the U.S. exchanges and securities of foreign issuers are generally less liquid and more volatile, relative to U.S. issuers. There is frequently less governmental regulation of foreign exchanges, broker- dealers and issuers than in the United States, and brokerage costs may be high- er. In addition, investments in foreign companies may be subject to the possi- bility of nationalization or other changes in policy. Policy changes may allow foreign governments to withhold dividends, expropriate (confiscate, or keep) investment returns, or raise taxes to extremely high levels, among other things. Also, should a foreign issuer default, it may be difficult to recover anything in a bankruptcy proceeding. The possibility of political instability or diplomatic developments in foreign countries could trigger nationalization of companies and industries, expropria- tion (confiscation of property), extremely high levels of taxation, and other negative developments. In the event of nationalization, expropriation or other confiscation, a Fund could lose its entire investment. Funds that invest in sovereign debt obligations are exposed to the risks of political, social and economic change in the countries that issued the bonds. Emerging Market Risk. The above risks can be more extreme for investments in emerging markets. A country that is in the initial stages of its industrial cycle is considered to be an emerging markets country. Such countries are sub- ject to more economic, political, and business risk than major industrialized nations, and the securities issued by companies located there may have more volatile share prices and be less liquid than those of securities issued by companies in countries at later stages of the industrial cycle. Interest Rate Risk (Market Risk) Interest rate risk, or market risk, is the risk that a change in interest rates will negatively affect the value of a security. This risk applies primarily to debt securities such as bonds, notes and asset backed securities. Debt securi- ties are obligations of the issuer to make payments of principal and/ or inter- est on future dates. As interest rates rise, an investment in a Fund can lose value, because the value of the securities the Fund holds may fall. Market risk is generally greater for Funds that invest in debt securities with longer maturities. This risk may be increased for Funds that invest in mort- gage-backed or other types of asset-backed securities that are often prepaid. Even Funds that invest in the highest quality debt securities are subject to interest rate risk. Liquidity Risk Liquidity risk is the risk that a Fund will not be able to sell a security because there are too few people - ------- 31 who actively buy and sell, or trade, that security on a regular basis. A Fund holding an illiquid security may not be able to sell the security at its cur- rent price. Liquidity risk increases for Funds investing in derivatives, for- eign investments or restricted securities. Management Risk Management risk is the risk that the subadvisor of a Fund, despite using vari- ous investment and risk analysis techniques, may not produce the desired investment results. Non-Diversification Risk Investment professionals believe that investment risk can be reduced through diversification, which is simply the practice of choosing more than a limited number of investments. On the other hand, concentrating investments in a smaller number of securities increases risk. Sector Risk Securities of companies within specific sectors of the economy can perform dif- ferently than the overall market. This may be due to changes in such things as the regulatory or competitive environment or to changes in investor perceptions regarding a sector. Because the Funds may allocate relatively more assets to certain industry sectors than others, the Funds' performance may be more sus- ceptible to any developments which affect those sectors emphasized by the Funds. Social Criteria Risk This risk applies only to the Socially Responsible Fund. If a company stops meeting the Fund's social criteria after the Fund invested in it, the Fund will sell these investments even if this means the Fund loses money. Also, if the Fund changes its social criteria and the companies the Fund has already invested in no longer qualify, the Fund will sell these investments, even if this means the Fund loses money. Social criteria screening will limit the availability of investment opportunities for the Fund more than for funds hav- ing no such criteria. Science & Technology Company Risk Companies in the rapidly changing fields of science and technology often face unusually high price volatility, both in terms of gains and losses. The poten- tial for wide variation in performance is based on the special risks common to these stocks. For example, products or services that at first appear promising may not prove commercially successful or may become obsolete quickly. Earnings disappointments can result in sharp price declines. A portfolio focused primar- ily on these stocks is, therefore, likely to be much more volatile. Unseasoned Company Risk Investments in smaller or unseasoned companies often involve greater risks than investments in larger, more established companies because small and unseasoned companies may lack the management experience, financial resources, product diversification and competitive strengths of large companies. ------- 32 Section II: Fees and Expenses This table describes the fees and expenses that you may pay if you invest in the Funds. Shareholder Fees (fees paid directly from your investment)
Class A Class B Class C - ---------------------------------------------------------------------------- Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) Equity Funds/1/ 5.75% None None Income Funds/1/ 4.75% None None Municipal Money Market Fund and Money Market Fund None None None Maximum Deferred Sales Charge (as a percentage of original purchase price or redemption price, whichever is lower) Equity Funds and Income Funds 1%/2/ 5%/3/ 1%/4/ Municipal Money Market Fund and Money Market Fund None None None Annual Fund Operating Expenses (expenses that are deducted from Fund assets) Class A Class B Class C - ---------------------------------------------------------------------------- Growth & Income Fund Management Fees 0.67% 0.67% 0.67% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.63% 0.63% 0.63% Total Annual Fund Operating Expenses 1.65% 2.30% 2.30% Fee Waiver and/or Expense Reimbursement 0.19% 0.19% 0.19% Net Expenses/5/ 1.46% 2.11% 2.11% - ---------------------------------------------------------------------------- Large Cap Growth Fund (formerly Growth Equity) Management Fees 0.90% 0.90% 0.90% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.61% 0.61% 0.61% Total Annual Fund Operating Expenses 1.86% 2.51% 2.51% Fee Waiver and/or Expense Reimbursement 0.49% 0.49% 0.49% Net Expenses/5/ 1.37% 2.02% 2.02% - ---------------------------------------------------------------------------- Mid Cap Growth (formerly Small/Mid Cap) Management Fees 0.93% 0.93% 0.93% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.63% 0.63% 0.63% Total Annual Fund Operating Expenses 1.91% 2.56% 2.56% Fee Waiver and/or Expense Reimbursement 0.38% 0.38% 0.38% Net Expenses/5/ 1.53% 2.18% 2.18% - ---------------------------------------------------------------------------- Mid Cap Value Fund Management Fees 0.90% 0.90% 0.90% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.53% 0.53% 0.53% Total Annual Fund Operating Expenses/5/ 1.78% 2.43% 2.43% Fee Waiver and/or Expense Reimbursement 0.00% 0.00% 0.00% Net Expenses/5/ 1.78% 2.43% 2.43% - ----------------------------------------------------------------------------
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Class Class Class Fund A B C - ------------------------------------------------------------------- Science & Technology Fund Management Fees 0.90% 0.90% 0.90% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.50% 0.50% 0.50% Total Annual Fund Operating Expenses 1.75% 2.40% 2.40% Fee Waiver and/or Expense Reimbursement 0.25% 0.25% 0.25% Net Expenses/5/ 1.50% 2.15% 2.15% - ------------------------------------------------------------------- Small Cap Growth Fund (formerly Emerging Growth) Management Fees 0.95% 0.95% 0.95% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.52% 0.52% 0.52% Total Annual Fund Operating Expenses 1.82% 2.47% 2.47% Fee Waiver and/or Expense Reimbursement 0.22% 0.22% 0.22% Net Expenses/5/ 1.60% 2.25% 2.25% - ------------------------------------------------------------------- Small Cap Index Fund Management Fees 0.28% 0.28% 0.28% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.87% 0.87% 0.87% Total Annual Fund Operating Expenses 1.50% 2.15% 2.15% Fee Waiver and/or Expense Reimbursement 0.00% 0.00% 0.00% Net Expenses/5/ 1.50% 2.15% 2.15% - ------------------------------------------------------------------- Socially Responsible Fund Management Fees 0.65% 0.65% 0.65% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.64% 0.64% 0.64% Total Annual Fund Operating Expenses 1.64% 2.29% 2.29% Fee Waiver and/or Expense Reimbursement 0.34% 0.34% 0.34% Net Expenses/5/ 1.30% 1.95% 1.95% - ------------------------------------------------------------------- Stock Index Fund Management Fees 0.27% 0.27% 0.27% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.55% 0.55% 0.55% Total Annual Fund Operating Expenses 1.17% 1.82% 1.82% Fee Waiver and/or Expense Reimbursement 0.42% 0.42% 0.42% Net Expenses/5/ 0.75% 1.40% 1.40% - ------------------------------------------------------------------- Global Equity Fund Management Fees 0.90% 0.90% 0.90% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 1.01% 1.01% 1.01% Total Annual Fund Operating Expenses 2.26% 2.91% 2.91% Fee Waiver and/or Expense Reimbursement 0.09% 0.09% 0.09% Net Expenses/5/ 2.17% 2.82% 2.82% - ------------------------------------------------------------------- International Equity Fund Management Fees 0.90% 0.90% 0.90% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.79% 0.79% 0.79% Total Annual Fund Operating Expenses 2.04% 2.69% 2.69% Fee Waiver and/or Expense Reimbursement 0.34% 0.34% 0.34% Net Expenses/5/ 1.70% 2.35% 2.35% - ------------------------------------------------------------------- International Small Cap Fund Management Fees 1.05% 1.05% 1.05% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 1.16% 1.16% 1.16% Total Annual Fund Operating Expenses 2.56% 3.21% 3.21% Fee Waiver and/or Expense Reimbursement 0.61% 0.61% 0.61% Net Expenses/5/ 1.95% 2.60% 2.60% - -------------------------------------------------------------------
------- 34
Class Class Class Fund A B C - ------------------------------------------------------------------------- Balanced Fund Management Fees 0.77% 0.77% 0.77% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.61% 0.61% 0.61% Total Annual Fund Operating Expenses 1.73% 2.38% 2.38% Fee Waiver and/or Expense Reimbursement 0.02% 0.02% 0.02% Net Expenses/5/ 1.71% 2.36% 2.36% - ------------------------------------------------------------------------- Aggressive Growth LifeStyle Fund Management Fees 0.10% 0.10% 0.10% Distribution (12b-1) Fees 0.10% 0.75% 0.75% Other Expenses 0.00% 0.00% 0.00% Total Annual Fund Operating Expenses 0.20% 0.85% 0.85% Estimated Total Annual Combined Indirect Expenses/6/ 1.45% 1.45% 1.45% - ------------------------------------------------------------------------- Moderate Growth LifeStyle Fund Management Fees 0.10% 0.10% 0.10% Distribution (12b-1) Fees 0.10% 0.75% 0.75% Other Expenses 0.00% 0.00% 0.00% Total Annual Fund Operating Expenses 0.20% 0.85% 0.85% Estimated Total Annual Combined Indirect Expenses/6/ 1.39% 1.39% 1.39% - ------------------------------------------------------------------------- Conservative Growth LifeStyle Fund Management Fees 0.10% 0.10% 0.10% Distribution (12b-1) Fees 0.10% 0.75% 0.75% Other Expenses 0.00% 0.00% 0.00% Total Annual Fund Operating Expenses 0.20% 0.85% 0.85% Estimated Total Annual Combined Indirect Expenses/6/ 1.33% 1.33% 1.33% - ------------------------------------------------------------------------- Core Bond Fund (formerly Investment Quality Bond) Management Fees 0.60% 0.60% 0.60% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.38% 0.38% 0.38% Total Annual Fund Operating Expenses 1.33% 1.98% 1.98% Fee Waiver and/or Expense Reimbursement 0.00% 0.00% 0.00% Net Expenses/5/ 1.33% 1.98% 1.98% - ------------------------------------------------------------------------- High Yield Bond Fund Management Fees 0.83% 0.83% 0.83% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.39% 0.39% 0.39% Total Annual Fund Operating Expenses 1.57% 2.22% 2.22% Fee Waiver and/or Expense Reimbursement 0.00% 0.00% 0.00% Net Expenses/5/ 1.57% 2.22% 2.22% - ------------------------------------------------------------------------- Municipal Bond Fund (formerly National Municipal Bond) Management Fees 0.60% 0.60% 0.60% Distribution (12b-1) Fees 0.15% 1.00% 1.00% Other Expenses 0.68% 0.68% 0.68% Total Annual Fund Operating Expenses 1.43% 2.28% 2.28% Fee Waiver and/or Expense Reimbursement 0.38% 0.38% 0.38% Net Expenses/5/ 1.05% 1.90% 1.90% - -------------------------------------------------------------------------
- ------- 35
Class Class Class Fund A B C - ---------------------------------------------------------- Strategic Income Fund Management Fees 0.74% 0.74% 0.74% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.86% 0.86% 0.86% Total Annual Fund Operating Expenses 1.95% 2.60% 2.60% Fee Waiver and/or Expense Reimbursement 0.38% 0.38% 0.38% Net Expenses/5/ 1.57% 2.22% 2.22% - ---------------------------------------------------------- U.S. Government Securities Fund Management Fees 0.60% 0.60% 0.60% Distribution (12b-1) Fees 0.35% 1.00% 1.00% Other Expenses 0.59% 0.59% 0.59% Total Annual Fund Operating Expenses 1.54% 2.19% 2.19% Fee Waiver and/or Expense Reimbursement 0.24% 0.24% 0.24% Net Expenses/5/ 1.30% 1.95% 1.95% - ---------------------------------------------------------- Money Market Fund Management Fees 0.20% 0.20% 0.20% Distribution (12b-1) Fees 0.00% 0.00% 0.00% Other Expenses 0.86% 0.86% 0.86% Total Annual Fund Operating Expenses 1.06% 1.06% 1.06% Fee Waiver and/or Expense Reimbursement 0.26% 0.26% 0.26% Net Expenses/5/ 0.80% 0.80% 0.80% - ---------------------------------------------------------- Municipal Money Market Fund Management Fees 0.35% 0.35% 0.35% Distribution (12b-1) Fees 0.00% 0.00% 0.00% Other Expenses 0.81% 0.81% 0.81% Total Annual Fund Operating Expenses 1.16% 1.16% 1.16% Fee Waiver and/or Expense Reimbursement 0.36% 0.36% 0.36% Net Expenses/5/ 0.80% 0.80% 0.80% - ----------------------------------------------------------
/1/ Equity Funds include: Growth & Income, Large Cap Growth, Mid Cap Growth, Mid Cap Value, Science & Technology, Small Cap Growth, Small Cap Index, Socially Responsible, Stock Index, Global Equity, International Equity, International Small Cap, Balanced Fund, Aggressive Growth LifeStyle, Conservative Growth LifeStyle and Moderate Growth LifeStyle. Income Funds include: Core Bond, High Yield Bond, Municipal Bond, Strategic Income and U.S. Government Securities. /2/ 1% first year after purchase for purchases of $1 million or more. /3/ 5% first and second year; 4% third year; 3% fourth year; 2% fifth year; 1% sixth year and 0% thereafter. /4/ 0% after first year. /5/ Reflects AGAM's contractual obligation to waive, and to the extent necessary, reimburse certain fees and expenses of the Fund through February 28, 2002. /6/ These estimates are based upon the Funds' Expenses shown above and the expenses of the Underlying Funds' Institutional Class I shares shown in the current prospectus for such shares. The estimates assume the following con- stant allocation by the Funds of their assets among the Underlying Funds:
Aggressive Growth Moderate Growth Conservative Growth LifeStyle Fund LifeStyle Fund LifeStyle Fund International Equity 25% 15% 8% Fund Small Cap Growth Fund 20% 13% 8% Mid Cap Value Fund 10% 9% 6% Mid Cap Growth Fund 5% 3% 2% Large Cap Growth Fund 20% 15% 13% Growth & Income Fund 10% 15% 13% Core Bond Fund 10% 30% 50% High Yield Bond Fund 0% 0% 0%
The Funds' actual expense may be higher or lower as a result of the allocation of their assets among the Underlying Funds, the expenses of the Underlying Funds, and/or the Funds' own expenses. The Total Fund Operating Expenses and Estimated Total Annual Combined Indirect Expenses shown above with respect to the LifeStyle Funds are combined and used to calculate the 1 year and 3, 5 and 10 years examples, respectively, shown on the following pages with respect to such Funds. The higher Distribution Fees borne by Class B and Class C shares may cause long-term shareholders to pay more in sales charges than the maximum permitted front-end sales charge on Class A shares. ------- 36 By translating "Total Annual Fund Operating Expenses" into dollar amounts, these examples help you compare the costs of investing in a particular Fund, or a particular class of shares, with the costs of investing in other mutual funds. The examples assume that you: . Invest $10,000 in a Fund for the time period indicated and then redeem all of your shares at the end of those periods. . Your investment earns a 5% return each year and that each Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
Fund 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------------------------- Growth & Income Fund Class A $715 $1,010 $1,327 $2,221 Class B 714 1,061 1,334 2,273* Class B No redemption 214 661 1,134 2,273* Class C 314 661 1,134 2,441 Class C No redemption 214 661 1,134 2,441 - ------------------------------------------------------------------------------- Large Cap Growth Fund (formerly Growth Equity) Class A 706 984 1,282 2,127 Class B 705 1,034 1,288 2,179* Class B No redemption 205 634 1,088 2,179* Class C 305 634 1,088 2,348 Class C No redemption 205 634 1,088 2,348 - ------------------------------------------------------------------------------- Mid Cap Growth Fund (formerly Small/Mid Cap) Class A 722 1,031 1,361 2,294 Class B 721 1,082 1,369 2,346* Class B No redemption 221 682 1,169 2,346* Class C 321 682 1,169 2,513 Class C No redemption 221 682 1,169 2,513 - ------------------------------------------------------------------------------- Mid Cap Value Fund Class A 745 1,103 1,484 2,549 Class B 746 1,158 1,496 2,603* Class B No redemption 246 758 1,296 2,603* Class C 346 758 1,296 2,766 Class C No redemption 246 758 1,296 2,766 - ------------------------------------------------------------------------------- Science & Technology Fund Class A 719 1,022 1,346 2,263 Class B 718 1,073 1,354 2,315* Class B No redemption 218 673 1,154 2,315* Class C 318 673 1,154 2,483 Class C No redemption 218 673 1,154 2,483 - ------------------------------------------------------------------------------- Small Cap Growth Fund (formerly Emerging Growth) Class A 728 1,051 1,396 2,366 Class B 728 1,103 1,405 2,419* Class B No redemption 228 703 1,205 2,419* Class C 328 703 1,205 2,585 Class C No redemption 228 703 1,205 2,585 - ------------------------------------------------------------------------------- Small Cap Index Fund Class A 719 1,022 1,346 2,263 Class B 718 1,073 1,354 2,315* Class B No redemption 218 673 1,154 2,315* Class C 318 673 1,154 2,483 Class C No redemption 218 673 1,154 2,483 - -------------------------------------------------------------------------------
* Based on conversion to Class A Shares after eight years. - ------- 37
Fund 1 Year 3 Years 5 Years 10 Years - ----------------------------------------------------------------- Socially Responsible Fund Class A $700 $ 963 $1,247 $2,053 Class B 698 1,012 1,252 2,104* Class B No redemption 198 612 1,052 2,104* Class C 298 612 1,052 2,275 Class C No redemption 198 612 1,052 2,275 - ----------------------------------------------------------------- Stock Index Fund Class A 647 801 968 1,452 Class B 643 843 966 1,501* Class B No redemption 143 443 766 1,501* Class C 243 443 766 1,680 Class C No redemption 143 443 766 1,680 - ----------------------------------------------------------------- Global Equity Fund Class A 782 1,215 1,672 2,934 Class B 785 1,274 1,689 2,989* Class B No redemption 285 874 1,489 2,989* Class C 385 874 1,489 3,147 Class C No redemption 285 874 1,489 3,147 - ----------------------------------------------------------------- International Equity Fund Class A 738 1,080 1,445 2,468 Class B 738 1,133 1,455 2,522* Class B No redemption 238 733 1,255 2,522* Class C 338 733 1,255 2,686 Class C No redemption 238 733 1,255 2,686 - ----------------------------------------------------------------- International Small Cap Fund Class A 762 1,152 1,567 2,719 Class B 763 1,208 1,580 2,773* Class B No redemption 263 808 1,380 2,773* Class C 363 808 1,380 2,934 Class C No redemption 263 808 1,380 2,934 - ----------------------------------------------------------------- Balanced Fund Class A 739 1,083 1,450 2,478 Class B 739 1,136 1,460 2,532* Class B No redemption 239 736 1,260 2,532* Class C 339 736 1,260 2,696 Class C No redemption 239 736 1,260 2,696 - ----------------------------------------------------------------- Aggressive Growth LifeStyle Fund Class A 733 1,065 1,420 2,417 Class B 733 1,118 1,430 2,470* Class B No redemption 233 718 1,230 2,470* Class C 333 718 1,230 2,636 Class C No redemption 233 718 1,230 2,636 - ----------------------------------------------------------------- Moderate Growth LifeStyle Fund Class A 727 1,048 1,391 2,356 Class B 727 1,100 1,400 2,409* Class B No redemption 227 700 1,200 2,409* Class C 327 700 1,200 2,575 Class C No redemption 227 700 1,200 2,575 - -----------------------------------------------------------------
* Based on conversion to Class A Shares after eight years. ------- 38
Fund 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------------------------- Conservative Growth LifeStyle Fund Class A $722 $1,031 $1,361 $2,294 Class B 721 1,082 1,369 2,346* Class B No redemption 221 682 1,169 2,346* Class C 321 682 1,169 2,513 Class C No redemption 221 682 1,169 2,513 - ------------------------------------------------------------------------------- Core Bond Fund (formerly Investment Quality Bond) Class A 604 876 1,169 2,000 Class B 701 1,021 1,268 2,136* Class B No Redemption 201 621 1,068 2,136* Class C 301 621 1,068 2,306 Class C No Redemption 201 621 1,068 2,306 - ------------------------------------------------------------------------------- High Yield Bond Fund Class A 627 947 1,290 2,254 Class B 725 1,094 1,390 2,388* Class B No Redemption 225 694 1,190 2,388* Class C 325 694 1,190 2,554 Class C No Redemption 225 694 1,190 2,554 - ------------------------------------------------------------------------------- Municipal Bond Fund (formerly National Munici- pal Bond) Class A 577 793 1,027 1,697 Class B 693 997 1,226 1,998* Class B No Redemption 193 597 1,026 1,998* Class C 293 597 1,026 2,222 Class C No Redemption 193 597 1,026 2,222 - ------------------------------------------------------------------------------- Strategic Income Fund Class A 627 947 1,290 2,254 Class B 725 1,094 1,390 2,388* Class B No Redemption 225 694 1,190 2,388* Class C 325 694 1,190 2,554 Class C No Redemption 225 694 1,190 2,554 - ------------------------------------------------------------------------------- U.S. Government Securities Fund Class A 601 868 1,154 1,968 Class B 698 1,012 1,252 2,104* Class B No Redemption 198 612 1,052 2,104* Class C 298 612 1,052 2,275 Class C No Redemption 198 612 1,052 2,275 - ------------------------------------------------------------------------------- Money Market Fund Class A 82 255 444 990 Class B 82 255 444 990* Class B No Redemption 82 255 444 990* Class C 82 255 444 990 Class C No Redemption 82 255 444 990 - ------------------------------------------------------------------------------- Municipal Money Market Fund Class A 82 255 444 990 Class B 82 255 444 990* Class B No Redemption 82 255 444 990* Class C 82 255 444 990 Class C No Redemption 82 255 444 990 - -------------------------------------------------------------------------------
* Based on conversion to Class A Shares after eight years. - ------- 39 More Information About Investment Strategies and Risks This Prospectus does not attempt to disclose all of the different investment techniques that the Funds might use, or all of the types of securities in which the Funds might invest. As with any mutual fund, investors must rely on the professional judgment and skill of the Funds' management. A subadvisor may choose not to use some or all of the investment techniques available to a Fund, and these choices may cause the Fund to lose money or not achieve its invest- ment objective. Each Fund has a unique investment objective (see the Fund Summaries) that it tries to achieve through its investment strategies. The investment objectives of the following Funds cannot be changed without the approval of the holders of a majority of the outstanding shares of each Fund; Growth & Income Fund, Large Cap Growth Fund, Mid Cap Growth Fund, Small Cap Growth Fund, Global Equity Fund, International Equity Fund, International Small Cap Fund, Balanced Fund, Core Bond Fund, Municipal Bond Fund, Strategic Income Fund, U.S. Government Securities Fund and Money Market Fund. The investment objectives of the other Funds may be changed solely by the Trustees. Except as noted for certain investment restrictions, the strategies a Fund uses to achieve its investment objective also may be changed by the Trustees without approval of the share- holders. Because each Fund is different, they have different investment poli- cies and risks, and will also have different returns over time. This section provides additional information about certain of the Funds, and should be read in conjunction with the Fund Summaries. Growth & Income Fund Wellington Management believes that high quality companies are evidenced by a leadership position within an industry, a strong or improving balance sheet, relatively high return on equity, steady or increasing dividend payout, and strong management skills. The Fund's investments will emphasize primarily divi- dend paying stocks of larger companies. The Fund may invest in securities that can be converted into, or that include the right to buy common stocks, includ- ing convertible securities issued in the Euromarket and preferred stocks. The Fund may also invest in marketable debt securities of domestic issuers and of foreign issuers (payable in U.S. dollars) rated at the time of purchase "A" or better by Moody's or S&P, or unrated securities considered to be of equivalent quality in Wellington Management's judgment. Under normal market conditions, the subadvisor expects that the Fund's portfolio will consist primarily of equity securities. The Fund may invest in derivatives. Large Cap Growth Fund The Fund may invest in preferred stocks and convertible securities, that offer opportunities for capital appreciation. The Fund may also invest in high- quality bonds, debentures and other corporate or government obligations. Although these securities may produce current income, income will not be a substantial factor in selecting these securities. The Fund may invest in investment grade bonds, debentures and corporate obliga- tions rated at the time of purchase of Baa or higher by Moody's or BBB or higher by S&P. The Fund may choose to invest in lower-rated (Ba or lower by Moody's and BB or lower by S&P) convertible and preferred stocks but not rated below B. The Fund may also invest in unrated convertible securities and pre- ferred stocks if Founders believes that they are equivalent in quality to the rated securities the Fund may buy. The Fund will not have more than 5% of its total assets invested in unrated or below-investment-grade fixed income securities, with the exception of preferred stocks. If the Fund holds securities that are downgraded after they are pur- chased, the Fund does not have to sell them unless the Fund assets in unrated and below investment-grade securities reaches 5% of total assets. The Fund may invest up to 30% of its total assets in foreign securities. The Fund may not invest more than 25% of its total assets in any one foreign coun- try. ------- 40 The Fund is also permitted to use forward foreign currency contracts and futures contracts. The Fund may also purchase and/or write options on securi- ties, on indices, futures contracts and foreign currencies and may invest in Rule 144A securities. Rule 144A securities are unregistered securities eligible for sale to certain buyers, such as mutual funds. The Fund may invest without limit in American Depositary Receipts ("ADRs"). ADRs are receipts representing shares of a foreign corporation held by a U.S. bank that entitle the holder to all dividends and capital gains on the under- lying foreign shares. ADRs are denominated in U.S. dollars and trade in the U.S. securities markets. Mid Cap Growth Fund The Fund invests in equity securities, including common and preferred stocks, and securities that can be converted into or exchanged for equity securities, including warrants and rights. The Fund will typically invest in companies whose securities are traded on domestic stock exchanges or in the over-the- counter market. To give the Fund the flexibility to take advantage of new opportunities that can help to meet the Fund's investment objectives, the Fund can invest in money market instruments, bank and thrift obligations, obligations issued or guaran- teed by the U.S. Government or by its agencies or instrumentalities, foreign bank obligations and obligations of foreign branches of domestic banks, vari- able rate master demand notes and repurchase agreements. The Fund may invest in derivatives. Mid Cap Value Fund Although primarily investing in equity securities of mid cap companies using a value-oriented approach, the Fund may use certain practices and securities involving additional risks. Borrowing and derivatives could create leverage, meaning that certain gains or losses could be amplified, increasing NAV price movements. In using certain derivatives to gain stock market exposure for excess cash holdings, the Fund increases its risk of loss. Although they may add diversification, foreign securities can be riskier, because foreign markets tend to be more volatile and exchange rates fluctuate. The Fund may invest up to 10% of its total assets in foreign securities. When the Fund anticipates adverse market, economic, political or other condi- tions, it may temporarily depart from its goal and invest substantially in high-quality short-term fixed-income investments. This could help the Fund avoid losses but may also mean lost opportunities. Science & Technology Fund Since this Fund is focused on the science and technology industries, it is less diversified than stock funds investing in a broader range of industries and, therefore, could experience significant volatility. Companies in the rapidly changing fields of science and technology often face unusually high price vola- tility, in terms of both gains and losses. The potential for wide variation in performance is based on the special risks common to these stocks. For example, products or services that at first appear promising may not prove commercially successful or may become obsolete quickly. Earnings disappointments can result in sharp price declines. The level of risk will rise to the extent that the Fund has significant expo- sure to smaller or unseasoned companies (those with less than a three-year operating history), which may not have established products or more experienced management. Foreign stock holdings are subject to the risk that some holdings may lose value because of declining foreign currencies or adverse political or economic events overseas. Investment in futures and options, if any, are subject to additional volatility and potential losses. Small Cap Growth Fund The Fund will usually invest at least 65% of its total assets in common and preferred stocks, securities convertible into common stocks and warrants of small U.S. growth companies. In seeking to identify growth companies the Fund's subadvisors often look for: companies still in the developmental stage; older companies that appear to be entering a new stage of growth; and companies pro- viding products or services with a high unit-volume growth rate. - ------- 41 Some companies may outgrow the definition of a small company after the Fund has purchased their securities. These companies continue to be considered small for purposes of the Fund's minimum 65% allocation to small company equi- ties. In addition, the Fund may invest in companies of any size once the 65% policy is met. As a result, the Fund's average market capitalization may some- times exceed that of the largest company in the Russell 2000 Index. Although the Fund will typically invest in smaller companies, the Fund may invest in emerging growth companies of any size. Emerging growth companies generally benefit from new products or services, technological developments, changes in management or other factors. The Fund may also invest in companies experiencing unusual developments affecting their market value, called "spe- cial situation" companies. These companies may be involved in acquisitions or consolidations, reorganization, recapitalization, mergers, liquidation, or distribution of cash, securities or other assets, tender or exchange offers, a breakup or workout of a holding company, lawsuits which, if resolved favor- ably, would improve the value of the company's stock, or a change in corporate control. Investing in securities of emerging growth and small-sized companies can involve greater risks because these securities may have limited marketability. Because small and medium-sized companies normally have fewer shares outstand- ing than larger companies, it may be more difficult for the Fund to buy or sell large numbers of shares without affecting current prices. Small- and medium-sized companies are typically subject to a greater degree of changes in earnings and business prospects than are larger, more established companies. There is typically less publicly available information concerning small- and medium-sized companies than for larger, more established ones. And companies with small market capitalizations may also be dependent upon a single proprie- tary product or market niche, may have limited product lines, markets or financial resources, or may depend on a limited management group. The Fund may invest up to 20% of its total assets in investment grade debt securities (other than money market obligations) and preferred stocks that are not convertible into common stock. The Fund may also invest up to 10% of its total assets in the securities of foreign issuers, which have certain risks associated with them. The Fund's status is non-diversified, although its portfolio managers have typically diversified the Fund's investments. The interest income to be derived may be considered as one factor in selecting debt securities for investment. Because the market value of debt obligations can be expected to vary inversely with changes in prevailing interest rates, investing in debt obligations may provide an opportunity for capital apprecia- tion when interest rates are expected to decline. The success of such a strat- egy is dependent upon the manager's ability to accurately forecast changes in interest rates. A security will be considered investment grade if it is rated within the four highest grades by Moody's or S&P or, if unrated, is determined by the manager to be of comparable quality. Bonds rated in the fourth highest grade may have speculative characteristics. If a security held by the Fund is no longer rat- ed, or is rated below the Fund's minimum allowed rating, the manager factors this information into the decision about whether the Fund should continue to hold the securities. The Fund can normally invest up to 20% of its total assets in domestic and foreign short-term money market obligations. The Fund may invest in derivatives. Small Cap Index Fund The Fund's subadvisor pursues the Fund's objective by investing in companies that are listed in the Russell 2000(TM) Index (the "Index"), except for a small portion in cash, to be available for redemptions. Since it may not be possible to buy every stock included in the Index, or in the same proportions, the Fund invests in a sampling of common stocks in the Index. The common stocks of the Index will be selected utilizing a statistical sampling tech- nique known as "optimization". This process selects stocks for the Fund so that various industry weightings, market capitalizations and fundamental char- acteristics (e.g., price-to-book, price-to- ------- 42 earnings, debt-to-asset ratios and dividend yields) closely approximate those of the Index. The common stocks held by the Fund are weighted to make the Fund's aggregate investment characteristics similar to those of the Index as a whole. Socially Responsible Fund The manager of the Fund determines whether a company "significantly" engages in prohibited activities by screening the Fund's investable universe against a proprietary database of stocks. Companies in the database generating more that 5% of revenues from any violating activity are not purchased by the Fund. In addition to this database, the manager uses various other resources to screen out companies whose operations appear to violate the social criteria. At least once a year, the Investor Responsibility Research Center surveys state laws to see if there are any new or revised state laws that govern or affect the investments of public funds. If the survey shows that at least 20 states have adopted laws that restrict public funds from being invested in a clearly definable category of investments, this category is automatically added to the Fund's social criteria list. The manager of the Fund determines whether a company "significantly pollutes the environment" by screening the Fund's investable universe against a list of the top 75 global emitters. Emissions data is collected from various sources including, but not limited to, government agencies and company filings. In addition to this list, the manager uses various publications to screen out com- panies whose operations appear to violate the social criteria. Stock Index Fund The Fund's subadvisor pursues the Fund's objective by investing in companies that are listed in the S&P 500 Index (the "Index"), except for a small portion in cash, to be available for redemptions. Since it may not be possible to buy every stock included in the Index, or in the same proportions, the Fund invests in a sampling of common stocks in the Index. The common stocks of the Index will be selected utilizing a statistical sampling technique known as "optimiza- tion". This process selects stocks for the Fund so that various industry weightings, market capitalizations and fundamental characteristics (e.g., price-to-book, price-to-earnings, debt-to-asset ratios and dividend yields) closely approximate those of the Index. The common stocks held by the Fund are weighted to make the Fund's aggregate investment characteristics similar to those of the Index as whole. Global Equity Fund The Fund invests primarily in equity securities of issuers throughout the world, including issuers in the U.S. and emerging market countries. While the Fund generally emphasizes investments in equity securities, such as common stocks and preferred stocks, it may also invest in fixed-income securi- ties when these investments offer opportunities for capital appreciation. Fixed-income securities that the Fund may invest in include bonds, debentures and other corporate or government obligations. The Fund may invest without limit in ADRs. ADRs are receipts representing shares of a foreign corporation held by a U.S. bank that entitle the holder to all dividends and capital gains on the underlying foreign shares. ADRs are denominated in U.S. dollars and trade in the U.S. securities markets. International Equity Fund MSAM's Active International Allocation team analyzes both the global economic environment and the economies of the industrialized countries comprising the MSCI Europe, Australasia, Far East (EAFE) Index. EAFE countries include Japan, most nations in Western Europe, Australia, New Zealand, Hong Kong and Singapore. MSAM views each country and sector as unique investment opportunities and evaluates prospects for value, growth, inflation, interest rates, corporate earnings, liquidity and risk characteristics, investor sentiment and currency outlook. After determining to invest in a country or sector, MSAM establishes overweight, underweight or neutral positions relative to the broad market index for that country or sector. Within the countries or sectors selected for investment, MSAM purchases optimized baskets of equity securities designed to track the local market - ------- 43 index. The Fund does not invest in securities of U.S. issuers. The Fund will limit its use of derivatives for non-hedging purposes to 33 1/3% of its total assets measured by the aggregate notional amount of outstanding derivatives. While the use of derivatives may be advantageous to the Fund, if MSAM is not successful in employing them, the Fund's performance may be worse than if it did not make such investments. The Fund may invest in emerging market countries and, with regard to such investments, may make global and regional allocations to emerging markets, as well as allocations to specific emerging market countries. Emerging market countries are countries that major international financial institutions, such as the World Bank, generally consider to be less economically mature than developed nations, such as the United States or most nations in Western Europe. Emerging market countries can include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most countries located in Western Europe. Emerging market countries may be more likely to experience political turmoil or rapid changes in economic conditions than more developed countries, and the financial condition of issuers in emerging market countries may be more precarious than in other countries. The characteristics result in greater risk of price volatility in emerging market countries, which may be heightened by currency fluctuations relative to the U.S. dollar. International Small Cap Fund The Fund may invest a significant portion of its assets in the securities of small companies. The securities of small companies may have limited marketabil- ity and may experience more abrupt or erratic movements in price than securi- ties of larger companies or the market averages in general. Because of this, the net asset value of the Fund may fluctuate more widely than popular market averages. The Fund may also invest in convertible securities, preferred stocks, bonds, debentures and other corporate obligations when Founders believes that these investments offer opportunities for capital appreciation. The Fund may invest in investment-grade bonds, debt securities and corporate obligations. For purposes of this Fund, investment grade securities are those rated Baa or higher by Moody's, or BBB or higher by S&P. The Fund may choose to invest in lower-rated convertible securities and preferred stocks (securities rated Ba or lower by Moody's and BB or lower by S&P) or of comparable invest- ment quality at the time of purchase. The Fund may also invest in unrated con- vertible securities and preferred stocks if Founders believes they are equiva- lent in quality to the rated securities that the Fund may buy. The Fund will not invest more than 5% of its total assets in unrated or below investment-grade fixed-income securities, with the exception of preferred stocks. If the Fund holds securities that are downgraded to below investment grade after they are purchased, the Fund does not have to sell them unless the Fund's investments in unrated and below investment grade securities are equal to or greater than 5% of total fund assets. Since the Fund's assets will be invested primarily in foreign securities and since substantially all of the Fund's revenues will be received in foreign cur- rencies, the Fund's net asset values will be affected by changes in currency exchange rates. The Fund will pay dividends in dollars and will incur currency conversion costs. Balanced Fund The Fund may invest in convertible securities, preferred stocks, bonds, deben- tures, and other corporate obligations when INVESCO believes that these invest- ments offer opportunities for capital appreciation. Current income is also a factor in the selection of these securities. The Fund may invest up to 25% of its total assets in foreign securities and will be subject to certain risks as a result of these investments. The Fund may also purchase ADRs or Canadian securities that are not included in the 25% for- eign securities limitation. The Fund may also take positions in securities traded on regional or foreign exchanges. The portion of the Fund's portfolio invested in debt securities may include obligations of the U.S. government, government agencies, and investment grade corporate bonds. Obligations ------- 44 issued by U.S. Government agencies may include some supported only by the credit of the issuing agency rather than by the full faith and credit of the U.S. Government. The Fund may hold securities of any maturity, with the average maturity of the portfolio varying depending upon economic and market condi- tions. The Fund may invest in derivatives. Aggressive Growth LifeStyle Fund The Fund is managed so that it can serve as a complete investment program or as a core part of your larger portfolio. The combination of the North American Funds ("Underlying Funds") has been selected to represent a reasonable spectrum of investment options for the Fund. The manager may change the asset allocation ranges and the particular Underlying Funds in which the Fund may invest from time to time. Conservative Growth LifeStyle Fund The Fund is managed so that it can serve as a complete investment program or as a core part of your larger portfolio. The combination of the North American Funds ("Underlying Funds") has been selected to represent a reasonable spectrum of investment options for the Fund. The manager may change the asset allocation ranges and the particular Underlying Funds in which the Fund may invest from time to time. Moderate Growth LifeStyle Fund The Fund is managed so that it can serve as a complete investment program or as a core part of your larger portfolio. The combination of the North American Funds ("Underlying Funds") has been selected to represent a reasonable spectrum of investment options for the Fund. The manager may change the asset allocation ranges and the particular Underlying Funds in which the Fund may invest from time to time. Core Bond Fund Credit research on corporate bonds includes examining both quantitative (mathe- matical) and qualitative criteria established by AGIM. These criteria include an issuer's industry, operating and financial profiles, business strategy, man- agement quality, and projected financial and business conditions. Up to 10% of the Fund's total assets may be invested in lower quality fixed- income securities, those rated below Baa3 by Moody's and BBB by S&P or compara- ble investment quality at the time of purchase. Equity securities, including common or preferred stocks, convertible securities, and warrants, may comprise up to 20% of the Fund's total assets. The Fund may invest in ADRs, foreign currency, futures and options, investment companies, loan participations, real estate securities, repurchase agreements, reverse repurchase agreements, dollar rolls, structured securities, variable amount master demand notes, variable rate demand notes, and when-issued securities. The Fund may invest in deriva- tives. High Yield Bond Fund The Fund may invest up to 35% in investment grade securities, those rated Baa3 or higher by Moody's and BBB- or higher by S&P or comparable investment quality at the time of purchase. In addition, the Fund may invest up to 15% in zero coupon securities (securities not paying current cash interest), and up to 20% of total assets in equity securities. Equity securities include common or pre- ferred stocks, warrants, and convertible securities. The Fund may invest in derivatives. Municipal Bond Fund U.S. Government securities are securities issued or guaranteed by the U.S. Government which are supported by the full faith and credit of the U.S. Government; the right of the issuer to borrow from the U.S. Treasury; the credit of the issuing government agency; or the authority of the U.S. Government to purchase obligations of the agency. The Fund may invest in asset- backed securities, equity securities, futures and options, investment companies, loan participations, mortgage-related securities, real estate securities, repurchase agreements, reverse repurchase agreements, variable amount master demand notes, variable rate demand notes, and when-issued securities. If the Fund invests in municipal securities issued for certain private purposes, a portion of the Fund's dividends may be subject to the alternative minimum tax. From time to time, the Fund may invest more than 25% of its total - ------- 45 assets in obligations whose interest payments are from revenues of similar projects (such as utilities or hospitals) or whose issuers share the same geographic location. As a result, the Fund may be more susceptible to a single economic, political or regulatory development than would a Fund of securities with a greater variety of issuers. Strategic Income Fund The Fund may invest in debt obligations issued or guaranteed by a foreign sov- ereign government or one of its agencies or political subdivisions, and debt obligations issued or guaranteed by international organizations designated or supported by governmental entities to promote economic reconstruction or devel- opment and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development, the European Coal and Steel Community, the Asian Development Bank and the Inter- American Development Bank. These securities may be denominated in multi- national currency units. The purpose of investing a portion of the Fund's assets in below investment grade, mortgage, and international debt securities, is to provide investors with a higher yield than a high-quality domestic corporate bond fund, and with less risk than a fund that invests principally in below investment grade secu- rities. Some of the debt securities the Fund may select may be considered com- parable to securities having, the lowest ratings for non-subordinated debt instruments assigned by Moody's or S&P (i.e., rated C by Moody's or CCC or lower by S&P) or comparable investment quality at time of purchase. The Fund may invest in derivatives. The Fund may also invest in asset-backed securities, foreign currency, futures and options, illiquid securities, investment companies, loan participations, money market securities, mortgage-related securities, real estate securities, repurchase agreements, reverse repurchase agreements, dollar rolls, structured securities, swaps, variable amount master demand notes, variable rate demand notes, and when-issued securities. U.S. Government Securities Fund The Fund may invest in: . Mortgage-backed securities guaranteed by the Government National Mortgage Association ("GNMA"), popularly known as "Ginnie Maes," that are backed by the full faith and credit of the U.S. Government. These are known as a "modified pass through" type of mortgage- backed security ("GNMA Certificates"). These securities entitle the holder to receive all interest and principal payments due whether or not payments are actually made on the underlying mortgages; . U.S. Treasury obligations; . Obligations issued or guaranteed by agencies or instrumentalities of the U.S. Government. These securities are backed by their own credit, and may not be backed by the full faith and credit of the U.S. Government; . Mortgage-backed securities guaranteed by agencies or instrumentalities of the U.S. Government which are supported by their own credit but not the full faith and credit of the U.S. Government, such as the Federal Home Loan Mortgage Cor- poration and the Federal National Mortgage Association; . Collateralized mortgage obligations issued by private issuers for which the underlying mortgage-backed securities serving as collateral are backed (i) by the credit alone of the U.S. Government agency or instrumentality which issues or guarantees the mortgage backed securities, or (ii) by the full faith and credit of the U.S. Government; and . Repurchase agreements collateralized by any of the foregoing. Money Market Fund The Fund invests in high quality, U.S. dollar-denominated money market instru- ments, as described on page 28. A money market instrument is high quality when it is rated in one of two highest credit categories by a Nationally Recognized Statistical Rating Organization such as Moody's or S&P. Municipal Money Market Fund The Fund invests in short term U.S. dollar-denominated instruments money market instruments that are exempt from regular federal income taxation, as described on page 29. ------- 46 Other Risks of Investing in the North American Funds Although a Fund may have the flexibility to use some or all of the investments or strategies described in this Prospectus and the Statement of Additional Information, its subadvisor may choose not to use these investments or strate- gies for a variety of reasons. These choices may cause a Fund to miss opportu- nities, lose money or not achieve its goal. High Yield/High Risk Securities High yield securities (often known as "junk bonds") include debt instruments that have an equity security attached to them. Securities rated below invest- ment grade and comparable unrated securities offer yields that fluctuate over time, but generally offer higher yields than do higher rated securities. Howev- er, securities rated below investment grade also involve greater risks than higher-rated securities. Under rating agency guidelines, medium- and lower- rated securities and comparable unrated securities will likely have some qual- ity and protective characteristics that are outweighed by large uncertainties or major risk exposures to adverse conditions. Some of the debt securities in which the Funds may choose to invest may be, or may be similar to, the lowest rated non-subordinated debt (securities rated C by Moody's or CCC or lower by S&P or comparable investment quality at the time of purchase). This type of security is very risky, as issuers may not have the ability to repay principal and interest, and may even default. If this should occur, the value of shares of the Fund holding them would likely fall. Illiquid Securities An illiquid security is one that may not be frequently traded or cannot be dis- posed of promptly within seven days and in the usual course of business without taking a materially reduced price. Illiquid securities include, but are not limited to, time deposits and repurchase agreements not maturing within seven days and restricted securities. Each Fund other than the Money Market Fund and the Municipal Money Market Fund may invest up to 15% of its net assets in illiquid securities. This limit is 10% for the Money Market Fund and the Munic- ipal Money Market Fund. This restriction applies at all times to all assets. A restricted security is one that has not been registered with the Securities and Exchange Commission ("SEC") and, therefore, cannot be sold to the general public. Under procedures adopted by the Trust's Trustees, certain restricted securities may be deemed liquid, and will not be counted toward the 15%/10% limits. Lending Fund Securities Each Fund, except the LifeStyle Funds, may lend up to 33% (30% for the Stock Index Fund and the Small Cap Index Fund, 33 1/3% for the High Yield Bond Fund, the Mid Cap Value Fund, the Socially Responsible Fund and the Science & Tech- nology Fund, and 10% for the Municipal Money Market Fund) of its total portfo- lio assets, or securities, to brokers, dealers and other financial institu- tions. These loans must be callable (the Fund may ask that the loan be repaid in full) at any time by the Fund. The loans must be at all times fully secured by cash, or liquid assets and marked-to-market (priced at market value) to the value of loaned securities on a daily basis. As with any extensions of credit, there may be risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of Fund securities will only be made to firms deemed by the subadvisors to be creditworthy. Leverage Risk Funds that borrow money to buy securities are using leverage. Leverage risk is the risk that leverage, or debt, will enable a Fund to buy more of a security that falls in value. In this case, the Fund would still need to repay the money it borrowed. Funds can create leverage, or borrow money, by using different types of techniques including reverse repurchase agreements, dollar rolls, and derivatives including inverse floating rate instruments. Hedging and Other Strategic Transactions Individual Funds may be authorized to use a variety of investment strategies described below for hedging purposes only, including hedging various market risks (such as interest rates, currency exchange rates and broad or specific market movements), and managing the effective maturity or duration of debt instruments held by the Fund. Hedging is simply believing that certain securi- ties will fall, or rise, in value, and structuring transactions that take advantage of those changes. These transactions are generally used to - ------- 47 protect against possible changes in the market value of securities a Fund already owns or plans to buy, to protect unrealized gains or to improve the Fund's return in some way. Where allowed, individual Funds may purchase and sell (or write) exchange- listed and over-the-counter put and call options on securities, index futures contracts, financial futures contracts and fixed-income indices and other financial instruments, enter into financial futures contracts, enter into interest rate transactions, and enter into currency transactions. This category includes derivative transactions. A "derivative" is generally defined as an instrument whose value is based upon, or derived from, some underlying index or rate. Interest rate transactions may include swaps, caps, floors and collars, and currency transactions may include currency forward contracts, currency futures contracts, currency swaps and options on currencies or currency futures contracts. Frequent Trading A Fund's investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and a higher amount of short-term capital gains, which are generally taxable to you at your ordinary income tax rate. Temporary Defensive Strategies A Fund's subadvisor may at certain times decide that pursuing the Fund's investment strategies is inconsistent with market conditions. A subadvisor may then employ defensive strategies designed mostly to limit losses. However, the subadvisor may choose not to use defensive strategies, even in volatile or unsettled market conditions. Such defensive strategies may cause the Fund to miss opportunities or to not achieve its goal. ------- 48 Management of the Funds Under the federal securities laws, Massachusetts law and the Trust's Agreement and Declaration of Trust and By-Laws, the business and affairs of the Trust are managed under the direction of the Trustees. American General Asset Management Corp. ("AGAM"), formerly CypressTree Asset Management Corporation, Inc., is the investment adviser for the Trust. AGAM was formed in 1996 to advise, acquire and distribute mutual funds through broker- dealers, banks and other intermediaries. AGAM's address is 286 Congress Street, Boston, Massachusetts 02210. According to its Advisory Agreement with the Trust (the "Advisory Agreement"), AGAM: . Oversees the administration of all aspects of the business and affairs of the Funds . Selects, contracts with and compensates subadvisors to manage the assets of the Funds The following table shows the management fees each Fund paid (or, in the case of new Funds will pay) to AGAM for the last fiscal year under the Advisory Agreement as a percentage of the Fund's average daily net asset value.
Funds Management Fees Between Between Excess Over First $50 Million & $200 Million & $500 $50 Million $200 Million $500 Million Million - ------------------------------------------------------------------------------- Growth & Income Fund 0.725% 0.675% 0.625% 0.550% Large Cap Growth Fund 0.900% 0.850% 0.825% 0.800% Mid Cap Growth Fund 0.925% 0.900% 0.875% 0.850% Mid Cap Value Fund 0.900% See Below/1/ Science and Technology 0.900% 0.900% 0.900% 0.900% Fund Small Cap Growth Fund 0.950% 0.950% 0.950% 0.950% Small Cap Index Fund 0.280% 0.280% 0.280% 0.270% Socially Responsible 0.650% 0.650% 0.650% 0.650% Fund Stock Index Fund 0.270% 0.270% 0.270% 0.260% Global Equity Fund 0.900% 0.900% 0.700% 0.700% International Equity 0.900% 0.850% 0.800% 0.750% Fund International Small Cap 1.050% 1.000% 0.900% 0.800% Fund Balanced Fund 0.775% 0.725% 0.675% 0.625% Aggressive Growth 0.100% 0.100% 0.100% 0.100% LifeStyle Fund Conservative Growth 0.100% 0.100% 0.100% 0.100% LifeStyle Fund Moderate Growth 0.100% 0.100% 0.100% 0.100% LifeStyle Fund Core Bond Fund 0.600% 0.600% 0.525% 0.475% High Yield Bond Fund 0.825% 0.825% 0.725% 0.675% Municipal Bond Fund 0.600% 0.600% 0.600% 0.600% Strategic Income Fund 0.750% 0.700% 0.650% 0.600% U.S. Government 0.600% 0.600% 0.525% 0.475% Securities Fund Money Market Fund 0.200% 0.200% 0.200% 0.145% Municipal Money Market 0.350% 0.350% 0.350% 0.350% Fund
- -------------------------------------------------------------------------------- /1/The management fee schedule for the Mid Cap Value Fund is as follows: 0.900% on the first $100 million, 0.875% between $100 million and $250 million, 0.850% between $250 million and $500 million, 0.825% between $500 million and $750 million, and 0.800% on the excess over $750 million of the average net assets of the Fund. - ------- 49 .Makes recommendations to the Trustees regarding the hiring, termination and replacement of subadvisors .Reimburses the Fund if the total of certain expenses allocated to any Fund exceeds certain limitations .Reviews the performance of the subadvisors .Periodically reports to the Trustees Under an order granted to the Funds by the SEC, AGAM is permitted to appoint a subadvisor, to create a subadvisory agreement, and to terminate or amend a subadvisory agreement, in each case without shareholder approval. This "Manager of Managers" structure permits the Funds to change subadvisors or the fees paid to subadvisors without the expense and delays associated with obtaining share- holder approval. AGAM has ultimate responsibility under the Manager of Managers structure to oversee the subadvisors, including making recommendations to the Trust regarding the hiring, termination and replacement of subadvisors. ------- 50 Subadvisory Agreements American General Investment Management, L.P. ("AGIM") AGIM has been the subadvisor to the Strategic Income Fund, the Core Bond Fund, the U.S. Government Securities Fund, the Municipal Bond Fund, and the Money Market Fund since March, 2000, and of the High Yield Bond Fund and the Municipal Money Market Fund since inception. The portfolio managers of the Small Cap Index Fund, the Stock Index Fund, the Socially Responsible Fund, the Aggressive Growth LifeStyle Fund, the Conservative Growth LifeStyle Fund and the Moderate Growth LifeStyle Fund previously managed the corresponding AGSPC 2 Fund. AGIM was formed in 1998 as a successor to the investment management division of American General Corporation ("American General"), and is an indirect wholly-owned subsidiary of American General. AGIM also provides investment management and advisory services to pension and profit sharing plans, financial institutions and other investors. Accounts managed by AGIM had combined assets, as of December 31, 2000, of approximately $72.2 billion. AGIM is located at 2929 Allen Parkway, Houston, Texas 77019. Albert Gutierrez is Executive Vice President responsible for portfolio management and trading since April, 2000, and is primarily responsible for implementing the investment strategies of the Core Bond Fund, the Municipal Money Market Fund, the Municipal Bond Fund, the U.S. Government Securities Fund, the Aggressive Growth LifeStyle Fund, the Conservative Growth LifeStyle Fund and the Moderate Growth LifeStyle Fund. Prior to working at AGIM, Mr. Gutierrez was Senior Vice President responsible for non-equity research, trading and various insurance company portfolios with Conseco Capital Management from 1987 to 2000. Magali E. Azema-Barac is responsible for AGIM's equity group. She heads the team making investment decisions for each of the Index Funds, as well as for the Socially Responsible Fund. Ms. Azema-Barac joined American General in Sep- tember, 1999. Prior to that, she worked on the equity desk of US West Invest- ment Management Company in Englewood, Colorado, where she managed an enhanced equity portfolio. Steven Guterman, Executive Vice President and portfolio manager of the Strate- gic Income Fund, joined AGIM in 1998. Mr. Guterman served as Managing Director at Salomon Brothers, Inc. from 1996 to 1998 and as Senior Portfolio Manager and head of the U.S. Fixed Income Portfolio Group from 1990 to 1998. Investment decisions for the High Yield Bond Fund are made by a team, headed by Gordon Massie. Mr. Massie, Executive Vice President, has been the lead portfo- lio manager of AGIM or its indirect parent, American General since August 1985. Currently, Mr. Massie is AGIM's Head of Public High Yield Portfolio Management and Trading. Teresa Moro, Vice President, serves as the portfolio manager of the Money Mar- ket Fund, and has served as Vice President and Investment Officer of the Money Market Fund of North American Funds Variable Product Series I since 1991. She is responsible for managing money market instruments for AGIM. Credit Suisse Asset Management, LLC. Credit Suisse Asset Management, LLC., the subadvisor to the Small Cap Growth Fund ("CSAM"), is located at 466 Lexington Ave., New York, New York, 10017. CSAM is a professional investment counseling firm which provides investment services to investment companies, employee benefit plans, endowment funds, foundations and other institutions and individuals. As of November 30, 2000, CSAM managed approximately $93 billion of assets, and together with its global affiliates, managed $223 billion worldwide. The co-fund managers of the Small Cap Growth Fund are Elizabeth B. Dater, Ste- phen J. Lurito and Sammy Oh. Ms. Dater, a managing director, has been a fund manager of the Small Cap Growth Fund since its inception and has been a fund manager since 1978. Mr. Lurito, a managing director, has been a fund manager of the Small Cap Growth Fund since its inception and has been with the firm since 1987. Mr. Oh, a director, has been a fund manager of the Small Cap Growth Fund since March 1999. Prior to that, he worked at Warburg Pincus as a fund manager since 1997. Previously, Mr. Oh was Vice President - ------- 51 of Bessemer Trust from 1995 to 1997. Founders Asset Management, LLC. Investment decisions for the Large Cap Growth Fund, International Small Cap Fund and Global Equity Funds are made by their subadvisor, Founders Asset Man- agement, LLC ("Founders"), located at 2930 East Third Avenue, Denver, Colorado 80206. Founders is a registered investment adviser first established as an asset manager in 1938, and is a subsidiary of Mellon Financial Corporation. As of December 31, 2000, Founders had over $7.24 billion of assets under manage- ment, including approximately $7.12 billion in mutual fund accounts and $120 million in other advisory accounts. To facilitate the day-to-day investment management of the Large Cap Growth Fund, International Small Cap Fund, and Global Equity Fund, Founders employs a unique team-and-lead-manager system. The management team is composed of several members of the Investment Department, including portfolio managers, portfolio traders and research analysts. Team members share responsibility for providing ideas, information, knowledge and expertise in the management of the Funds. Each team member has one or more areas of expertise that is applied to the man- agement of the Fund. Daily decisions on Fund selection for the Fund rests with a fund manager assigned to the Fund. Tracy P. Stouffer, Vice President of Investments, has been the lead fund man- ager for the International Small Cap Fund since July 1999. Previously, Ms. Stouffer was a vice president and portfolio manager with Federated Global Incorporated from 1995 to July 1999 and a vice president and portfolio manager with Clariden Asset Management from 1988 to 1995. Thomas M. Arrington, Vice President of Investments, is a Chartered Financial Analyst who has been the co-portfolio manager, along with Scott Chapman, of the Large Cap Growth Fund since December 1998. Mr. Arrington has served as co-port- folio manager to the Global Equity Fund since March 2000. Prior to joining Founders, he was vice president and director of income equity strategy at HighMark Capital Management, a subsidiary of Union BanCal Corp., where he man- aged the HighMark Income Equity Fund, a large-cap fund. He received a bache- lor's degree in economics from the University of California, Los Angeles and an MBA from San Francisco State University. Scott Chapman, Vice President of Investments, is a Chartered Financial Analyst who has been the co-portfolio manager, along with Thomas Arrington, of the Large Cap Growth Fund since December 1998. Mr. Chapman has served as co-portfo- lio manager to the Global Equity Fund since March 2000. Before joining Found- ers, Chapman was vice president and director of growth strategy for HighMark Capital. He has more than 10 years experience in equity investment management, including security analysis positions with McCullough, Andrews and Cappiello and Cooper Development Co. Chapman received a bachelor of science degree in accounting from Santa Clara University and an MBA in finance from Golden Gate University. Douglas A. Loeffler, Vice President of Investments, is a Chartered Financial Analyst who has served as the co-portfolio manager of the Global Equity Fund since March, 2000. Prior to joining Founders in 1995, Mr. Loeffler was an investment professional at Scudder, Stevens & Clark for seven years. INVESCO Funds Group, Inc. ("INVESCO") INVESCO, with principal offices at 7800 E. Union Blvd., Denver, Colorado 80237, has been the subadvisor to the Balanced Fund and the Mid Cap Growth Fund since March 2000. Established in 1932, INVESCO Funds Group is one of the oldest existing mutual fund management companies in the United States. Some of the world's largest institutions and more than two million individual investors rely on the knowledge of INVESCO's investment specialists. As of December 31, 2000, INVESCO and its affiliates managed approximately $402.6 billion in assets. Charles P. Mayer, Director of Equity Income Investments & Senior Vice Presi- dent, manages the equity portion of the Balanced Fund. Mr. Mayer, who joined INVESCO in 1993, has been an investment professional since 1969. Mr. Mayer holds a BA from ------- 52 St. Peter's College, and an MBA from St. John's University. Donovan J. Paul, Director of Fixed Income Investments and Senior Vice Presi- dent, co-manages the fixed-income portion of the Balanced Fund. Mr. Paul, who joined INVESCO in 1994, has been an investment professional since 1976. Mr. Paul holds a BBA from the University of Iowa, and an MBA from the University of Northern Iowa. Peter Lovell, Vice President, is the lead manager of the Balanced Fund. Mr. Lovell, who joined INVESCO in 1994, has been an investment professional since 1976. Mr. Lovell holds a BBA from Colorado State University, and an MBA from Regis University. Timothy J. Miller, Chief Investment Officer, Director and Senior Vice Presi- dent, is lead manager of the Mid Cap Growth Fund. Mr. Miller, who joined INVESCO in 1992, has been an investment professional since 1979. Mr. Miller holds a BSBA from St. Louis University, and an MBA from the University of Missouri. Morgan Stanley Dean Witter Investment Management Inc. Morgan Stanley Dean Witter Investment Management Inc., with principal offices at 1221 Avenue of the Americas, New York, New York 10020, has been the subadvisor to the International Equity Fund since April 1, 1999. On December 1, 1998, Morgan Stanley Asset Management Inc. changed its name to Morgan Stanley Dean Witter Investment Management Inc., but continues to do business in certain instances using the name Morgan Stanley Asset Management ("MSAM"). MSAM, a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co., conducts a worldwide fund management business, providing a broad range of fund management services to customers in the United States and abroad. As of December 31, 2000, MSAM, together with its affiliated institutional asset management companies, managed investments totaling approximately $170.2 billion. Ann D. Thivierge shares portfolio management responsibility for the Interna- tional Equity Fund with Barton M. Biggs. Ms. Thivierge is a Managing Director of MSAM. She joined MSAM in 1986 and holds a B.A. in International Relations from James Madison College, Michigan State University, and an M.B.A. in Finance from New York University. Barton M. Biggs has been Chairman and a director of MSAM since 1980. He is also a director and chairman of various registered investment companies to which MSAM and certain of its affiliates provide investment advisory services. Mr. Biggs holds a B.A. from Yale University and an M.B.A. from New York University. Neuberger Berman Management, Inc. ("NBM") 605 Third Avenue, Second Floor, New York, New York 10158-0180 NBM is the subadvisor for the Mid Cap Value Fund. NBM and its predecessor firms have specialized in the management of no-load mutual funds since 1950. As of December 31, 2000, NBM and its affiliates managed approximately $55.5 billion in aggregate net assets. Robert I. Gendelman serves as manager of the Mid Cap Value Fund. Mr. Gendelman is a Vice President of NBM and managing director of Neuberger Berman, LLC. Mr. Gendelman has been associated with NBM since 1994. T. Rowe Price Associates, Inc., ("T. Rowe Price") 100 East Pratt St., Baltimore, MD 21202 T. Rowe Price is the subadvisor for the Science & Technology Fund. Founded in 1937 by Thomas Rowe Price, Jr., the Baltimore-based investment management firm is one of the nation's leading providers of no-load mutual funds for individual investors and corporate retirement programs. T. Rowe Price Group, Inc. owns 100% of the stock of T. Rowe Price. T. Rowe Price was formed in 2000 as a holding company for the T. Rowe Price affiliated companies. As of December 31, 2000, T. Rowe Price and its affiliates served as investment advisor to more than 80 stock, bond, and money market funds and managed about $166.7 billion. The Fund is managed by an investment advisory committee, chaired by Charles A. Morris. Mr. Morris has day-to-day responsibility for - ------- 53 managing the portfolio and works with the committee to develop and execute the Fund's investment program. Mr. Morris joined T. Rowe Price in 1987, and has been managing investments since 1991. Wellington Management Company, LLP Wellington Management Company, LLP, the subadvisor to the Growth & Income Fund ("Wellington Management"), is located at 75 State Street, Boston, Massachusetts 02109. Wellington Management and its predecessor organizations have provided invest- ment management services to investment companies, employee benefit plans, endowments, foundations and other institutions and individuals since 1928. As of September 30, 2000, Wellington Management had investment management author- ity with respect to approximately $267 billion of assets. Matthew E. Megargel, Senior Vice President of Wellington Management, is a chartered financial analyst who has served as fund manager to the Growth & Income Fund since February 1992. Mr. Megargel joined Wellington Management in 1983 as a research analyst and took on additional responsibilities as a fund manager in 1988. In 1991, he became solely a fund manager with Wellington Management. ------- 54 Section III: Investing in the North American Funds Classes of Shares There are three classes of shares of North American Funds offered by this pro- spectus: Class A shares, Class B shares and Class C shares. The initial investment minimum for all classes of shares per fund is $1,000; the minimum for subsequent investments is $50. For retirement plans and other automatic investment programs, the initial purchase minimum is $50. You must maintain a minimum account balance of $500, or $50 for retirement plans and other automatic investing programs. Purchases and redemptions will be made at the share price next calculated by North American Funds after the request is received in good order. Confirmations of all transactions will be mailed to you promptly, and a copy will be sent to your broker of record. North American Funds may refuse any request to purchase shares.
Buying Fund Redeeming Fund Shares Shares - ------------------------------------------------------------------------------------------------------------------ By Mail Mail a check and account Send a written request to: application to: North American Funds North American Funds P.O. Box 8505 P.O. Box 8505 Boston, MA 02266-8505 Boston, MA 02266-8505 To add to an existing account, mail a check with your account number: North American Funds P.O. Box 8505 Boston, MA 02266-8505 Overnight Mailing Address: North American Funds c/o Boston Financial 66 Brooks Dr. Braintree, MA 02184 - ------------------------------------------------------------------------------------------------------------------ By Wire Transfer For wire instructions, contact Yes, with a minimum of $1,000. For wire Customer Service at 1-800-872-8037 instructions, contact Customer Service at 1-800-872-8037 - ------------------------------------------------------------------------------------------------------------------ By Phone No Yes, simply call 1-800-872-8037 by 4:00 p.m., Eastern Time, to receive that day's closing price - ------------------------------------------------------------------------------------------------------------------ Through Broker-Dealers Yes, if a dealer agreement is in place Yes, if a dealer agreement is in place - ------------------------------------------------------------------------------------------------------------------
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Class A Shares Class B Shares Class C Shares - ----------------------------------------------------------------------------------- Sales Charges . Purchases of less . Shares are sold . Shares are sold than without a front end without a front end $1 million are sold sales charge. For sales charge. For with a front end shares redeemed shares redeemed sales charge within six years within one year (see table on next there is a sales there is a 1% sales page). charge at redemption charge at . Purchases over $1 (see table on next redemption. million are sold page). without a front end . Available for . Available for sales charge. For purchases of purchases under $1 such shares redeemed $250,000 or less. million. within one year there is a 1% back end sales charge at redemption. . For B and C Shares, the back end sales charge is assessed on the lesser of the net asset value at redemption, or the original purchase price. - ----------------------------------------------------------------------------------- Programs That . Rights of Reduce Accumulation - you Sales Charges will pay the sales charge applicable to your total account balance in all classes of shares. . Statement of intention -agree to invest a certain amount over 13 months and you will pay the sales charge based on your goal. --------------------------------------------------------------------- . For an account opened after 5-1-95, in any class of shares, there will be no deferred sales charge applied on redemptions of up to 12% of the account value annually pursuant to a systematic withdrawal plan. . For qualified group retirement plans, please see the Statement of Additional Information (SAI) for a more detailed discussion. - -----------------------------------------------------------------------------------
Class A shares of the Funds are available at net asset value (NAV) to investors if purchased with redemption proceeds from other mutual fund complexes on which they had previously paid a front-end or a contingent deferred sales charge (CDSC) no more than 60 days prior to purchase. American General Funds Distribu- tor Inc. (the "Distributor") will require satisfactory evidence of your quali- fication for this waiver. Please call for more information. The redemption of the shares from the other mutual fund is, for federal income tax purposes, a sale upon which a gain or loss may be realized. ------- 56 Sales Charge Tables Class A Shares Sales Charge Table There is no front end sales charge for Class A shares of the Municipal Money Market Fund or the Money Market Fund and no payments are made to broker-dealers on sales of such shares. If Class A shares of these Funds are exchanged for Class A shares of another Fund, the regular sales charge for Class A shares will be charged.
Amount of Sales Charge Sales Charge Concession to Purchase Payment as a as a Broker/Dealer as Percentage of Percentage of a Percentage of the Offering Price the Net Amount Offering Price Invested - ----------------------------------------------------------------------------------- Less than $50,000 Equity Funds 5.75% 6.10% 5.00% Income Funds 4.75% 4.99% 4.00% - ----------------------------------------------------------------------------------- $50,000 but less than 4.75% 4.99% 4.00% $100,000 - ----------------------------------------------------------------------------------- $100,000 but less than 4.00% 4.17% 3.25% $250,000 - ----------------------------------------------------------------------------------- $250,000 but less than 3.00% 3.09% 2.50% $500,000 - ----------------------------------------------------------------------------------- $500,000 but less than $1 2.25% 2.30% 1.75% million - ----------------------------------------------------------------------------------- $1 million or more None* None* See Below** - -----------------------------------------------------------------------------------
* A CDSC (contingent deferred sales charge) may apply. ** For purchases of Class A shares of $1 million or more the Distributor will pay a commission to dealers as follows: 1.00% on sales up to $5 million, plus 0.50% of the amount in excess of $5 million; provided, however, that the Distributor may pay a commission on sales in excess of $5 million of up to 1.00% to certain dealers which, at the Distributor's invitation, enter into an agreement with the Distributor in which the dealer agrees to return any commission paid to it on the sale (or a pro rata portion thereof) if the shareholder redeems his shares within a period of time after purchase as specified by the Distributor. Purchases of $1 million or more for each shareholder account will be aggregated over a 12 month period (commencing from the date of the first such purchase) for purposes of determining the level of commission to be paid during that period with respect to such account. - ------- 57 Class B Shares Sales Charge Table*
Year(s) Since Purchase Deferred Sales Charge as Percentage of Amount Redeemed - -------------------------------------------------------------- Up to 2 years 5% - -------------------------------------------------------------- 2 years or more but less than 3 years 4% - -------------------------------------------------------------- 3 years or more but less than 4 years 3% - -------------------------------------------------------------- 4 years or more but less than 5 years 2% - -------------------------------------------------------------- 5 years or more but less than 6 years 1% - -------------------------------------------------------------- 6 or more years 0% - --------------------------------------------------------------
Class B shares purchased on or after October 1, 1997 will automatically convert into Class A shares eight years after the calendar month in which a sharehold- er's order to purchase the shares was accepted. Class C Shares* Class C shares are offered for sale at net asset value and are offered for pur- chases of less than $1 million. Class C shares are sold without a front end sales charge. Class C shares are subject to a deferred sales charge of 1% of the dollar amount subject thereto during the first year after purchase. Class C shares will be redeemed or exchanged in order of the date purchased, with the shares purchased earlier being redeemed or exchanged first, unless a shareholder specifically requests that specific shares be redeemed or exchanged. Redemption in Kind The Funds reserve the right to pay redemption proceeds in whole or in part by a distribution "in kind" of securities held by the Fund. Payment Following Redemption Each Fund will normally send the proceeds from a redemption (less any applica- ble deferred sales charge) on the next business day, but may delay payment for up to seven days. Payment may be delayed if the shares to be redeemed were purchased by a check that has not cleared. Each Fund may suspend the right of redemption and may postpone payment for more than seven days when the New York Stock Exchange is closed for other than weekends or holidays, or if permitted by the rules of, or action by, the SEC. * Any shares in the redeeming shareholder's account that can be redeemed with- out charge will be redeemed prior to those subject to a charge. Only time of ownership spent in Funds other than the Municipal Money Market Fund and the Money Market Fund counts toward determining the applicable deferred sales charge. ------- 58 Pricing of Fund Shares The public offering price of the Class A shares of each Fund is the net asset value per share (next determined following receipt of a properly completed order) plus, in the case of all Funds except either the Municipal Money Market Fund or the Money Market Fund, a front end sales charge, if applicable. The share price for Class B shares and Class C shares is the net asset value per share (next determined following receipt of a properly completed order). The net asset value of the shares of each class of each Fund is calculated sep- arately and, except as described below, is determined once daily as of the close of regularly scheduled trading on the New York Stock Exchange (the "Exchange") (generally 4:00 p.m., Eastern Time). The net asset value per share of each class of each Fund is calculated by dividing the value of the portion of the Fund's securities and other assets attributable to that class, less the liabilities attributable to that class, by the number of shares of that class outstanding. No determination is required on days when the Exchange is closed (for example, weekends and national holidays). Generally, trading in non-U.S. securities, as well as U.S. Government securities and money market instruments, is substantially completed each day at various times prior to the close of regularly scheduled trading on the Exchange. The values of such securities used in computing the net asset value of the shares of a class of a Fund are generally determined as of such times. Occasionally, events which affect the values of such securities may occur between the times at which they are generally determined and the close of regularly scheduled trading on the Exchange and would therefore not be reflected in the computation of a class's net asset value. If events materially affecting the value of such securities occur during such period, then these securities are valued at their fair value as determined in good faith by the subadvisors underprocedures established by the Trustees. All instruments held by the Municipal Money Market Fund, Money Market Fund and short-term debt instruments with a remaining maturity of 60 days or less held by the other Funds are valued on an amortized cost basis. Unless you request cash payment, all dividends and distributions will be rein- vested. All Funds except the Money Market Fund and the Municipal Money Market Fund declare and pay capital gains, if any, annually. - ------- 59 Dividends and Distributions from North American Funds These Funds declare and pay income dividends annually: . Aggressive Growth LifeStyle Fund . Balanced Fund . Conservative Growth LifeStyle Fund . Global Equity Fund . Growth & Income Fund . International Equity Fund . International Small Cap Fund . Large Cap Growth Fund . Mid Cap Growth Fund . Mid Cap Value Fund . Moderate Growth LifeStyle Fund . Science & Technology Fund . Small Cap Growth Fund . Small Cap Index Fund . Socially Responsible Fund . Stock Index Fund These Funds declare income dividends daily and pay annually: . Core Bond Fund . High Yield Bond Fund . Money Market Fund . Municipal Bond Fund . Municipal Money Market Fund . Strategic Income Fund . U.S. Government Securities Fund ------- 60 Taxes It is expected that each Fund of the Trust will qualify as a "regulated invest- ment company" under the Internal Revenue Code, as amended. If each Fund quali- fies it will not be subject to United States federal income taxes on its net investment income and net capital gain, if any, that it distributes to its shareholders in each taxable year. A Fund's distributions derived from interest, dividends and certain other income, including gains from investments that the Fund held for one year or less, will generally result in taxable ordinary income to the shareholders of the Fund. Distributions of net gains from investments held by a Fund for more than one year are taxable as long-term capital gains (generally at a 20% rate for noncorporate shareholders). In the case of the Municipal Bond Fund and the Municipal Money Market Fund dividends designated as "exempt-interest dividends" will constitute tax exempt income. Distributions will be treated as described above for federal income tax purposes whether they are paid in cash or rein- vested in additional shares regardless of how long a shareholder has held shares in the Fund. Distributions are taxed as described in this paragraph even if such distributions economically represent a return of a particular share- holder's investment. Distributions that represent a return of a particular shareholder's investment are likely to occur in respect of shares purchased at a time when a Fund's net asset value reflects gains that are either unrealized, or realized but not distributed. Because a Fund may invest in foreign securities or currencies, it may be required to pay withholding or other taxes to foreign governments on dividends and interest. The investment yield of the Fund's investment in foreign securi- ties or currencies will be reduced by these foreign taxes. Shareholders will bear the cost of any foreign taxes, but may not be able to claim a foreign tax credit or deduction for these taxes for any taxable year, the shareholders will be notified. The ability of the shareholders to utilize such a foreign tax credit is subject to a holding period requirement. In addition, if the Fund invests in securities of passive foreign investment companies, it may be sub- ject to U.S. federal income taxes (and interest on such taxes) as a result of such investments. The investment yield of such investments will be reduced by these taxes and interest. Shareholders will bear the cost of these taxes and interest, but will not be able to claim a deduction for these amounts. The redemption, sale or exchange of Fund shares (including the exchange of shares of one Fund for shares of another) is a taxable event and may result in a gain or loss. Gain or loss, if any, recognized on the sale or other disposi- tion of shares of the Fund will be taxed as a long-term capital gain or loss if the shares are capital assets in the shareholder's hands and if the shareholder held the shares for more than one year (such gains are generally taxed at a 20% rate for noncorporate shareholders). Investors in the Municipal Bond or the Municipal Money Market Fund who receive social security or retirement benefits should consult with their tax adviser to determine what effect, if any, an investment in such fund may have on the federal taxation of their benefits. In addition, an investment in the Municipal Bond Fund or the Municipal Money Mar- ket Fund may result in liability for federal alternative minimum tax, both for individual and corporate shareholders. If a shareholder sells or otherwise disposes of a share of the Fund before holding it for more than six months, any loss on the sale or other disposition of such share shall be (i) treated as a long-term capital loss to the extent of any capital gain dividends received by the shareholder with respect to such share or (ii) in the case of the Municipal Bond Fund, disallowed to the extent of any exempt-interest dividend received by the shareholder with respect to such shares. Moreover, in the case of the Municipal Bond Fund and the Municipal Money Market Fund, each of these Funds may invest a portion of its assets in securities that generate income that is not exempt from federal income tax. In addition, the exemption of exempt-interest dividend income from regular federal income taxa- tion does not necessarily result in similar exemptions for such income under tax laws of state or local taxing authorities. In general, states exempt from state income tax only that portion of any exempt-interest dividend that is derived from interest received by a regulated investment company on its hold- ings or obligations issued by that state or its political subdivisions and instrumentalities. Descriptions of tax consequences set forth in this Prospectus and in the State- ment of Additional Information are intended to be a general guide. Investors should consult their tax advisers with respect to the specific tax consequences of an investment in a Fund, including the effect and applicability of state, local, foreign, and other tax laws and the possible effects of changes in fed- eral or other tax laws. This discussion is not intended as a substitute for careful tax planning. - ------- 61 Rule 12b-1 Fees The Trust has adopted a distribution plan under Rule 12b-1 of the Investment Company Act of 1940, as amended, that allows the Funds to pay distribution fees for the sale and distribution of fund shares. Portions of the fees are used to provide payments for services provided to shareholders ("service fees"), as indicated below. Class A shares of each Fund, except the Municipal Money Market Fund and the Money Market Fund, are subject to a Rule 12b-1 fee of up to .35% of average daily net assets, of which .25% is a "service fee." There are no Rule 12b-1 fees on the Municipal Money Market Fund or the Money Market Fund. Class B shares of each Fund, except the Municipal Money Market Fund and the Money Market Fund, are subject to a Rule 12b-1 fee of up to 1.00% of average annual net assets, of which .25% is a "service fee." Class C shares of each Fund, except the Municipal Money Market Fund and the Money Market Fund, are subject to a Rule 12b-1 fee of up to 1.00% of average annual net assets, of which .25% is a "service fee." For the Aggressive Growth LifeStyle Fund, the Moderate Growth LifeStyle Fund and the Conservative Growth LifeStyle Fund, the Trustees presently limit pay- ments under the Rule 12b-1 Plan to .10%, .75% and .75% of average daily net assets of Class A, Class B and Class C shares, respectively. Because these fees are paid out of the Fund's assets on an ongoing basis, over time they will increase the cost of your investment and may cost you more than paying other types of sales charges. The higher fees for Class B and Class C shares may therefore cost you more than paying the maximum permitted front end sales charge on Class A Shares. ------- 62 Account Services To use any of these programs, simply fill out the appropriate section of your account application, or request the appropriate form. Automatic Dividend Diversification With this program, you can have all dividends and other distributions from one Fund automatically invested in the same class of shares of another Fund. Automatic Investment Plan Shareholders can set up an Automatic Investment Plan. Once each month the shareholder's account will be debited the amount (at least $50) specified by the shareholder. Checkwriting Checkwriting is available to Class A and Class C shareholders of the Municipal Money Market Fund, the Money Market Fund and the U.S. Government Securities Fund. Simply request this on your account application, and complete a signature card, and you will receive a book of blank checks. The minimum amount of a check is $100. When a check is presented for payment, enough shares will be redeemed to cover the amount of the check and any applicable deferred sales charge. If the amount of the check plus the sales charge is more than the account value, the check will be returned unpaid. Exchange Privilege Shareholders may make free unlimited exchanges by mail or telephone within classes of shares without any sales charge (except that Class A shares of the Municipal Money Market Fund and the Money Market Fund are subject to a sales charge upon exchange). Shares of one class may not be exchanged for shares of any other class of any Fund. Be aware that exchanges are regarded as sales for federal and state income tax purposes and could result in a gain or loss, depending on the original cost of shares exchanged. Exchanges usually occur on the same day they are requested. The terms of the exchange privilege may change and the privilege may be revoked at any time without notice. The Fund will not be responsible for any losses resulting from unauthorized telephone transactions if it follows reasonable procedures designed to verify the identify of the caller. The Fund will request personal or other information from the caller, and will record calls. By establishing an account with the Fund, you consent to all recording of telephone calls. You may make exchanges over the telephone by calling 1-800-872-8037. Reinstatement Privilege If you redeem Class A shares (under $1 million) and reinvest within 90 days, you will not have to pay a sales charge. If you redeem Class A shares over $1 million, or Class B or Class C shares and pay a deferred sales charge and then reinvest within 90 days, your account will be credited the amount of the deferred sales charge. Systematic Investing Your shares of any class of either the Municipal Money Market Fund or the Money Market Fund can be exchanged monthly for shares of the same class of other Funds. An exchange of at least $50 per exchange will be made around the 15th of each month in accordance with your instructions. This program takes advantage of dollar cost averaging. Systematic Withdrawal Plan If you have an account balance of at least $10,000, you can set up a plan to have redemptions paid to you, or someone you designate, on a monthly, quarter- ly, semi-annual or annual basis. You can withdraw up to 12% of the account value annually, if a monthly plan, up to 1% per month, without a deferred sales charge. If you request this service after completing our application and pay- ments are to be made to someone other than yourself, you will have to provide a signature guarantee. Redemption checks are generally mailed within two days after redemption. The availability of this service may end, and a fee of up to $5 per withdrawal may be charged with 30 days written notice to you. Transfer of Shares You may transfer Fund shares to family members and others at any time without a sales charge. Consult your tax adviser concerning such transfers. - ------- 63 Section IV: Privacy Notice and Other Information Privacy Notice The Trust, an affiliate of American General, understands your privacy is impor- tant. You have received this notice in accordance with applicable state and federal laws and because you are a current or potential customer of one of the Funds. This notice will help you understand what types of nonpublic personal information--information about you that is not publicly available--we may col- lect, how we use it, and how we protect your privacy. This notice describes our privacy practices for both current and former customers. Types of Nonpublic Personal Information We Collect and Disclose . American General's employees, representatives, agents, and selected third parties--companies or individuals not affliated with American General--may collect nonpublic personal information about our customers, including: --Information provided to us, such as on applications or other forms (account balances, income, assets and marital status). --Information about transactions with us, our affiliates, or third parties. --Information from others, such as employers, and federal and state agencies. Protection of Nonpublic Personal Information . We restrict access to nonpublic personal information to those employees, agents, representatives or third parties who need to know the information to provide products and services to our customers. . We have policies and procedures that give direction to our employees, agents, and representatives on how to protect and use nonpublic personal information. . We maintain physical, electronic, and procedural safeguards to protect non- public personal information. Sharing of Nonpublic Personal Information . We do not share nonpublic personal information about our customers to anyone, including other affiliated American General companies or third parties, except as permitted by law. . We do not sell nonpublic personal information about our customers to third- parties who are not part of the American General family of companies. . We may disclose all of the types of nonpublic personal information we collect when needed, to: (i) affiliated companies, agents, employees, representa- tives, and third parties that market our services and products, and adminis- ter and service customer accounts on our behalf, (ii) financial service prov- iders, or (iii) other financial institutions with whom we have joint market- ing agreements. . Examples of the types of companies and individuals to whom we may disclose nonpublic personal information include, but are not limited to, banks, insur- ance companies, third-party administrators, registered broker/dealers, audi- tors, regulators, and transfer agents. Customers of Broker/Dealers . If you own shares of the Funds through a financial intermediary such as a broker/dealer, bank or trust company, you may receive the privacy policy of the financial intermediary that would address how it shares your nonpublic personal information with nonaffiliated third parties. Changes in Privacy Policy . We reserve the right to change any of our privacy policies and related proce- dures at any time, in accordance with applicable federal and state laws. You will receive appropriate notice if our Privacy Policy changes. Other Information Mailings to Shareholders To reduce expenses and to note our concern for the environment, we may deliver a single copy of most financial reports, proxy and information statements and prospectuses to investors who share an address, even if the accounts are regis- tered under different names. If you would like to receive separate mailings, please call us and we will begin individual delivery within 30 days. In most cases, we also will deliver account statements for all the investors in a household in a single envelope. ------- 64 Financial Highlights The financial highlights tables are intended to help you understand each Fund's financial performance for the past five years or, if shorter, the period of a Fund's operations. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the return that an investor would have earned or lost on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been derived from each Fund's financial statements, which have been audited by either PricewaterhouseCoopers LLP (Growth & Income Fund, Large Cap Growth Fund, Mid Cap Growth Fund, Science & Technology Fund, Small Cap Growth Fund, Global Equity Fund, International Equity Fund, International Small Cap Fund, Balanced Fund, Core Bond Fund, Municipal Bond Fund, Strategic Income Fund, U.S. Government Securities Fund and the Money Market Fund) or by Ernst & Young LLP (Mid Cap Value Fund, Small Cap Index Fund, Socially Responsible Fund, Stock Index Fund, Aggressive Growth LifeStyle Fund, Conservative Growth LifeStyle Fund, Moderate Growth LifeStyle Fund, High Yield Bond Fund and the Municipal Money Market Fund). The annual report of PricewaterhouseCoopers LLP, along with the above listed funds' financial statements, is included in the Trust's annual report, which is available upon request. - ------- 65 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Growth & Income Fund ---------------------------------------------------- Class A ---------------------------------------------------- Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00* 10/31/99* 10/31/98 10/31/97 10/31/96* - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $28.78 $24.26 $21.77 $17.56 $14.72 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.09) 0.03 0.08 0.14 0.18 Net realized and unrealized gain/(loss) on investments and foreign currency 0.80 5.45 4.14 5.26 2.99 ----------------------------------------------------- Total from investment operations 0.71 5.48 4.22 5.40 3.17 ----------------------------------------------------- Distributions Dividends from net investment income - - - (0.15) (0.21) Distributions from realized capital gains (2.43) (0.96) (1.70) (1.04) (0.12) Distributions in excess of net investment income - - (0.03) - - ----------------------------------------------------- Total distributions (2.43) (0.96) (1.73) (1.19) (0.33) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $27.06 $28.78 $24.26 $21.77 $17.56 - --------------------------------------------------------------------------------- Total Return 2.39% 23.11% 20.82% 31.95% 21.84% - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $46,581 $37,210 $42,916 $34,186 $18,272 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.45% 1.34% 1.34% 1.34% 1.34% - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (0.33%) 0.11% 0.34% 0.66% 1.10% - --------------------------------------------------------------------------------- Portfolio turnover rate 31% 28% 18% 39% 49% - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.61% 1.49% 1.45% 1.50% 1.56% - ---------------------------------------------------------------------------------
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Growth & Income Fund ------------------------------------------------------ Class B ------------------------------------------------------ Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00* 10/31/99* 10/31/98 10/31/97 10/31/96* - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $28.28 $24.01 $21.67 $17.50 $14.69 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.26) (0.15) (0.07) 0.01 0.07 Net realized and unrealized gain/(loss) on investments and foreign currency 0.79 5.38 4.11 5.23 2.99 ------------------------------------------------------- Total from investment operations 0.53 5.23 4.04 5.24 3.06 ------------------------------------------------------- Distributions Dividends from net investment income - - - (0.03) (0.13) Distributions from realized capital gains (2.43) (0.96) (1.70) (1.04) (0.12) ------------------------------------------------------- Total distributions (2.43) (0.96) (1.70) (1.07) (0.25) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $26.38 $28.28 $24.01 $21.67 $17.50 - --------------------------------------------------------------------------------- Total Return 1.75% 22.28% 20.04% 31.40% 21.08% - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $106,464 $104,695 $75,574 $54,871 $34,740 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.10% 1.99% 1.99% 1.99% 1.99% - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (0.97%) (0.54%) (0.32%) 0.01% 0.45% - --------------------------------------------------------------------------------- Portfolio turnover rate 31% 28% 18% 39% 49% - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.27% 2.13% 2.10% 2.15% 2.20% - ---------------------------------------------------------------------------------
* Net investment income per share has been calculated using the average share method --------- 66 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Growth & Income Fund -------------------------------------------------------- Class C -------------------------------------------------------- Year Year Year Year Ended Year Ended Ended Ended Ended 10/31/00** 10/31/99 ** 10/31/98 10/31/97 10/31/96 - ----------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $28.39 $24.10 $21.75 $17.56 $14.71 - ----------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.27) (0.15) (0.07) 0.01 0.07 Net realized and unrealized gain/(loss) on investments and foreign currency 0.80 5.40 4.12 5.25 3.00 -------------------------------------------------------- Total from investment operations 0.53 5.25 4.05 5.26 3.07 -------------------------------------------------------- Distributions Dividends from net investment income - - - (0.03) (0.10) Distributions from realized capital gains (2.43) (0.96) (1.70) (1.04) (0.12) -------------------------------------------------------- Total distributions (2.43) (0.96) (1.70) (1.07) (0.22) - ----------------------------------------------------------------------------------- Net Asset Value, End of Period $26.49 $28.39 $24.10 $21.75 $17.56 - ----------------------------------------------------------------------------------- Total Return 1.74% 22.28% 20.00% 31.37% 21.12% - ----------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------- Net assets, end of period (000's) $170,277 $156,056 $122,395 $98,250 $74,825 - ----------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.10% 1.99% 1.99% 1.99% 1.99% - ----------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (0.97%) (0.54%) (0.31%) 0.01% 0.45% - ----------------------------------------------------------------------------------- Portfolio turnover rate 31% 28% 18% 39% 49% - ----------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.27% 2.13% 2.10% 2.13% 2.20% - -----------------------------------------------------------------------------------
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Large Cap Growth Fund (formerly Growth Equity Fund) --------------------------------------------------------- Class A --------------------------------------------------------- Year Year 3/04/96* Year Ended Year Ended Ended Ended to 10/31/00** 10/31/99 ** 10/31/98 10/31/97 10/31/96 - ------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $21.44 $17.73 $17.01 $13.78 $12.50 - ------------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.21) (0.19) (0.07) (0.03) 0.28 Net realized and unrealized gain/(loss) on investments and foreign currency 1.72 5.05 2.22 3.45 1.00 --------------------------------------------------------- Total from investment operations 1.51 4.86 2.15 3.42 1.28 --------------------------------------------------------- Distributions Dividends from net investment income - - - (0.19) - Distributions from realized capital gains (4.66) (1.15) (1.43) - - --------------------------------------------------------- Total distributions (4.66) (1.15) (1.43) (0.19) - ------------------------------------------------------------------------------------- Net Asset Value, End of Period $18.29 $21.44 $17.73 $17.01 $13.78 - ------------------------------------------------------------------------------------- Total Return 5.66% 28.57% 13.85% 25.13% 10.24%+ - ------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------------- Net assets, end of period (000's) $9,548 $5,656 $3,919 $3,053 $2,244 - ------------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.51% 1.65% 1.65% 1.65% 1.65%# - ------------------------------------------------------------------------------------- Ratio of net investment income/(loss) to average net assets (0.93%) (0.94%) (0.43%) (0.17%) 4.11%# - ------------------------------------------------------------------------------------- Portfolio turnover rate 196% 145% 115% 181% 450%# - ------------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.85% 1.90% 1.91% 2.28% 2.71%# - -------------------------------------------------------------------------------------
* Commencement of Operations ** Net investment income per share has been calculated using the average share method # Annualized + Non-annualized - --------- 67 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Large Cap Growth Fund (formerly Growth Equity Fund) --------------------------------------------------------- Class B --------------------------------------------------------- Year Year 3/04/96* Year Ended Year Ended Ended Ended to 10/31/00** 10/31/99 ** 10/31/98 10/31/97 10/31/96 - ------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $20.96 $17.46 $16.90 $13.73 $12.50 - ------------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.34) (0.31) (0.18) (0.13) 0.24 Net realized and unrealized gain/(loss) on investments and foreign currency 1.70 4.96 2.17 3.46 0.99 ----------------------------------------------------------- Total from investment operations 1.36 4.65 1.99 3.33 1.23 ----------------------------------------------------------- Distributions Dividends from net investment income - - - (0.16) - Distributions from realized capital gains (4.66) (1.15) (1.43) - - ----------------------------------------------------------- Total distributions (4.66) (1.15) (1.43) (0.16) - ------------------------------------------------------------------------------------- Net Asset Value, End of Period $17.66 $20.96 $17.46 $16.90 $13.73 - ------------------------------------------------------------------------------------- Total Return 5.01% 27.77% 12.93% 24.50% 9.84%+ - ------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------------- Net assets, end of period (000's) $34,711 $17,171 $11,659 $9,040 $4,748 - ------------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.15% 2.30% 2.30% 2.30% 2.30%# - ------------------------------------------------------------------------------------- Ratio of net investment income/(loss) to average net assets (1.57%) (1.58%) (1.07%) (0.82%) 4.18%# - ------------------------------------------------------------------------------------- Portfolio turnover rate 196% 145% 115% 181% 450%# - ------------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.50% 2.52% 2.56% 2.78% 3.06%# - -------------------------------------------------------------------------------------
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Large Cap Growth Fund (formerly Growth Equity Fund) -------------------------------------------------------- Class C -------------------------------------------------------- Year Year 3/04/96* Year Ended Year Ended Ended Ended to 10/31/00** 10/31/99** 10/31/98 10/31/97 10/31/96 - ------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $20.93 $17.44 $16.89 $13.73 $12.50 - ------------------------------------------------------------------------------------ Investment Operations: Net investment income/(loss) (0.35) (0.31) (0.20) (0.13) 0.24 Net realized and unrealized gain/(loss) on investments and foreign currency 1.72 4.95 2.18 3.46 0.99 ---------------------------------------------------------- Total from investment operations 1.37 4.64 1.98 3.33 1.23 ---------------------------------------------------------- Distributions Dividends from net investment income - - - (0.17) - Distributions from realized capital gains (4.66) (1.15) (1.43) - - ---------------------------------------------------------- Total distributions (4.66) (1.15) (1.43) (0.17) - ------------------------------------------------------------------------------------ Net Asset Value, End of Period $17.64 $20.93 $17.44 $16.89 $13.73 - ------------------------------------------------------------------------------------ Total Return 5.06% 27.75% 12.87% 24.50% 9.84%+ - ------------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------------ Net assets, end of period (000's) $22,780 $19,463 $12,965 $12,766 $6,494 - ------------------------------------------------------------------------------------ Ratio of total expenses to average net assets 2.23% 2.30% 2.30% 2.30% 2.30%# - ------------------------------------------------------------------------------------ Ratio of net investment income/(loss) to average net assets (1.64%) (1.58%) (1.06%) (0.82%) 4.13%# - ------------------------------------------------------------------------------------ Portfolio turnover rate 196% 145% 115% 181% 450%# - ------------------------------------------------------------------------------------ Expense ratio before expense reimbursement by adviser 2.52% 2.52% 2.56% 2.75% 2.96%# - ------------------------------------------------------------------------------------
* Commencement of Operations ** Net investment income per share has been calculated using the average share method # Annualized + Non-annualized --------- 68 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Mid Cap Growth Fund (formerly Small/Mid Cap Fund) -------------------------------------------------------- Class A -------------------------------------------------------- Year Year Year Year 3/04/96* Ended Ended Ended Ended to 10/31/00** 10/31/99** 10/31/98 10/31/97 10/31/96 - ------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $18.52 $16.09 $15.51 $12.62 $12.50 - ------------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.27) (0.21) (0.15) (0.14) (0.02) Net realized and unrealized gain/(loss) on investments and foreign currency 6.33 4.12 0.97 3.03 0.14 ----------------------------------------------------------- Total from investment operations 6.06 3.91 0.82 2.89 0.12 ----------------------------------------------------------- Distributions Distributions from realized capital gains (6.68) (1.48) (0.24) - - - ------------------------------------------------------------------------------------- Net Asset Value, End of Period $17.90 $18.52 $16.09 $15.51 $12.62 - ------------------------------------------------------------------------------------- Total Return 35.03% 25.50% 5.51% 22.90% 0.96%+ - ------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------------- Net assets, end of period (000's) $11,718 $5,970 $4,814 $4,170 $2,966 - ------------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.59% 1.68% 1.68% 1.68% 1.68%# - ------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (1.30%) (1.15%) (0.90%) (1.02%) (0.40%)# - ------------------------------------------------------------------------------------- Portfolio turnover rate 210% 181% 162% 145% 92%# - ------------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.88% 1.89% 1.93% 2.24% 2.69%# - -------------------------------------------------------------------------------------
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Mid Cap Growth Fund (formerly Small/Mid Cap Fund) ---------------------------------------------------------- Class B ---------------------------------------------------------- Year Year Year Year 3/04/96* Ended Ended Ended Ended to 10/31/00** 10/31/99** 10/31/98 10/31/97** 10/31/96 - --------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $17.99 $15.77 $15.33 $12.58 $12.50 - --------------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.41) (0.32) (0.25) (0.23) (0.05) Net realized and unrealized gain/(loss) on investments and foreign currency 6.13 4.02 0.93 2.98 0.13 ------------------------------------------------------------- Total from investment operations 5.72 3.70 0.68 2.75 0.08 ------------------------------------------------------------- Distributions Distributions from realized capital gains (6.68) (1.48) (0.24) - - - --------------------------------------------------------------------------------------- Net Asset Value, End of Period $17.03 $17.99 $15.77 $15.33 $12.58 - --------------------------------------------------------------------------------------- Total Return 34.04% 24.62% 4.65% 21.86% 0.64%+ - --------------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------------- Net assets, end of period (000's) $29,978 $17,184 $13,972 $11,802 $6,659 - --------------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.31% 2.33% 2.33% 2.33% 2.33%# - --------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (2.01%) (1.80%) (1.55%) (1.67%) (1.05%)# - --------------------------------------------------------------------------------------- Portfolio turnover rate 210% 181% 162% 145% 92%# - --------------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.54% 2.54% 2.58% 2.79% 3.05%# - ---------------------------------------------------------------------------------------
* Commencement of Operations ** Net investment income per share has been calculated using the average share method # Annualized + Non-annualized - --------- 69 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Mid Cap Growth Fund (formerly Small/Mid Cap Fund) ---------------------------------------------------------- Class C ---------------------------------------------------------- Year Year Year Year 3/04/96* Ended Ended Ended Ended to 10/31/00** 10/31/99** 10/31/98 10/31/97** 10/31/96 - -------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $18.02 $15.79 $15.35 $12.59 $12.50 - -------------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.41) (0.32) (0.25) (0.23) (0.05) Net realized and unrealized gain/(loss) on investments and foreign currency 6.13 4.03 0.93 2.99 0.14 ------------------------------------------------------------- Total from investment operations 5.72 3.71 0.68 2.76 0.09 ------------------------------------------------------------- Distributions Distributions from realized capital gains (6.68) (1.48) (0.24) - - - --------------------------------------------------------------------------------------- Net Asset Value, End of Period $17.06 $18.02 $15.79 $15.35 $12.59 - --------------------------------------------------------------------------------------- Total Return 33.95% 24.65% 4.64% 21.92% 0.72%+ - --------------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------------- Net assets, end of period (000's) $22,913 $18,939 $16,221 $13,471 $8,241 - --------------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.33% 2.33% 2.33% 2.33% 2.33%# - --------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (2.02%) (1.80%) (1.55%) (1.67%) (1.05%)# - --------------------------------------------------------------------------------------- Portfolio turnover rate 210% 181% 162% 145% 92%# - --------------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.54% 2.54% 2.58% 2.78% 3.04%# - ---------------------------------------------------------------------------------------
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Mid Cap Value Fund/1/ --------------------------------------------------------- Class A Class B Class C --------------------- --------------------- ---------- Year Year Year Year 7/31/00* Ended Ended Ended Ended to 10/31/00** 10/31/99 10/31/00** 10/31/99 10/31/00** - -------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $11.98 $10.00 $11.85 $10.00 $12.88 - -------------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) - 0.06 (0.09) - (0.05) Net realized and unrealized gain/(loss) on investments and foreign currency 3.87 1.97 3.79 1.87 1.23 ----------------------------------------------------------- Total from investment operations 3.87 2.03 3.70 1.87 1.18 ----------------------------------------------------------- Distributions Dividends from net investment income - (0.05) - (0.02) - Distributions from realized capital gains (2.24) (2.24) (0.80) ----------------------------------------------------------- Total distributions (2.24) (0.05) (2.24) (0.02) (0.80) - ------------------------------------------------------------------------------------- Net Asset Value, End of Period $13.61 $11.98 $13.31 $11.85 $13.26 - ------------------------------------------------------------------------------------- Total Return 35.42% 20.23% 34.26% 18.71% 9.53%+ - ------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------------- Net assets, end of period (000's) $2,747 $1,728 $7,471 $4,555 $614 - ------------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.45% 1.29% 2.17% 2.04% 2.31%# - ------------------------------------------------------------------------------------- Ratio of net investment income/(loss) to average net assets (0.04%) 0.51% (0.75%) (0.26%) (1.18%)# - ------------------------------------------------------------------------------------- Portfolio turnover rate 191% 177% 191% 177% 191%+ - ------------------------------------------------------------------------------------- Expense ratio before expense reimbursement by advisor 1.95% 2.43% 2.67% 2.77% 2.37%# - -------------------------------------------------------------------------------------
/1/ The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 Mid Cap Value Fund, which was reorganized into North American Mid Cap Value Fund on that date. * Commencement of Operations ** Net investment income per share has been calculated using the average share method # Annualized + Non-annualized --------- 70 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Science & Technology Fund/1/ -------------------------------------- Class A Class B Class C ---------- ---------- ---------- 3/01/00* 3/01/00* 7/12/00* to to to 10/31/00** 10/31/00** 10/31/00** - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.00 $10.00 $8.48 - -------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.04) (0.07) (0.03) Net realized and unrealized gain/(loss) on investments and foreign currency (1.88) (1.90) (0.63) ----------------------------------------- Total from investment operations (1.92) (1.97) (0.66) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $8.08 $8.03 $7.82 - -------------------------------------------------------------------------------- Total Return (19.20%)+ (19.70%)+ (7.78%)+ - -------------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------------- Net assets, end of period (000's) $4,623 $15,840 $1,065 - -------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.24%# 1.91%# 1.71%# - -------------------------------------------------------------------------------- Ratio of net investment income/(loss) to average net assets (0.64%)# (1.37%)# (1.11%)# - -------------------------------------------------------------------------------- Portfolio turnover rate 120%+ 120%+ 120%+ - -------------------------------------------------------------------------------- Expense ratio before expense reimbursement by advisor 1.92%# 2.59%# 2.37%# - --------------------------------------------------------------------------------
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Small Cap Growth Fund (formerly Emerging Growth Fund) -------------------------------------------- Class A -------------------------------------------- Year Year 1/06/98* Ended Ended to 10/31/00** 10/31/99** 10/31/98 - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $12.81 $8.88 $10.00 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.12) (0.15) (0.08) Net realized and unrealized gain/(loss) on investments and foreign currency 5.66 4.08 (1.04) ----------------------------------------- Total from investment operations 5.54 3.93 (1.12) Distributions Distributions from realized capital gains (1.08) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $17.27 $12.81 $8.88 - --------------------------------------------------------------------------------- Total Return 43.62% 44.26% (11.20%)+ - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $6,795 $224 $146 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.35% 1.70% 1.70%# - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (0.66%) (1.43%) (1.00%)# - --------------------------------------------------------------------------------- Portfolio turnover rate 222% 129% 52%+ - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.10% 6.96% 15.48%# - ---------------------------------------------------------------------------------
/1/ The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 Science & Technology Fund, which was reorganized into North American Science & Technology Fund on that date. * Commencement of Operations ** Net investment income per share has been calculated using the average month- end share method # Annualized + Non-annualized - --------- 71 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Small Cap Growth Fund (formerly Emerging Growth Fund) ------------------------------------------------------------------------ Class B Class C ---------------------------------- ---------------------------------- Year Year 1/06/98* Year Year 1/06/98* Ended Ended to Ended Ended to 10/31/00** 10/31/99** 10/31/98 10/31/00** 10/31/99** 10/31/98 - ----------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $12.57 $8.83 $10.00 $12.57 $8.84 $10.00 - ----------------------------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.24) (0.21) (0.12) (0.29) (0.21) (0.12) Net realized and unrealized gain/(loss) on investments and foreign currency 5.55 3.95 (1.05) 5.59 3.94 (1.04) --------------------------------------------------------------------------- Total from investment operations 5.31 3.74 (1.17) 5.30 3.73 (1.16) --------------------------------------------------------------------------- Distributions Distributions from realized capital gains (1.08) (1.08) - ----------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $16.80 $12.57 $8.83 $16.79 $12.57 $8.84 - ----------------------------------------------------------------------------------------------------- Total Return 42.62% 42.36% (11.70%)+ 42.54% 42.19% (11.60%)+ - ----------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------- Net assets, end of period (000's) $14,554 $660 $263 $3,337 $440 $238 - ----------------------------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.00% 2.35% 2.35%# 2.21% 2.35% 2.35%# - ----------------------------------------------------------------------------------------------------- Ratio of net investment income/(loss) to average net assets (1.31%) (2.04%) (1.76%)# (1.56%) (2.03%) (1.67%)# - ----------------------------------------------------------------------------------------------------- Portfolio turnover rate 222% 129% 52%# 222% 129% 52%# - ----------------------------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.75% 7.58% 16.48%# 3.17% 7.60% 15.78%# - -----------------------------------------------------------------------------------------------------
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Small Cap Index Fund/1/ ------------------------------------------------------ Class A Class B Class C -------------------- -------------------- ---------- Year Year Year Year 8/23/00* Ended Ended Ended Ended to 10/31/00** 10/31/99 10/31/00** 10/31/99 10/31/00** - ----------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $11.03 $10.00 $11.03 $10.00 $11.56 - ----------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.13 0.10 0.05 0.02 - Net realized and unrealized gain/(loss) on investments and foreign currency 1.08 1.03 1.07 1.03 (0.43) --------------------------------------------------------- Total from investment operations 1.21 1.13 1.12 1.05 (0.43) --------------------------------------------------------- Distributions Dividends from net investment income (0.11) (0.10) (0.05) (0.02) - Distributions from realized capital gains (2.34) - (2.34) - (1.25) --------------------------------------------------------- Total distributions (2.45) (0.10) (2.39) (0.02) (1.25) - ----------------------------------------------------------------------------------- Net Asset Value, End of Period $9.79 $11.03 $9.76 $11.03 $9.88 - ----------------------------------------------------------------------------------- Total Return 11.74% 11.32% 10.83% 10.53% (3.07%)+ - ----------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------- Net assets, end of period (000's) $3,361 $2,900 $4,574 $3,361 $38 - ----------------------------------------------------------------------------------- Ratio of total expenses to average net assets 0.89% 0.83% 1.61% 1.58% 1.64%# - ----------------------------------------------------------------------------------- Ratio of net investment income to average net assets 1.15% 0.97% 0.43% 0.23% 0.17%# - ----------------------------------------------------------------------------------- Portfolio turnover rate 63% 48% 63% 48% 63%+ - ----------------------------------------------------------------------------------- Expense ratio before expense reimbursement by advisor 1.19% 1.69% 1.91% 2.37% 2.02%# - -----------------------------------------------------------------------------------
/1/ The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 Small Cap Index Fund, which was reorganized into North American Small Cap Index Fund on that date. * Commencement of Operations ** Net investment income per share has been calculated using the average month- end share method # Annualized + Non-annualized --------- 72 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Socially Responsible Fund/1/ ------------------------------------------- Class A Class B -------------------- -------------------- Year Year Year Year Ended Ended Ended Ended 10/31/00** 10/31/99 10/31/00** 10/31/99 - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $12.15 $10.00 $12.13 $10.00 - -------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.10 0.10 0.01 0.02 Net realized and unrealized gain/(loss) on Investments and foreign currency 0.21 2.15 0.23 2.13 ------------------------------------------- Total from investment operations 0.31 2.25 0.24 2.15 ------------------------------------------- Distributions Dividends from net investment income (0.06) (0.10) (0.01) (0.02) Distributions from realized capital gains (0.49) - (0.49) - ------------------------------------------- Total distributions (0.55) (0.10) (0.50) (0.02) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $11.91 $12.15 $11.87 $12.13 - -------------------------------------------------------------------------------- Total Return 2.53% 22.53%+ 1.88% 21.50%+ - -------------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------------- Net assets, end of period (000's) $1,896 $1,663 $3,649 $2,943 - -------------------------------------------------------------------------------- Ratio of total expenses to average net assets 0.94% 0.80% 1.65% 1.55% - -------------------------------------------------------------------------------- Ratio of net investment income to average net assets 0.81% 0.87% 0.10% 0.09% - -------------------------------------------------------------------------------- Portfolio turnover rate 52% 24% 52% 24% - -------------------------------------------------------------------------------- Expense ratio before expense reimbursement by advisor 1.24% 1.97% 1.96% 2.49% - --------------------------------------------------------------------------------
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Socially Responsible Fund/1/ ---------------------------- Class C ---------------------------- 7/28/00* to 10/31/00** - ------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $12.09 - ------------------------------------------------------------------------------ Investment Operations: Net investment income/(loss) (0.01) Net realized and unrealized gain/(loss) on Investments and foreign currency ---------------------------- Total from investment operations (0.01) ---------------------------- Distributions Dividends from net investment income (0.01) Distributions from realized capital gains - ---------------------------- Total distributions (0.01) - ------------------------------------------------------------------------------ Net Asset Value, End of Period $12.07 - ------------------------------------------------------------------------------ Total Return (0.11%)+ - ------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------ Net assets, end of period (000's) $57 - ------------------------------------------------------------------------------ Ratio of total expenses to average net assets 2.23%# - ------------------------------------------------------------------------------ Ratio of net investment income/(loss) to average net assets (0.17%)# - ------------------------------------------------------------------------------ Portfolio turnover rate 52%+ - ------------------------------------------------------------------------------ Expense ratio before expense reimbursement by advisor 2.23%# - ------------------------------------------------------------------------------
/1/ The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 Socially Responsible Fund, which was reorganized into North American Socially Responsible Fund on that date. * Commencement of Operations ** Net investment income per share has been calculated using the average month- end share method # Annualized + Non-annualized - --------- 73 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Stock Index Fund/1/ ------------------------------------------------------ Class A Class B Class C -------------------- -------------------- ---------- Year Year Year Year 7/17/00* Ended Ended Ended Ended to 10/31/00** 10/31/99 10/31/00** 10/31/99 10/31/00** - ----------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $12.32 $10.00 $12.23 $10.00 $13.38 - ----------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.14 0.11 0.05 0.02 0.01 Net realized and unrealized gain/(loss) on investments and foreign currency 0.47 2.32 0.46 2.23 (0.83) --------------------------------------------------------- Total from investment operations 0.61 2.43 0.51 2.25 (0.82) --------------------------------------------------------- Distributions Dividends from net investment income (0.10) (0.11) (0.02) (0.02) (0.01) Distributions from realized capital gains (0.08) - (0.08) - --------------------------------------------------------- Total distributions (0.18) (0.11) (0.10) (0.02) (0.01) - ----------------------------------------------------------------------------------- Net Asset Value, End of Period $12.75 $12.32 $12.64 $12.23 $12.55 - ----------------------------------------------------------------------------------- Total Return 4.91% 24.36% 4.21% 22.55% (5.21%)+ - ----------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------- Net assets, end of period (000's) $8,543 $5,634 $24,966 $15,040 $500 - ----------------------------------------------------------------------------------- Ratio of total expenses to average net assets 0.78% 0.82% 1.49% 1.57% 1.35%# - ------------------------------------------------------------------------------------ Ratio of net investment income to average net assets 1.12% 1.08% 0.42% 0.37% 0.30%# - ------------------------------------------------------------------------------------ Portfolio turnover rate 2% 14% 2% 14% 2%+ - ------------------------------------------------------------------------------------ Expense ratio before expense reimbursement by advisor 1.12% 1.53% 1.83% 1.98% 1.84%# - ------------------------------------------------------------------------------------
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Global Equity Fund --------------------------------------------------- Class A --------------------------------------------------- Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00** 10/31/99 10/31/98 10/31/97 10/31/96 - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $16.12 $16.43 $16.32 $14.50 $13.84 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.06) 0.08 0.02 0.06 (0.04) Net realized and unrealized gain/(loss) on investments and foreign currency (2.86) 0.82 1.34 3.45 0.91 ----------------------------------------------------- Total from investment operations (2.92) 0.90 1.36 3.51 0.87 ----------------------------------------------------- Distributions Dividends from net investment income - - (0.22) (0.05) (0.21) Distributions from realized capital gains (2.14) (1.21) (1.03) (1.64) - ----------------------------------------------------- Total distributions (2.14) (1.21) (1.25) (1.69) (0.21) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $11.06 $16.12 $16.43 $16.32 $14.50 - --------------------------------------------------------------------------------- Total Return (21.08)% 5.60% 8.90% 26.10% 6.33% - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $8,610 $12,757 $31,055 $30,960 $25,924 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.86% 1.75% 1.75% 1.75% 1.75% - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (0.42%) 0.47% 0.09% 0.33% (0.30%) - --------------------------------------------------------------------------------- Portfolio turnover rate 207% 38% 20% 28% 165% - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.06% 1.84% 1.75% 1.81% 1.83% - ---------------------------------------------------------------------------------
/1/ The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 Stock Index Fund, which was reorganized into North American Stock Index Fund on that date. * Commencement of Operations ** Net investment income per share has been calculated using the average month- end share method # Annualized + Non-annualized --------- 74 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Global Equity Fund ------------------------------------------------------ Class B ------------------------------------------------------ Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00** 10/31/99 10/31/98 10/31/97 10/31/96 - ---------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $15.83 $16.24 $16.14 $14.36 $13.73 - ---------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.14) (0.04) (0.11) (0.05) (0.14) Net realized and unrealized gain/(loss) on investments and foreign currency (2.78) 0.84 1.35 3.47 0.91 -------------------------------------------------------- Total from investment operations (2.92) 0.80 1.24 3.42 0.77 - ---------------------------------------------------------------------------------- Distributions Dividends from net investment income - - (0.11) (0.14) Distributions from realized capital gains (2.14) (1.21) (1.03) (1.64) - -------------------------------------------------------- Total distributions (2.14) (1.21) (1.14) (1.64) (0.14) - ---------------------------------------------------------------------------------- Net Asset Value, End of Period $10.77 $15.83 $16.24 $16.14 $14.36 - ---------------------------------------------------------------------------------- Total Return (21.44%) 5.01% 8.17% 25.63% 5.64% - ---------------------------------------------------------------------------------- Ratios/Supplemental Data - ---------------------------------------------------------------------------------- Net assets, end of period (000's) $10,089 $25,381 $30,287 $31,833 $25,661 - ---------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.51% 2.40% 2.40% 2.40% 2.40% - ---------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (1.04%) (0.25%) (0.55%) (0.32%) (0.95%) - ---------------------------------------------------------------------------------- Portfolio turnover rate 207% 38% 20% 28% 165% - ---------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.71% 2.50% 2.40% 2.47% 2.48% - ----------------------------------------------------------------------------------
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Global Equity Fund ------------------------------------------------------ Class C ------------------------------------------------------ Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00** 10/31/99 10/31/98 10/31/97 10/31/96 - ---------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $15.89 $16.30 $16.19 $14.41 $13.73 - ---------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.14) (0.04) (0.10) (0.05) (0.14) Net realized and unrealized gain/(loss) on investments and foreign currency (2.79) 0.84 1.35 3.47 0.92 -------------------------------------------------------- Total from investment operations (2.93) 0.80 1.25 3.42 0.78 - ---------------------------------------------------------------------------------- Distributions Dividends from net investment income - - (0.11) - (0.10) Distributions from realized capital gains (2.14) (1.21) (1.03) (1.64) - -------------------------------------------------------- Total distributions (2.14) (1.21) (1.14) (1.64) (0.10) - ---------------------------------------------------------------------------------- Net Asset Value, End of Period $10.82 $15.89 $16.30 $16.19 $14.41 - ---------------------------------------------------------------------------------- Total Return (21.42%) 4.99% 8.21% 25.54% 5.70% - ---------------------------------------------------------------------------------- Ratios/Supplemental Data - ---------------------------------------------------------------------------------- Net assets, end of period (000's) $19,549 $45,201 $57,774 $61,245 $64,830 - ---------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.51% 2.40% 2.40% 2.40% 2.40% - ---------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (1.05%) (0.24%) (0.56%) (0.32%) (0.95%) - ---------------------------------------------------------------------------------- Portfolio turnover rate 207% 38% 20% 28% 165% - ---------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.71% 2.50% 2.40% 2.46% 2.48% - ----------------------------------------------------------------------------------
** Net investment income per share has been calculated using the average share method - --------- 75 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
International Equity Fund --------------------------------------------------------- Class A --------------------------------------------------------- Year Year Ended Year Ended Ended Year Ended Year Ended 10/31/00** 10/31/99** 10/31/98 10/31/97** 10/31/96** - ------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $11.89 $9.83 $10.81 $11.35 $10.11 - ------------------------------------------------------------------------------------ Investment Operations: Net investment income/(loss) (0.03) 0.02 0.03 0.06 0.09 Net realized and unrealized gain/(loss) on investments and foreign currency (0.35) 2.07 0.02 0.35 1.33 ---------------------------------------------------------- Total from investment operations (0.38) 2.09 0.05 0.41 1.42 ---------------------------------------------------------- Distributions Dividends from net investment income (0.10) - (0.13) (0.19) (0.08) Distributions from realized capital gains (0.92) (0.03) (0.90) (0.76) (0.10) ---------------------------------------------------------- Total distributions (1.02) (0.03) (1.03) (0.95) (0.18) - ------------------------------------------------------------------------------------ Net Asset Value, End of Period $10.49 $11.89 $9.83 $10.81 $11.35 - ------------------------------------------------------------------------------------ Total Return (4.00%) 21.33% 0.67% 3.55% 14.25% - ------------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------------ Net assets, end of period (000's) $7,471 $3,997 $3,769 $4,461 $4,732 - ------------------------------------------------------------------------------------ Ratio of total expenses to average net assets 1.71% 1.75% 1.75% 1.75% 1.75% - ------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average net assets (0.27%) 0.18% 0.44% 0.97% 0.84% - ------------------------------------------------------------------------------------ Portfolio turnover rate 126% 142% 173% 146% 170% - ------------------------------------------------------------------------------------ Expense ratio before expense reimbursement by adviser 2.02% 1.98% 1.87% 1.96% 1.97% - ------------------------------------------------------------------------------------
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International Equity Fund ----------------------------------------------------------- Class B ----------------------------------------------------------- Year Year Ended Year Ended Ended Year Ended Year Ended 10/31/00** 10/31/99** 10/31/98 10/31/97** 10/31/96** - -------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $11.74 $9.77 $10.75 $11.30 $10.10 - -------------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.11) (0.05) (0.02) 0.03 0.06 Net realized and unrealized gain/(loss) on investments and foreign currency (0.35) 2.05 0.00 0.31 1.30 ------------------------------------------------------------ Total from investment operations (0.46) 2.00 (0.02) 0.34 1.36 ------------------------------------------------------------ Distributions Dividends from net investment income (0.02) - (0.06) (0.13) (0.05) Distributions from realized capital gains (0.92) (0.03) (0.90) (0.76) (0.11) ------------------------------------------------------------ Total distributions (0.94) (0.03) (0.96) (0.89) (0.16) - -------------------------------------------------------------------------------------- Net Asset Value, End of Period $10.34 $11.74 $9.77 $10.75 $11.30 - -------------------------------------------------------------------------------------- Total Return (4.78%) 20.53% (0.03%) 2.92% 13.58% - -------------------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------------------- Net assets, end of period (000's) $18,204 $14,269 $14,030 $16,334 $15,217 - -------------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.38% 2.40% 2.40% 2.40% 2.40% - -------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (0.96%) (0.45%) (0.18%) 0.32% 0.57% - -------------------------------------------------------------------------------------- Portfolio turnover rate 126% 142% 173% 146% 170% - -------------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.66% 2.63% 2.52% 2.54% 2.60% - --------------------------------------------------------------------------------------
** Net investment income per share has been calculated using the average share method --------- 76 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
International Equity Fund ----------------------------------------------------------- Class C ----------------------------------------------------------- Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00** 10/31/99** 10/31/98 10/31/97** 10/31/96** - --------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $11.74 $9.77 $10.76 $11.31 $10.10 - --------------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.11) (0.05) (0.02) 0.03 0.06 Net realized and unrealized gain/(loss) on investments and foreign currency (0.38) 2.05 (0.01) 0.31 1.30 ------------------------------------------------------------- Total from investment operations (0.49) 2.00 (0.03) 0.34 1.36 ------------------------------------------------------------- Distributions Dividends from net investment income (0.02) - (0.06) (0.13) (0.05) Distributions from realized capital gains (0.92) (0.03) (0.90) (0.76) (0.10) ------------------------------------------------------------- Total distributions (0.94) (0.03) (0.96) (0.89) (0.15) - --------------------------------------------------------------------------------------- Net Asset Value, End of Period $10.31 $11.74 $9.77 $10.76 $11.31 - --------------------------------------------------------------------------------------- Total Return (5.05%) 20.53% (0.13%) 2.91% 13.63% - --------------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------------- Net assets, end of period (000's) $4,765 $6,680 $7,960 $8,460 $9,076 - --------------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.43% 2.40% 2.40% 2.40% 2.40%# - --------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (0.96%) (0.49%) (0.19%) 0.32% 0.51%# - --------------------------------------------------------------------------------------- Portfolio turnover rate 126% 142% 173% 146% 170% - --------------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.68% 2.62% 2.52% 2.57% 2.60%# - ---------------------------------------------------------------------------------------
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International Small Cap Fund -------------------------------------------------------- Class A -------------------------------------------------------- Year Year 3/04/96* Year Ended Year Ended Ended Ended to 10/31/00** 10/31/99** 10/31/98 10/31/97 10/31/96 - ------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $18.83 $13.91 $13.86 $13.43 $12.50 - ------------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.30) (0.14) (0.02) (0.03) 0.05 Net realized and unrealized gain/(loss) on investments and foreign currency 5.35 5.06 0.07 0.46 0.88 --------------------------------------------------------- Total from investment operations 5.05 4.92 0.05 0.43 0.93 --------------------------------------------------------- Distributions Distributions from realized capital gains (4.67) - - - - - ------------------------------------------------------------------------------------- Net Asset Value, End of Period $19.21 $18.83 $13.91 $13.86 $13.43 - ------------------------------------------------------------------------------------- Total Return 23.34% 35.37% 0.36% 3.20% 7.44%+ - ------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------------- Net assets, end of period (000's) $6,003 $2,309 $2,173 $3,225 $2,120 - ------------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.97% 1.90% 1.90% 1.90% 1.90%# - ------------------------------------------------------------------------------------- Ratio of net investment income/(loss) to average net assets (1.21%) (0.87%) (0.12%) (0.19%) (0.50%)# - ------------------------------------------------------------------------------------- Portfolio turnover rate 537% 202% 54% 75% 67%# - ------------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.21% 2.24% 2.23% 2.46% 3.07%# - -------------------------------------------------------------------------------------
* Commencement of Operations ** Net investment income per share has been calculated using the average share method # Annualized + Non-annualized - --------- 77 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
International Small Cap Fund ------------------------------------------------------ Class B ------------------------------------------------------ Year Year Year 3/04/96* Year Ended Ended Ended Ended to 10/31/00** 10/31/99 10/31/98 10/31/97 10/31/96 - ----------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $18.35 $13.66 $13.71 $13.37 $12.50 - ----------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.43) (0.27) (0.12) (0.11) (0.01) Net realized and unrealized gain/(loss) on investments and foreign currency 5.18 4.96 0.07 0.45 0.88 --------------------------------------------------------- Total from investment operations 4.75 4.69 (0.05) 0.34 0.87 --------------------------------------------------------- Distributions Distributions from realized capital gains (4.67) - - - - - ----------------------------------------------------------------------------------- Net Asset Value, End of Period $18.43 $18.35 $13.66 $13.71 $13.37 - ----------------------------------------------------------------------------------- Total Return 22.16% 34.33% (0.36%) 2.54% 6.96%+ - ----------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------- Net assets, end of period (000's) $11,665 $7,417 $7,073 $7,369 $5,068 - ----------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.62% 2.55% 2.55% 2.55% 2.55%# - ----------------------------------------------------------------------------------- Ratio of net investment income/(loss) to average net assets (1.87%) (1.53%) (0.79%) (0.84%) (0.15%)# - ----------------------------------------------------------------------------------- Portfolio turnover rate 537% 202% 54% 75% 67%# - ----------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.85% 2.89% 2.88% 2.98% 3.27%# - -----------------------------------------------------------------------------------
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International Small Cap Fund ------------------------------------------------------ Class C ------------------------------------------------------ Year Year Year 3/04/96* Year Ended Ended Ended Ended to 10/31/00** 10/31/99 10/31/98 10/31/97 10/31/96 - ----------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $18.37 $13.66 $13.71 $13.37 $12.50 - ----------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.43) (0.31) (0.12) (0.11) (0.01) Net realized and unrealized gain/(loss) on investments and foreign currency 5.23 5.02 0.07 0.45 0.88 --------------------------------------------------------- Total from investment operations 4.80 4.71 (0.05) 0.34 0.87 --------------------------------------------------------- Distributions Distributions from realized capital gains (4.67) - - - - - ----------------------------------------------------------------------------------- Net Asset Value, End of Period $18.50 $18.37 $13.66 $13.71 $13.37 - ----------------------------------------------------------------------------------- Total Return 22.43% 34.48% (0.36%) 2.54% 6.96%+ - ----------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------- Net assets, end of period (000's) $9,893 $5,972 $6,195 $7,025 $5,517 - ----------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.62% 2.55% 2.55% 2.55% 2.55%# - ----------------------------------------------------------------------------------- Ratio of net investment income/(loss) to average net assets (1.84%) (1.53%) (0.78%) (0.84%) (0.15%)# - ----------------------------------------------------------------------------------- Portfolio turnover rate 537% 202% 54% 75% 67%# - ----------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.86% 2.89% 2.88% 2.96% 3.25%# - -----------------------------------------------------------------------------------
* Commencement of Operations ** Net investment income per share has been calculated using the average share method # Annualized + Non-annualized --------- 78 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Balanced Fund ------------------------------------------------------ Class A ------------------------------------------------------ Year Year Year Ended Year Ended Ended Ended Year Ended 10/31/00** 10/31/99** 10/31/98 10/31/97 10/31/96** - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.56 $11.48 $12.58 $12.33 $12.02 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.14 0.24 0.25 0.34 0.39 Net realized and unrealized gain/(loss) on investments and foreign currency 0.32 (0.09) 1.04 1.52 1.07 ------------------------------------------------------- Total from investment operations 0.46 0.15 1.29 1.86 1.46 ------------------------------------------------------- Distributions Dividends from net investment income (0.28) (0.23) (0.32) (0.45) (0.40) Distributions from realized capital gains (1.31) (0.84) (2.07) (1.16) (0.75) ------------------------------------------------------- Total distributions (1.59) (1.07) (2.39) (1.61) (1.15) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $9.43 $10.56 $11.48 $12.58 $12.33 - --------------------------------------------------------------------------------- Total Return 5.67% 1.20% 12.42% 17.01% 13.10% - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $7,910 $5,936 $14,415 $12,294 $10,873 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.50% 1.39% 1.39% 1.34% 1.34% - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 1.54% 2.18% 2.11% 2.74% 3.32% - --------------------------------------------------------------------------------- Portfolio turnover rate 217% 198% 185% 211% 253% - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.76% 1.60% 1.53% 1.59% 1.55% - ---------------------------------------------------------------------------------
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Balanced Fund -------------------------------------------------------- Class B -------------------------------------------------------- Year Year Ended Year Ended Ended Year Ended Year Ended 10/31/00** 10/31/99** 10/31/98 10/31/97** 10/31/96** - ----------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.49 $11.40 $12.49 $12.26 $11.98 - ----------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.08 0.18 0.18 0.25 0.31 Net realized and unrealized gain/(loss) on investments and foreign currency 0.34 (0.10) 1.04 1.53 1.07 --------------------------------------------------------- Total from investment operations 0.42 0.08 1.22 1.78 1.38 --------------------------------------------------------- Distributions Dividends from net investment income (0.22) (0.15) (0.24) (0.39) (0.35) Distributions from realized capital gains (1.31) (0.84) (2.07) (1.16) (0.75) --------------------------------------------------------- Total distributions (1.53) (0.99) (2.31) (1.55) (1.10) - ----------------------------------------------------------------------------------- Net Asset Value, End of Period $9.38 $10.49 $11.40 $12.49 $12.26 - ----------------------------------------------------------------------------------- Total Return 5.17% 0.57% 11.71% 16.27% 12.35% - ----------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------- Net assets, end of period (000's) $15,566 $13,958 $18,929 $17,140 $16,219 - ----------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.15% 2.04% 2.04% 1.99% 1.99% - ----------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 0.87% 1.60% 1.46% 2.09% 2.67% - ----------------------------------------------------------------------------------- Portfolio turnover rate 217% 198% 185% 211% 253% - ----------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.41% 2.25% 2.18% 2.23% 2.20% - -----------------------------------------------------------------------------------
** Net investment income per share has been calculated using the average share method - --------- 79 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Balanced Fund ---------------------------------------------------- Class C ---------------------------------------------------- Year Year Year Year Ended Year Ended Ended Ended Ended 10/31/00** 10/31/99** 10/31/98 10/31/97 10/31/96 - ------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $10.63 $11.54 $12.62 $12.35 $12.02 - ------------------------------------------------------------------------------ Investment Operations: Net investment income/(loss) 0.08 0.17 0.18 0.25 0.32 Net realized and unrealized gain/(loss) on investments and foreign currency 0.32 (0.09) 1.05 1.54 1.07 ---------------------------------------------------- Total from investment operations 0.40 0.08 1.23 1.79 1.39 ---------------------------------------------------- Distributions Dividends from net investment income (0.22) (0.15) (0.24) (0.36) (0.31 Distributions from realized capital gains (1.31) (0.84) (2.07) (1.16) (0.75 ---------------------------------------------------- Total distributions (1.53) (0.99) (2.31) (1.52) (1.06 - ------------------------------------------------------------------------------ Net Asset Value, End of Period $9.50 $10.63 $11.54 $12.62 $12.35 - ------------------------------------------------------------------------------ Total Return 4.86% 0.58% 11.68% 16.21% 12.41 - ------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------ Net assets, end of period (000's) $37,282 $53,669 $65,049 $68,261 $72,821 - ------------------------------------------------------------------------------ Ratio of total expenses to average net assets 2.15% 2.04% 2.04% 1.99% 1.99 - ------------------------------------------------------------------------------ Ratio of net investment income (loss) to average net assets 0.88% 1.55% 1.47% 2.09% 2.67 - ------------------------------------------------------------------------------ Portfolio turnover rate 217% 198% 185% 211% 253 - ------------------------------------------------------------------------------ Expense ratio before expense reimbursement by adviser 2.43% 2.25% 2.18% 2.20% 2.20 - ------------------------------------------------------------------------------
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Core Bond Fund (formerly Investment Quality Bond Fund) ----------------------------------------------------- Class A ----------------------------------------------------- Year Year Year Year Ended Year Ended Ended Ended Ended 10/31/00** 10/31/99** 10/31/98 10/31/97 10/31/96 - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $9.85 $10.63 $10.52 $10.34 $10.56 - -------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.62 0.66 0.68 0.67 0.66 Net realized and unrealized gain/(loss) on investments and foreign currency (0.21) (0.77) 0.10 0.18 (0.20) ----------------------------------------------------- Total from investment operations 0.41 (0.11) 0.78 0.85 0.46 ----------------------------------------------------- Distributions Dividends from net investment income (0.66) (0.67) (0.67) (0.67) (0.68) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $9.60 $9.85 $10.63 $10.52 $10.34 - -------------------------------------------------------------------------------- Total Return 4.35% (1.08%) 7.63% 8.57% 4.52% - -------------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------------- Net assets, end of period (000's) $3,858 $3,507 $6,730 $7,110 $9,056 - -------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.29% 1.25% 1.25% 1.25% 1.25% - -------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 6.45% 4.77% 6.45% 6.54% 6.37% - -------------------------------------------------------------------------------- Portfolio turnover rate 94% 43% 48% 65% 56% - -------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.78% 1.70% 1.54% 1.62% 1.55% - --------------------------------------------------------------------------------
** Net investment income per share has been calculated using the average share method --------- 80 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Core Bond Fund (formerly Investment Quality Bond Fund) ------------------------------------------------------- Class B ------------------------------------------------------- Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00** 10/31/99** 10/31/98 10/31/97 10/31/96** - ---------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $9.85 $10.62 $10.52 $10.33 $10.55 - ---------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.58 0.59 0.61 0.60 0.60 Net realized and unrealized gain/(loss) on investments and foreign currency (0.24) (0.75) 0.10 0.20 (0.20) ------------------------------------------------------- Total from investment operations 0.34 (0.16) 0.71 0.80 0.40 ------------------------------------------------------- Distributions Dividends from net investment income (0.60) (0.61) (0.61) (0.61) (0.62) - ---------------------------------------------------------------------------------- Net Asset Value, End of Period $9.59 $9.85 $10.62 $10.52 $10.33 - ---------------------------------------------------------------------------------- Total Return 3.70% (1.56%) 6.93% 8.05% 3.92% - ---------------------------------------------------------------------------------- Ratios/Supplemental Data - ---------------------------------------------------------------------------------- Net assets, end of period (000's) $4,937 $4,295 $4,845 $4,613 $4,678 - ---------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.95% 1.90% 1.90% 1.90% 1.90% - ---------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 5.95% 5.71% 5.81% 5.89% 5.72% - ---------------------------------------------------------------------------------- Portfolio turnover rate 94% 43% 48% 65% 56% - ---------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.45% 2.39% 2.20% 2.33% 2.27% - ----------------------------------------------------------------------------------
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Core Bond Fund (formerly Investment Quality Bond Fund) ------------------------------------------------------- Class C ------------------------------------------------------- Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00** 10/31/99** 10/31/98 10/31/97 10/31/96** - ---------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $9.85 $10.62 $10.52 $10.33 $10.55 - ---------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.57 0.59 0.61 0.60 0.60 Net realized and unrealized gain/(loss) on investments and foreign currency (0.23) (0.75) 0.10 0.20 (0.20) -------------------------------------------------------- Total from investment operations 0.34 (0.16) 0.71 0.80 0.40 -------------------------------------------------------- Distributions Dividends from net investment income (0.60) (0.61) (0.61) (0.61) (0.62) - ---------------------------------------------------------------------------------- Net Asset Value, End of Period $9.59 $9.85 $10.62 $10.52 $10.33 - ---------------------------------------------------------------------------------- Total Return 3.70% (1.56%) 6.93% 8.05% 3.92% - ---------------------------------------------------------------------------------- Ratios/Supplemental Data - ---------------------------------------------------------------------------------- Net assets, end of period (000's) $2,778 $4,593 $5,532 $6,109 $7,543 - ---------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.95% 1.90% 1.90% 1.90% 1.90% - ---------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 5.84% 5.70% 5.81% 5.89% 5.72% - ---------------------------------------------------------------------------------- Portfolio turnover rate 94% 43% 48% 65% 56% - ---------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.49% 2.38% 2.20% 2.29% 2.22% - ----------------------------------------------------------------------------------
** Net investment income per share has been calculated using the average share method - --------- 81 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
High Yield Bond Fund/1/ ------------------------------------------------------- Class A Class B Class C -------------------- --------------------- ---------- Year Year Year Year 8/21/00* Ended Ended Ended Ended to 10/31/00** 10/31/99 10/31/00** 10/31/99 10/31/00** - ------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $9.43 $10.00 $9.43 $10.00 $9.00 - ------------------------------------------------------------------------------------ Investment Operations: Net investment income/(loss) 0.88 0.81 0.82 0.74 0.20 Net realized and unrealized gain/(loss) on Investments and foreign currency (0.87) (0.57) (0.88) (0.57) (0.49) ---------------------------------------------------------- Total from investment operations 0.01 0.24 (0.06) 0.17 (0.29) ---------------------------------------------------------- Distributions Dividends from net investment income (0.88) (0.81) (0.82) (0.74) (0.16) - ------------------------------------------------------------------------------------ Net Asset Value, End of Period $8.56 $9.43 $8.55 $9.43 $8.55 - ------------------------------------------------------------------------------------ Total Return 0.04% 2.28% (0.83%) 1.53% (3.29%)+ - ------------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------------ Net assets, end of period (000's) $286 $34 $1,594 $652 $545 - ------------------------------------------------------------------------------------ Ratio of total expenses to average net assets 1.38% 1.25% 2.10% 2.00% 2.07%# - ------------------------------------------------------------------------------------ Ratio of net investment income to average net assets 10.13% 5.69% 9.41% 7.30% 9.10%# - ------------------------------------------------------------------------------------ Portfolio turnover rate 57% 72% 57% 72% 57% - ------------------------------------------------------------------------------------ Expense ratio before expense reimbursement by advisor 1.81% 2.01% 2.52% 2.37% 2.07%# - ------------------------------------------------------------------------------------
/1/ The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 High Yield Bond Fund, which was reorganized into North American High Yield Bond Fund on that date. * Commencement of Operations ** Net investment income per share has been calculated using the average month- end share method # Annualized + Non-annualized --------- 82 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Municipal Bond Fund (formerly National Municipal Bond) ------------------------------------------------- Class A ------------------------------------------------- Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00 10/31/99 10/31/98 10/31/97 10/31/96 - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $9.48 $10.22 $10.09 $9.73 $9.62 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.45 0.45 0.47 0.48 0.48 Net realized and unrealized gain/(loss) on investments and foreign currency 0.18 (0.74) 0.13 0.36 0.11 -------------------------------------------------- Total from investment operations 0.63 (0.29) 0.60 0.84 0.59 -------------------------------------------------- Distributions Dividends from net investment income (0.46) (0.45) (0.47) (0.48) (0.48) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $9.65 $9.48 $10.22 $10.09 $9.73 - --------------------------------------------------------------------------------- Total Return 6.80% (2.95%) 6.04% 8.85% 6.31% - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $7,774 $4,435 $5,820 $6,347 $7,710 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.01% 1.00% 1.00% 0.99% 0.99% - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 4.74% 4.52% 4.60% 4.87% 4.99% - --------------------------------------------------------------------------------- Portfolio turnover rate 48% 46% 43% 29% 49% - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.61% 1.41% 1.23% 1.23% 1.25% - ---------------------------------------------------------------------------------
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Municipal Bond Fund (formerly National Municipal Bond) ------------------------------------------------- Class B ------------------------------------------------- Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00 10/31/99 10/31/98 10/31/97 10/31/96 - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $9.48 $10.22 $10.09 $9.73 $9.62 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.37 0.37 0.38 0.40 0.40 Net realized and unrealized gain/(loss) on investments and foreign currency 0.18 (0.74) 0.13 0.36 0.11 -------------------------------------------------- Total from investment operations 0.55 (0.37) 0.51 0.76 0.51 -------------------------------------------------- Distributions Dividends from net investment income (0.38) (0.37) (0.38) (0.40) (0.40) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $9.65 $9.48 $10.22 $10.09 $9.73 - --------------------------------------------------------------------------------- Total Return 5.92% (3.77%) 5.15% 7.94% 5.41% - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $6,416 $4,197 $5,273 $6,532 $6,130 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.88% 1.85% 1.85% 1.84% 1.84% - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 3.89% 3.67% 3.75% 4.02% 4.14% - --------------------------------------------------------------------------------- Portfolio turnover rate 48% 46% 43% 29% 49% - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.47% 2.26% 2.08% 2.15% 2.11% - ---------------------------------------------------------------------------------
- --------- 83 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Municipal Bond Fund (formerly National Municipal Bond) ------------------------------------------------- Class C ------------------------------------------------- Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00 10/31/99 10/31/98 10/31/97 10/31/96 - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $9.48 $10.22 $10.09 $9.73 $9.62 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.38 0.37 0.38 0.40 0.40 Net realized and unrealized gain/(loss) on investments and foreign currency 0.17 (0.74) 0.13 0.36 0.11 ----------------------------------------------- Total from investment operations 0.55 (0.37) 0.51 0.76 0.51 ----------------------------------------------- Distributions Dividends from net investment income (0.38) (0.37) (0.38) (0.40) (0.40) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $9.65 $9.48 $10.22 $10.09 $9.73 - --------------------------------------------------------------------------------- Total Return 5.93% (3.77%) 5.15% 7.94% 5.41% - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $2,297 $3,931 $5,147 $5,305 $5,693 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.87% 1.85% 1.85% 1.84% 1.84% - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 3.97% 3.67% 3.75% 4.02% 4.14% - --------------------------------------------------------------------------------- Portfolio turnover rate 48% 46% 43% 29% 49% - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.53% 2.26% 2.08% 2.15% 2.25% - ---------------------------------------------------------------------------------
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Strategic Income Fund ------------------------------------------------ Class A ------------------------------------------------ Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00 10/31/99 10/31/98 10/31/97 10/31/96 - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $8.40 $8.99 $9.76 $9.80 $9.07 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.72 0.72 0.67 0.70 0.80 Net realized and unrealized gain/(loss) on investments and foreign currency (0.38) (0.53) (0.63) 0.28 0.72 ------------------------------------------------ Total from investment operations 0.34 0.19 0.04 0.98 1.52 ------------------------------------------------ Distributions Dividends from net investment income (0.75) (0.73) (0.67) (0.84) (0.79) Distributions from realized capital gains - (0.05) (0.14) (0.18) - ------------------------------------------------ Total distributions (0.75) (0.78) (0.81) (1.02) (0.79) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $7.99 $8.40 $8.99 $9.76 $9.80 - --------------------------------------------------------------------------------- Total Return 4.09% 2.10% 0.22% 10.57% 17.35% - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $6,439 $8,997 $15,296 $15,924 $13,382 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.55% 1.50% 1.50% 1.50% 1.50% - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 8.70% 8.21% 7.02% 7.25% 8.28% - --------------------------------------------------------------------------------- Portfolio turnover rate 46% 119% 162% 193% 68% - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.87% 1.67% 1.56% 1.61% 1.65% - ---------------------------------------------------------------------------------
--------- 84 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Strategic Income Fund ------------------------------------------------- Class B ------------------------------------------------- Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00 10/31/99 10/31/98 10/31/97 10/31/96 - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $8.41 $8.99 $9.76 $9.80 $9.07 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.67 0.66 0.61 0.64 0.73 Net realized and unrealized gain/(loss) on investments and foreign currency (0.39) (0.52) (0.63) 0.28 0.73 -------------------------------------------------- Total from investment operations 0.28 0.14 (0.02) 0.92 1.46 -------------------------------------------------- Distributions Dividends from net investment income (0.70) (0.67) (0.61) (0.78) (0.73) Distributions from realized capital gains - (0.05) (0.14) (0.18) - -------------------------------------------------- Total distributions (0.70) (0.72) (0.75) (0.96) (0.73) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $7.99 $8.41 $8.99 $9.76 $9.80 - --------------------------------------------------------------------------------- Total Return 3.33% 1.56% (0.43%) 9.86% 16.59% - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $15,131 $21,340 $29,210 $34,590 $30,890 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.20% 2.15% 2.15% 2.15% 2.15% - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 8.00% 7.58% 6.39% 6.60% 7.63% - --------------------------------------------------------------------------------- Portfolio turnover rate 46% 119% 162% 193% 68% - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.52% 2.32% 2.21% 2.23% 2.27% - ---------------------------------------------------------------------------------
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Strategic Income Fund ------------------------------------------------- Class C ------------------------------------------------- Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00 10/31/99 10/31/98 10/31/97 10/31/96 - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $8.41 $8.99 $9.76 $9.80 $9.07 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.67 0.66 0.61 0.64 0.73 Net realized and unrealized gain/(loss) on investments and foreign currency (0.39) (0.52) (0.63) 0.28 0.73 ------------------------------------------------ Total from investment operations 0.28 0.14 (0.02) 0.92 1.46 ------------------------------------------------ Distributions Dividends from net investment income (0.70) (0.67) (0.61) (0.78) (0.73) Distributions from realized capital gains - (0.05) (0.14) (0.18) - ------------------------------------------------ Total distributions (0.70) (0.72) (0.75) (0.96) (0.73) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $7.99 $8.41 $8.99 $9.76 $9.80 - --------------------------------------------------------------------------------- Total Return 3.32% 1.56% (0.43%) 9.86% 16.59% - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $13,056 $20,749 $33,537 $32,683 $22,783 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 2.20% 2.15% 2.15% 2.15% 2.15% - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 8.04% 7.57% 6.37% 6.60% 7.63% - --------------------------------------------------------------------------------- Portfolio turnover rate 46% 119% 162% 193% 68% - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.52% 2.32% 2.21% 2.24% 2.28% - ---------------------------------------------------------------------------------
- --------- 85 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
U.S. Government Securities Fund -------------------------------------------------- Class A -------------------------------------------------- Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00** 10/31/99 10/31/98 10/31/97 10/31/96 - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $9.55 $10.08 $9.94 $9.80 $9.98 - -------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.55 0.53 0.56 0.59 0.56 Net realized and unrealized gain/(loss) on investments and foreign currency (0.02) (0.48) 0.16 0.13 (0.12) --------------------------------------------------1 Total from investment operations 0.53 0.05 0.72 0.72 0.44 --------------------------------------------------1 Distributions Dividends from net investment income (0.58) (0.58) (0.58) (0.58) (0.56) Distributions in excess of net investment income - - - - (0.06) --------------------------------------------------- Total distributions (0.58) (0.58) (0.58) (0.58) (0.62) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $9.50 $9.55 $10.08 $9.94 $9.80 - -------------------------------------------------------------------------------- Total Return 5.76% 0.48% 7.41% 7.56% 4.64% - -------------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------------- Net assets, end of period (000's) $29,468 $35,495 $49,624 $53,235 $72,774 - -------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.25% 1.25% 1.25% 1.25% 1.25% - -------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 5.90% 5.64% 5.65% 6.20% 5.71% - -------------------------------------------------------------------------------- Portfolio turnover rate 193% 63% 116% 364% 477% - -------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.62% 1.46% 1.40% 1.42% 1.41% - --------------------------------------------------------------------------------
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U.S. Government Securities Fund -------------------------------------------------- Class B -------------------------------------------------- Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00** 10/31/99 10/31/98 10/31/97 10/31/96 - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $9.56 $10.07 $9.94 $9.80 $9.98 - -------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.49 0.47 0.49 0.54 0.50 Net realized and unrealized gain/(loss) on investments and foreign currency (0.04) (0.47) 0.15 0.11 (0.12) --------------------------------------------------- Total from investment operations 0.45 0.00 0.64 0.65 0.38 --------------------------------------------------- Distributions Dividends from net investment income (0.51) (0.51) (0.51) (0.51) (0.50) Distributions in excess of net investment income - - - - (0.06) --------------------------------------------------- Total distributions (0.51) (0.51) (0.51) (0.51) (0.56) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $9.50 $9.56 $10.07 $9.94 $9.80 - -------------------------------------------------------------------------------- Total Return 4.91% 0.01% 6.60% 6.84% 3.97% - -------------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------------- Net assets, end of period (000's) $8,326 $12,072 $17,850 $16,659 $19,444 - -------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.90% 1.90% 1.90% 1.90% 1.90% - -------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 5.27% 5.00% 4.99% 5.55% 5.06% - -------------------------------------------------------------------------------- Portfolio turnover rate 193% 63% 116% 364% 477% - -------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.27% 2.11% 2.05% 2.09% 2.06% - --------------------------------------------------------------------------------
** Net investment income per share has been calculated using the average share method --------- 86 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
U.S. Government Securities Fund ---------------------------------------------------- Class C ---------------------------------------------------- Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00** 10/31/99 10/31/98 10/31/97 10/31/96** - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $9.56 $10.07 $9.94 $9.80 $9.98 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.49 0.47 0.49 0.54 0.50 Net realized and unrealized gain/(loss) on investments and foreign currency (0.04) (0.47) 0.15 0.11 (0.12) ----------------------------------------------------- Total from investment operations 0.45 0.00 0.64 0.65 0.38 ----------------------------------------------------- Distributions Dividends from net investment income (0.51) (0.51) (0.51) (0.51) (0.50) Distributions in excess of net investment income - - - - (0.06) ----------------------------------------------------- Total distributions (0.51) (0.51) (0.51) (0.51) (0.56) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $9.50 $9.56 $10.07 $9.94 $9.80 - --------------------------------------------------------------------------------- Total Return 4.91% 0.01% 6.60% 6.84% 3.97% - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $6,846 $10,817 $12,708 $14,716 $20,009 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.90% 1.90% 1.90% 1.90% 1.90% - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 5.27% 5.00% 5.00% 5.55% 5.06% - --------------------------------------------------------------------------------- Portfolio turnover rate 193% 63% 116% 364% 477% - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 2.28% 2.11% 2.05% 2.09% 2.06% - ---------------------------------------------------------------------------------
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Money Market Fund ------------------------------------------------ Class A ------------------------------------------------ Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00 10/31/99 10/31/98 10/31/97 10/31/96 - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.05 0.04 0.05 0.05 0.05 Distributions Dividends from net investment income (0.05) (0.04) (0.05) (0.05) (0.05) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 - --------------------------------------------------------------------------------- Total Return 5.57% 4.56% 5.18% 5.13% 5.16% - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $25,610 $6,030 $10,295 $11,057 $8,087 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 0.69% 0.50% 0.50% 0.50% 0.50% - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 5.72% 4.46% 5.06% 5.02% 5.02% - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 0.94% 0.95% 0.92% 0.96% 0.95% - ---------------------------------------------------------------------------------
** Net investment income per share has been calculated using the average month- end share method - --------- 87 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Money Market Fund ------------------------------------------------ Class B ------------------------------------------------ Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00 10/31/99 10/31/98 10/31/97 10/31/96 - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.05 0.04 0.05 0.05 0.05 Distributions Dividends from net investment income (0.05) (0.04) (0.05) (0.05) (0.05) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 - --------------------------------------------------------------------------------- Total Return 5.57% 4.56% 5.18% 5.13% 5.16% - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $8,096 $4,551 $5,919 $3,332 $3,062 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 0.67% 0.50% 0.50% 0.50% 0.50% - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 5.54% 4.47% 5.02% 5.02% 5.02% - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 0.93% 0.99% 0.98% 1.05% 1.18% - ---------------------------------------------------------------------------------
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Money Market Fund ------------------------------------------------ Class C ------------------------------------------------ Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/00 10/31/99 10/31/98 10/31/97 10/31/96 - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.05 0.04 0.05 0.05 0.05 Distributions Dividends from net investment income (0.05) (0.04) (0.05) (0.05) (0.05) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 - --------------------------------------------------------------------------------- Total Return 5.57% 4.56% 5.18% 5.13% 5.16% - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $7,195 $8,644 $8,237 $7,539 $9,840 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 0.67% 0.50% 0.50% 0.50% 0.50% - --------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 5.37% 4.48% 5.05% 5.01% 5.02% - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.00% 1.01% 0.94% 1.00% 0.98% - ---------------------------------------------------------------------------------
--------- 88 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - -------------------------------------------------------------------------------
Municipal Money Market Fund/1/ ------------------------------------------------ Class A Class B Class C ------------------ ------------------ -------- Year Year Year Year 8/10/00* Ended Ended Ended Ended to 10/31/00 10/31/99 10/31/00 10/31/99 10/31/00 - --------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 - --------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.03 0.02 0.03 0.01 0.01 Distributions Dividends from net investment income (0.03) (0.02) (0.03) (0.01) (0.01) - --------------------------------------------------------------------------------- Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 - --------------------------------------------------------------------------------- Total Return 3.06% 2.18% 2.48% 1.42% 0.71%+ - --------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------- Net assets, end of period (000's) $4,452 $3,651 $2,777 $2,841 $108 - --------------------------------------------------------------------------------- Ratio of total expenses to average net assets 0.97% 1.05% 1.54% 1.80% 0.75%# - --------------------------------------------------------------------------------- Ratio of net investment income to average net assets 3.03% 2.18% 2.44% 1.42% 2.78%# - --------------------------------------------------------------------------------- Expense ratio before expense reimbursement by advisor 1.44% 1.89% 2.00% 2.69% 1.16%# - ---------------------------------------------------------------------------------
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Aggressive Growth LifeStyle Fund/2/ ------------------------------------------------------ Class A Class B Class C -------------------- -------------------- ---------- Year Year Year Year 8/10/00* Ended Ended Ended Ended to 10/31/00** 10/31/99 10/31/00** 10/31/99 10/31/00** - ----------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $11.92 $10.00 $11.90 $10.00 $13.03 - ----------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 1.39 0.07 1.46 0.06 0.86 Net realized and unrealized gain/(loss) on investments 0.53 1.91 0.48 1.89 (1.09) --------------------------------------------------------- Total from investment operations 1.92 1.98 1.94 1.95 (0.23) Distributions Dividends from net investment income (0.98) (0.06) (0.96) (0.05) - Distributions from realized capital gains (0.15) - (0.15) - - --------------------------------------------------------- Total distributions (1.13) (0.06) (1.11) (0.05) - - ----------------------------------------------------------------------------------- Net Asset Value, End of Period $12.71 $11.92 $12.73 $11.90 $12.80 - ----------------------------------------------------------------------------------- Total Return 16.27% 19.65% 16.30% 19.52% (1.77%)+ - ----------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------- Net assets, end of period (000's) $4,064 $1,929 $13,450 $4,915 $184 - ----------------------------------------------------------------------------------- Ratio of total expenses to average net assets 0.12% 0.10% 0.24% 0.10% 0.73%# - ----------------------------------------------------------------------------------- Ratio of net investment income to average net assets 10.81% 0.63% 11.51% 0.66% 39.30%# - ----------------------------------------------------------------------------------- Portfolio turnover rate 53% 9% 53% 9% 53%# - ----------------------------------------------------------------------------------- Expense ratio before expense reimbursement by advisor 0.14% 0.10% 0.41% 0.10% 0.89%# - -----------------------------------------------------------------------------------
/1/ The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 Municipal Money Market Fund, which was reorganized into North American Municipal Money Market Fund on that date. /2/ The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 Aggressive Growth LifeStyle Fund, which was reorganized into North American Aggressive Growth LifeStyle Fund on that date. * Commencement of Operations ** Net investment income per share has been calculated using the average month-end share method # Annualized + Non-annualized - --------- 89 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Moderate Growth LifeStyle Fund/1/ ------------------------------------------------------ Class A Class B Class C -------------------- -------------------- ---------- Year Year Year Year 7/12/00* Ended Ended Ended Ended to 10/31/00** 10/31/99 10/31/00** 10/31/99 10/31/00** - ---------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $11.40 $10.00 $11.42 $10.00 $12.77 - ---------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.99 0.14 1.02 0.12 0.73 Net realized and unrealized gain/(loss) on investments 0.50 1.39 0.47 1.41 (1.03) -------------------------------------------------------- Total from investment operations 1.49 1.53 1.49 1.53 (0.30) -------------------------------------------------------- Distributions Dividends from net investment income (0.73) (0.13) (0.74) (0.11) (0.36) Distributions from realized capital gains (0.09) - (0.09) - -------------------------------------------------------- Total distributions (0.82) (0.13) (0.83) (0.11) (0.36) - ---------------------------------------------------------------------------------- Net Asset Value, End of Period $12.07 $11.40 $12.08 $11.42 $12.11 - ---------------------------------------------------------------------------------- Total Return 13.27% 15.20% 13.22% 15.26% (2.30%) - ---------------------------------------------------------------------------------- Ratios/Supplemental Data - ---------------------------------------------------------------------------------- Net assets, end of period (000's) $3,396 $1,918 $11,843 $5,553 $183 - ---------------------------------------------------------------------------------- Ratio of total expenses to average net assets 0.12% 0.10% 0.23% 0.10% 0.80%# - ---------------------------------------------------------------------------------- Ratio of net investment income to average net assets 8.27% 1.33% 8.53% 1.40% 19.82%# - ---------------------------------------------------------------------------------- Portfolio turnover rate 47% 11% 47% 11% 47% - ---------------------------------------------------------------------------------- Expense ratio before expense reimbursement by advisor 0.12% 0.10% 0.23% 0.10% 0.80%# - ----------------------------------------------------------------------------------
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Conservative Growth LifeStyle Fund/1/ ------------------------------------------------------ Class A Class B Class C -------------------- -------------------- ---------- Year Year Year Year 7/20/00* Ended Ended Ended Ended to 10/31/00** 10/31/99 10/31/00** 10/31/99 10/31/00** - ---------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $11.03 $10.00 $11.06 $10.00 $11.95 - ---------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.87 0.21 0.81 0.18 0.74 Net realized and unrealized gain/(loss) on investments 0.39 1.02 0.45 1.05 (0.73) -------------------------------------------------------- Total from investment operations 1.26 1.23 1.26 1.23 0.01 -------------------------------------------------------- Distributions Dividends from net investment income (0.60) (0.20) (0.59) (0.17) (0.27) Distributions from realized capital gains (0.10) - (0.10) - - -------------------------------------------------------- Total distributions (0.70) (0.20) (0.69) (0.17) (0.27) - ---------------------------------------------------------------------------------- Net Asset Value, End of Period $11.59 $11.03 $11.63 $11.06 $11.69 - ---------------------------------------------------------------------------------- Total Return 11.61% 12.30% 11.66% 12.21% 0.06% - ---------------------------------------------------------------------------------- Ratios/Supplemental Data - ---------------------------------------------------------------------------------- Net assets, end of period (000's) $3,420 $1,790 $10,354 $5,880 $150 - ---------------------------------------------------------------------------------- Ratio of total expenses to average net assets 0.12% 0.10% 0.23% 0.10% 0.86%# - ---------------------------------------------------------------------------------- Ratio of net investment income to average net assets 7.62% 2.01% 7.15% 2.11% 22.43%# - ---------------------------------------------------------------------------------- Portfolio turnover rate 45% 10% 45% 10% 45% - ---------------------------------------------------------------------------------- Expense ratio before expense reimbursement by advisor 0.12% 0.10% 0.23% 0.10% 0.86%# - ----------------------------------------------------------------------------------
/1/ The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 Conservative Growth Life- Style Fund, which was reorganized into North American Conservative Growth LifeStyle Fund on that date. * Commencement of operations ** Net investment income per share has been calculated using the average month- end share method # Annualized --------- 90 North American Funds 286 Congress Street Boston, Massachusetts 02210 (800) 872-8037 Class A Shares Class B Shares Class C Shares For Additional Information More information about the Funds, including the SAI, is available to you free of charge. To request additional information: By Telephone Call 1-800-872-8037 By Mail from the Funds (There is no fee) Write to: North American Funds 286 Congress Street Boston, MA 02210 By Mail or in Person from the Public Reference Room of the Securities and Exchange Commission (SEC). (You will pay a duplication fee.) Visit or Write to: SEC's Public Reference Section 450 Fifth Street, NW Washington, DC, 20549-6009 1-800-SEC-0330 Online at the SEC's Internet Site Text-only versions of fund documents can be viewed online or downloaded from http://www.sec.gov. Statement of Additional Information (SAI) The SAI provides additional information about the Trust and the Funds. The SAI and the auditor's report and financial statements included in the Trust's most recent Annual Report to its shareholders are incorporated by reference as part of this Prospectus. Annual and Semi-annuals Reports The Annual and Semi-annual Reports describe the Funds' performance, list portfolio holdings and include additional information about the Funds' investments. The Annual Report discusses the market conditions and investment strategies that significantly affected the Fund's performance during their last fiscal year. Investment Company Act File: 811-05797 North American Funds 286 Congress Street, Boston, MA 02210 www.northamericanfunds.com [(background graphics is a listing of all subadvisors)] Privacy Notice Included - ----------------------- 0201:90201 PROSPECTUS North American Funds A specialized family of mutual funds managed by experts with your dreams in mind. MARCH 1, 2001 INSTITUTIONAL CLASS I SHARES [(background graphics is a listing of all subadvisors)] The Securities and Exchange Commission has not approved or disapproved of these securities or passed on the American adequacy or accuracy of this prospectus. Any representation General to the contrary is a criminal offense. Financial Group U.S. Equity Funds Growth & Income Fund Large Cap Growth Fund Mid Cap Growth Fund Mid Cap Value Fund Science & Technology Fund Small Cap Growth Fund Small Cap Index Fund Socially Responsible Fund Stock Index Fund International/Global Equity Funds Global Equity Fund International Equity Fund International Small Cap Fund Balanced Funds Balanced Fund LifeStyle Funds Aggressive Growth LifeStyle Fund Conservative Growth LifeStyle Fund Moderate Growth LifeStyle Fund Income Funds Core Bond Fund High Yield Bond Fund Strategic Income Fund U.S. Government Securities Fund Money Market Funds Money Market Fund LOGO] Table of Contents Organization of Information This Prospectus includes information about 21 different Funds. . Section I includes a summary of each Fund. . Section II includes additional information about the Funds' investment strategies, additional risk information and information about the Funds' management. . Section III includes information about how to invest and manage your North American Funds account. . Section IV includes our privacy notice and other information. Section I: Summaries of the Funds............. Page 1 . Investment Objective . Principal Investment Strategies . Main Risks . Investment Performance . Description of Main Risks North American Funds U.S. Equity Funds Growth & Income Fund Page 2 Large Cap Growth Fund Page 3 Mid Cap Growth Fund Page 4 Mid Cap Value Fund Page 5 Science & Technology Fund Page 6 Small Cap Growth Fund Page 8 Small Cap Index Fund Page 9 Socially Responsible Fund Page 10 Stock Index Fund Page 11 International/Global Equity Funds Global Equity Fund Page 12 International Equity Fund Page 13 International Small Cap Fund Page 14 Balanced Funds Balanced Fund Page 15 Lifestyle Funds Aggressive Growth LifeStyle Fund Page 16 Conservative Growth LifeStyle Fund Page 18 Moderate Growth LifeStyle Fund Page 20 Income Funds Core Bond Fund Page 22 High Yield Bond Fund Page 23 Strategic Income Fund Page 24 U.S. Government Securities Fund Page 25 Money Market Funds Money Market Fund Page 26 Section II: Other Information About Each Page 30 Fund.......................................... . Fees and Expenses . More Information About Investment Strategies . Other Risks of Investing . Fund Management Section III: Investing in the Funds........... Page 50
This section includes the information you need about how to invest and how to redeem shares. It also includes other important information about pricing of fund shares, dividends and distributions, and taxes. Section IV: Privacy Notice and Other Page 54 Information...................................
Additional Information If you'd like information additional to that included in this Prospectus, the back cover lists a number of places to call or to visit for additional materials. Section I: Fund Summaries North American Funds (the "Trust") is a group of mutual funds that includes 24 separate investment portfolios, or Funds. Each Fund has a specific investment objective. Each Fund also has a subadvisor, a firm responsible for making investment decisions for the Fund. This Prospectus includes information about Institutional Class I shares for 21 of the Funds. The summaries on the next 25 pages describe each Fund's investment objective and principal investment strategies, list the main risks of investing in the Fund, and show the Fund's past investment performance. Explanations of the main risks of investing in each Fund starts on page 27. Below the Funds' descriptions are a bar chart and a table. The bar chart shows annual return of one class of shares for each full calendar year in the life of the Fund. In certain cases, the class shown in the bar chart (either Class A shares or Class C shares, depending on the Fund) is not offered by this Prospectus, but the performance would have been substantially similar for Institutional Class I shares of the same fund, differing only to the extent that the classes have different expenses. The table (the Average Annual Total Return Table) following each bar chart shows how that Fund's average annual returns for each class of shares for the last one, five and ten years (or since the Fund began, for newer Funds) compared to returns of a broad-based securities market index. Like the bar chart, in certain cases the Average Annual Total Return Table shows performance information for either Class A shares or Class C shares, depending on the Fund, neither of which are offered by this Prospectus. Where applicable, the table reflects sales charges, including the maximum initial sales charge for Class A shares, and the maximum applicable deferred sales charge for Class C shares. A Fund's bar chart and table provide indications of the historical risk/return of an investment in the Fund. It is important to remember that past performance does not predict future performance and that-as with any investment, it is possible to lose money by investing in the Funds. An investment in any of the Funds is not a deposit in a bank and is not insured by the Federal Deposit Insurance Corporation or any other government agency. - ------ 1 Growth & Income Fund Investment Goal and Strategies The investment objective of the Growth & Income Fund is to provide long-term growth of capital and income consistent with prudent investment risk. Wellington Management Company, LLP ("Wellington Management"), the Fund's subadvisor, pursues this objective by investing mostly in a diversified portfolio of common stocks of U.S. issuers that Wellington Management believes are of high quality. High quality companies are companies that Wellington Management believes have solid balance sheets, strong management teams, consistent earnings growth and market leadership in their industry. The Fund will typically invest in dividend-paying stocks of larger companies. The Fund may invest up to 20% of its total assets in foreign securities. To select stocks for the Fund, Wellington Management assesses a company and its business environment, management, balance sheet, income statement, anticipated earnings and dividends, and other related measures of fundamental value. Wel- lington Management will also monitor and evaluate the economic and political climate and the principal securities markets of the country in which each com- pany is located. The Fund may participate in the initial public offering ("IPO") market, and a portion of the Fund's returns may be attributable to the Fund's investments in IPOs. There is no guarantee that as the Fund's assets grow it will be able to experience significant improvement in performance by investing in IPOs. Main Risks . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally, including, in particular, the risks associated with value stocks and the risk that the stocks the Fund buys may stop paying dividends) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. Wellington Management has been the subadvisor to the Fund since its inception. For periods prior to the inception of Institutional Class I shares (7/7/00), the table also shows estimated historical performance for Institutional Class I Shares based on the performance of Class C shares, adjusted to reflect that there are no sales charges paid by Institutional Class I shares. The table compares the Fund's average annual returns to those of a broad based index. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR C SHARES Annual Total Return 1992...........8.29% 1993...........9.20% 1994...........2.11% 1995..........26.78% 1996..........20.90% 1997..........31.64% 1998..........25.39% 1999..........16.74% 2000..........-8.86% BEST QUARTER: QUARTER ENDED 12/31/98 20.06% WORST QUARTER: QUARTER ENDED 9/30/98 -9.81% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Past Life of Fund One Year Five Years (since 5/1/91) - ----------------------------------------------------------- Class C -9.77% 16.25% 14.16% - ----------------------------------------------------------- Institutional Class I -8.86% 16.25% 14.16% - ----------------------------------------------------------- S&P 500 Index(TM) -9.10% 18.33% 16.40%
- -------------------------------------------------------------------------------- ------ 2 Large Cap Growth Fund (formerly Growth Equity Fund) Investment Goal and Strategies The investment objective of the Large Cap Growth Fund is to seek long-term cap- ital growth. To achieve this goal, Founders Asset Management LLC ("Founders"), the Fund's subadvisor, invests at least 65% of the Fund's total assets in the common stocks of well-established, high-quality growth companies whose earnings are expected by Founders to increase faster than the market average. These companies tend to have strong performance records, solid market posi- tions, reasonable financial strength, and continuous operating records of three years or more. Main Risks . Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally, including, in particular, the risks associated with growth stock and investing in IPOs) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Sector Risk (the risk that securities of companies within specific sectors of the economy can perform differently than the overall market) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. Founders has been the subadvisor to the Fund since its inception. For periods prior to the inception of Institutional Class I shares (7/7/00), the table also shows estimated historical performance for Institutional Class I Shares based on the performance of Class A shares, adjusted to reflect that there are no sales charges paid by Institutional Class I shares. The table compares the Fund's average annual returns to those of a broad based index. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1992................0% 1993................0% 1994................0% 1995................0% 1996................0% 1997............25.37% 1998............25.13% 1999............38.37% 2000...........-27.69% BEST QUARTER: QUARTER ENDED 12/31/99 31.53% WORST QUARTER: QUARTER ENDED 12/31/00 -24.47% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Life of Fund One Year (since 3/4/96) - ------------------------------------------------ Class A -31.85% 11.23% - ------------------------------------------------ Institutional Class I -27.69% 12.61% - ------------------------------------------------ S&P 500 Index(TM) -9.10% 17.96%
- -------------------------------------------------------------------------------- - ------ 3 Mid Cap Growth Fund (formerly Small/Mid Cap Growth Fund) Investment Goal and Strategies The investment objective of the Mid Cap Growth Fund is to seek long-term capi- tal appreciation. INVESCO Funds Group, Inc. ("INVESCO"), the Fund's subadvisor, invests primarily in common stocks of mid-sized companies--those with market capitalizations ranging from approximately $2 billion to $15 billion at the time of purchase--but also has the flexibility to invest in other types of securities including preferred stocks, convertible securities and bonds. The core of the Fund's portfolio will be invested in securities of established com- panies that are leaders in attractive growth markets with a history of strong returns. The remainder of the portfolio will be invested in securities of com- panies that show accelerating growth, driven by product cycles, favorable industry or sector conditions and other factors that the subadvisor believes will lead to rapid sales or earnings growth. The Fund's strategy relies on many short-term factors including current information about a company, investor interest, price movements of a company's securities and general market and mon- etary conditions. Consequently, the Fund's investments will usually be bought and sold frequently, which may cause the Fund to incur higher trading costs and/or to have a relatively high amount of short-term capital gains, which are generally taxable to you at your ordinary income tax rate. The Fund may invest up to 25% of its total assets in foreign securities and will be subject to certain risks as a result of these investments. The Fund may also purchase ADRs, U.S. dollar-denominated securities of foreign issuers or Canadian securities that are not included in the 25% foreign securities limita- tion. Main Risks . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally, including, in particular, the risks associated with invest- ing in smaller companies) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. INVESCO assumed subadvisory duties March 13, 2000. For periods prior to the inception of Institutional Class I shares (7/7/00), the table also shows estimated historical performance for Institutional Class I Shares based on the performance of Class A shares, adjusted to reflect that there are no sales charges paid by Institutional Class I shares. The table compares the Fund's average annual returns to those of a broad based index. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1992.....................0% 1993.....................0% 1994.....................0% 1995.....................0% 1996.....................0% 1997.................15.89% 1998.................29.65% 1999.................32.20% 2000................-13.03% BEST QUARTER: QUARTER ENDED 12/31/99 30.15% WORST QUARTER: QUARTER ENDED 12/31/00 -24.88% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Life of Fund One Year (since 3/4/96) - ------------------------------------------------- Class A -18.03% 11.75% - ------------------------------------------------- Institutional Class I -13.03% 13.13% - ------------------------------------------------- Russell 2000 Index(TM) -3.02% 15.33%
- -------------------------------------------------------------------------------- ------ 4 Mid Cap Value Fund Investment Goal and Strategies The investment objective of the Mid Cap Value Fund is to seek capital growth. Neuberger Berman Management, Inc. ("NBM"), the Fund's subadvisor, pursues this objective by investing at least 65% of the Fund's total assets in equity secu- rities of medium capitalization companies using a value-oriented investment approach. Medium capitalization companies include companies with the characteristics of companies included in the Russell Midcap(TM) Index. As of December 31, 2000, the largest company included in the Russell Midcap(TM) Index had an approximate mar- ket capitalization of $23.6 billion, while the average market capitalization was approximately $7.8 billion. NBM chooses securities it believes are undervalued based on strong fundamen- tals, including a low price-to-earnings ratio, consistent cash flow, and the company's track record through all parts of the market cycle. When selecting securities for this Fund, NBM also considers other factors, including ownership by a company's management of the company's stock and the dominance of a company in its particular field. Up to 35% of the Fund's total assets may be invested in other equity securities, including common and preferred stocks, convertible securities, and related equities. The Fund may invest in derivatives. The Fund may participate in the initial public offering ("IPO") market, and a portion of the Fund's returns may be attributable to the Fund's investments in IPOs. There is no guarantee that as the Fund's assets grow it will be able to experience significant improvement in performance by investing in IPOs. Main Risks . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally including, in particular, the risks of investing in IPOs) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variabil- ity of the Fund's historical returns. NBM has been the subadvisor to the Fund since its inception. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, investment strategies and policies as does the Fund, and was also subadvised by NBM. The table com- pares the Fund's average annual returns to those of a broad based index. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR I SHARES Annual Total Return 1992.................0% 1993.................0% 1994.................0% 1995.................0% 1996.................0% 1997.................0% 1998.................0% 1999.............23.80% 2000.............29.71% BEST QUARTER: QUARTER ENDED 6/30/99 16.58% WORST QUARTER: QUARTER ENDED 9/30/99 -11.34% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Life of Fund One Year (since 11/2/98) - ---------------------------------------------------------- Institutional Class I 29.71% 28.72% - ---------------------------------------------------------- Russell Midcap Value Index(TM) 19.18% 11.67% - ----------------------------------------------------------
- ------ 5 Science & Technology Fund Investment Goal and Strategies The objective of the Science & Technology Fund is long-term capital apprecia- tion. The Fund's subadvisor, T. Rowe Price Associates, Inc. ("T. Rowe Price"), pur- sues this objective by investing at least 65% of the Fund's total assets in the common stocks of companies expected to benefit from the development, advance- ment, and use of science and technology. Some of the industries that are likely to be included in the portfolio are: . electronics, including hardware, software, and components . communications . e-commerce . information services . media . life sciences and health care . environmental services . chemicals and synthetic materials . defense and aerospace Stock selection reflects a growth approach and is based on intensive research that assesses a company's fundamental prospects for above average earnings. Holdings can range from small companies developing new technologies to blue chip firms with established track records of developing and marketing technolo- gy. Investments may also include companies that are expected to benefit from technological advances even if they are not directly involved in research and development. The Fund may invest up to 30% of its assets in foreign securities, including American Depositary Receipts ("ADRs") and other dollar-denominated foreign securities. The Fund may also invest in other equity-related securities of sci- ence and technology companies, including convertible debt securities and con- vertible preferred stock. In addition, the Fund may invest in money market securities in order to have cash available for redemptions. The Fund may invest in derivatives. The Fund may participate in the initial public offering ("IPO") market, and a portion of the Fund's returns may be attributable to the Fund's investments in IPOs. There is no guarantee that as the Fund's assets grow it will be able to experience significant improvement in performance by investing in IPOs. The Fund's investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and a higher amount of short-term capital gains, which are generally taxable to you at your ordinary income tax rate. Main Risks . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally including, in particular, the risks of investing in IPOs) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Science & Technology Company Risk (the risk that the prices of securities of science and technology companies will be particularly volatile) . Unseasoned Company Risk (the level of risk will rise to the extent that the Fund has significant exposure to smaller or unseasoned companies (those with less than a three-year operating history, which may not have established prod- ucts or more experienced management)) ------ 6 Fund Performance and Prior Performance of Similar Accounts The Fund commenced operations on March 1, 2000 and was reorganized on July 7, 2000, when a corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") was reorganized into the Fund. The performance information shown below in the table reflects the Fund's return of Institutional Class I shares since the inception date of the AGSPC2 Fund on March 1, 2000. The performance information shown below in the bar chart and table is for the North American--T. Rowe Price Science & Technology Fund and the T. Rowe Price Science & Technology Fund, and not that of the Fund, or the AGSPC2 Fund, which had not completed a full year of operations on October 31, 2000. The North American--T. Rowe Price Science & Technology Fund is sold as an annu- ity only to registered and unregistered separate accounts of The Variable Annu- ity Life Insurance Corporation ("VALIC") and its affiliates or employee thrift plans maintained by VALIC or American General Corporation. The returns shown reflect investment management fees and other Fund expenses, and do not reflect any charges included in the annuity contract or variable life insurance policy for mortality and expenses guarantees, administrative fees or surrender charges. The T. Rowe Price Science & Technology Fund is sold to the general public. The Fund's investment objective, policies, and strategies are substantially similar to those employed by T. Rowe Price Associates, Inc. for the North Amer- ican--T. Rowe Price Science & Technology Fund, and for the T. Rowe Price Sci- ence & Technology Fund. Investments made by the Fund, may not be the same as those made by the North American--T. Rowe Price Science & Technology Fund or the T. Rowe Price Science & Technology Fund. Each of the funds will have different performance results, due to factors such as the cash flow in and out, different fees and expenses, and diversity in portfolio size and positions. Past performance shown is no guarantee of similar future performance for the Fund. The bar charts show the annual returns and performance for each full calendar year since inception of the North American--T. Rowe Price Science & Technology Fund, and for the past ten years for the T. Rowe Price Science & Technology Fund, assuming reinvestment of dividends and distributions. Annual Total Return 1991........................0% 1992........................0% 1993........................0% 1994........................0% 1995....................61.86% 1996....................13.81% 1997.....................2.61% 1998....................42.13% 1999...................100.95% 2000...................-34.13% . North American - T. Rowe Price Science & Technology Fund BEST QUARTER: QUARTER ENDED 12/31/98 48.04% WORST QUARTER: QUARTER ENDED 12/31/00 -31.83% Annual Total Return 1991....................60.17% 1992....................18.76% 1993....................24.25% 1994....................15.79% 1995....................55.53% 1996....................14.23% 1997.....................1.71% 1998....................42.35% 1999...................100.99% 2000...................-34.19% . T. Rowe Price Science & Technology Fund BEST QUARTER: QUARTER ENDED 12/31/98 47.89% WORST QUARTER: QUARTER ENDED 12/31/00 -32.29% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
1 Year 5 Years 10 Years Since Inception - ---------------------------------------------------------------- Institutional Class I N/A N/A N/A -19.20%+ - ---------------------------------------------------------------- North American - T. Rowe Price Science & Technology Fund -34.13% 17.05% N/A 25.13% (4/29/94) - ---------------------------------------------------------------- T. Rowe Price Science & Technology Fund -34.19% 16.95% 25.00% 20.47% (9/30/87) - ---------------------------------------------------------------- S&P 500 Index Institutional Class I N/A N/A N/A -4.27% - ---------------------------------------------------------------- North American - T. Rowe Price Science & Technology Fund -9.10% 18.33% 25.00% 17.47% (4/29/94) - ---------------------------------------------------------------- T. Rowe Price Science & Technology Fund -9.10% 18.33% 17.46% 11.10% (9/30/87)
- -------------------------------------------------------------------------------- Inception date: Institutional Class I - 3/1/00 + Not annualized - ------ 7 Small Cap Growth Fund (formerly Emerging Growth Fund) Investment Goal and Strategies The investment objective of the Small Cap Growth Fund is maximum capital appre- ciation. Credit Suisse Asset Management, LLC ("Credit Suisse") the Fund's subadvisor, pursues this objective by investing at least 65% of its total assets in equity securities of small U.S. companies. The Fund considers a "small" company to be one whose market capitalization is within the range of capitalizations in the Russell 2000 Index. As of December 31, 2000, market cap- italizations of Russell 2000 companies ranged from $3.3 million to $6.1 - billion. The Fund may also invest in emerging growth companies--small or medium-sized companies with growth characteristics such as positive earnings and potential for accelerated growth. The Fund may also invest in investment grade bonds, and, to a certain extent, in foreign securities. The Fund is not "diversified," which means that it may invest in a relatively small number of issuers of securities, and its value may be affected very sig- nificantly by the change in value of a single security. The Fund may participate in the initial public offering ("IPO") market, and a portion of the Fund's returns may be attributable to the Fund's investments in IPOs. There is no guarantee that as the Fund's assets grow it will be able to experience significant improvement in performance by investing in IPOs. The Fund's investments may be bought and sold relatively fre-quently. A high turnover rate may result in higher brokerage commissions and/or a higher amount of short-term capital gains, which are generally taxable to you at your ordi- nary income tax rate. Main Risks . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally, including, in particular, the risks associated with invest- ing in smaller companies and in IPOs) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Non-Diversification Risk (the risk that investing in a smaller number of secu- rities increases investment risks) . Sector Risk (the risk that securities of companies within specific sectors of the economy can perform differently than the overall market) The bar chart and table provide an indication of risk by showing the variabil- ity of the Fund's historical returns. Credit Suisse has been the subadvisor to the Fund since its inception. For periods prior to the inception of Institu- tional Class I shares (7/7/00), the table also shows estimated historical per- formance for Institutional Class I Shares based on the performance of Class A shares, adjusted to reflect that there are no sales charges paid by Institu- tional Class I shares. The table compares the Fund's average annual returns to those of a broad based index. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not neces- sarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........73.13% 2000..........-1.17% BEST QUARTER: QUARTER ENDED 12/31/99 45.94% WORST QUARTER: QUARTER ENDED 9/30/98 -22.58% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Life of Fund One Year (since 1/6/98) - ---------------------------------------------------- Class A -6.85% 17.71% - ---------------------------------------------------- Institutional Class I -1.17% 20.06% - ---------------------------------------------------- Russell 2000 Growth Index -22.43% 4.29%
- -------------------------------------------------------------------------------- ------ 8 Small Cap Index Fund Investment Goal and Strategies The Small Cap Index Fund seeks to provide investment results that are similar to the total return of the Russell 2000(TM) Index (the "Index"). American Gen- eral Investment Management, L.P. ("AGIM") acts as the subadvisor to the Fund. The Index is a sub-index of the Russell 3000(TM) Index, which follows the 3,000 largest U.S. companies based on total market capitalization. The Index measures the performance of the 2,000 smallest companies in the Russell 3000(TM) Index, and represents about 8% of the total market capitalization of the Russell 3000(TM) Index. The average market capitalization in the Index was $1.09 bil- lion as of December 31, 2000. As of the same date, the largest company in the Index had a market capitalization of nearly $6.12 billion. Generally, an index fund tries to mirror the target index and its performance. An index fund's performance will not exactly match that of an index because the index fund incurs operating expenses and other investment overhead as part of its normal operations. The index is an unmanaged group of securities, so it does not have these expenses. These differences between an index fund and its index are called tracking differences. The tracking differences are reviewed monthly by AGIM for the Fund. If the Fund does not accurately track an index, AGIM will rebalance the Fund's portfolio by selecting securities which will provide a more representative sampling of the securities in the index as a whole or the sector diversification within the index, as appropriate. Financial futures will be used to hedge cashflows and maintain liquidity in the Fund's portfolio. Main Risks . Derivatives Risk (the risk that the value of the Fund's derivative invest- ments will decline as a result of imperfect correlation or improper valua- tion). Although financial futures track the underlying Index fairly closely there is the risk that, at times, their results will diverge from the Index. . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally, including, in particular, the risks associated with investing in smaller companies) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regu- lar basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objec- tive, investment strategies and policies as does the Fund, and was managed by the same portfolio managers. For periods prior to the inception of Institu- tional Class I shares (7/7/00), the table also shows estimated historical per- formance for Institutional Class I Shares based on the performance of Class A shares, adjusted to reflect that there are no sales charges paid by Institu- tional Class I shares. The table compares the Fund's average annual returns to those of a broad based index. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not neces- sarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........18.35% 2000..........-6.93% BEST QUARTER: QUARTER ENDED 12/31/99 17.15% WORST QUARTER: QUARTER ENDED 12/31/00 -7.10% - -------------------------------------------------------------------------------- Average Annual Returns as of 12/31/00
Past Life of Fund One Year (since 11/2/98) - -------------------------------------------------- Class A -12.28% 6.22% - -------------------------------------------------- Institutional Class I -6.93% 9.17% - -------------------------------------------------- Russell 2000 Index(TM) -3.02% 13.45%
- -------------------------------------------------------------------------------- - ------ 9 Socially Responsible Fund Investment Goal and Strategies The investment objective of the Socially Responsible Fund is to seek to obtain growth of capital. To achieve this objective, American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor, invests at least 80% of the Fund's total assets in the equity securities of companies meeting social criteria estab- lished for the Fund. To find out which companies meet the Fund's social crite- ria, AGIM relies on industry classifications and research services such as the Investor Responsibility Research Center. The Fund does not invest in companies that are significantly engaged in: . the production of nuclear energy; . the manufacture of weapons or delivery systems; . the manufacture of alcoholic beverages or tobacco products; . the operation of gambling casinos; or . business practices or the production of products that significantly pollute the environment. Up to 20% of the Fund's total assets may be invested in high quality money mar- ket securities and warrants, or in other types of equity securities of compa- nies meeting social criteria, including American Depositary Receipts, foreign securities, preferred stock, and convertible securities. The Fund may invest in derivatives. Main Risks . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regu- lar basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Social Criteria Risk (the risk that securities of companies meeting the Fund's social criteria will underperform the market generally) The bar chart and table provide an indication of risk by showing the variabil- ity of the Fund's historical returns. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, investment strategies and policies as does the Fund, and was managed by the same portfolio managers. No sales charge has been applied to the index used for comparison in the table. The table compares the Fund's average annual returns to those of a broad based index. The Fund's past performance does not necessar- ily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR I SHARES Annual Total Return 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........18.55% 2000.........-10.33% BEST QUARTER: QUARTER ENDED 12/31/99 14.11% WORST QUARTER: QUARTER ENDED 12/31/00 -7.25% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Life of Fund One Year (since 11/2/98) - ------------------------------------------------- Class A -15.56% 4.63% - ------------------------------------------------- Institutional Class I -10.41% 7.53% - ------------------------------------------------- S&P 500 Index(TM) -9.10% 10.21%
- -------------------------------------------------------------------------------- ------- 10 Stock Index Fund Investment Goal and Strategies The Stock Index Fund seeks to provide investment results that are similar to the total return of the S&P 500 Index (the "Index"). American Investment Man- agement, L.P. ("AGIM") acts as the subadvisor to the Fund. The Index is composed of 500 common stocks which are chosen by Standard & Poor's Corporation ("S&P"). The Index approximates the general distribution of industries in the U.S. economy, and captures the price performance of a large cross-section of the publicly traded stock market. The Index is capitalization- weighted, meaning that it holds each stock in proportion to its total value in the stock market. Generally, an index fund tries to mirror the target index and its performance. An index fund's performance will not exactly match that of an index because the index fund incurs operating expenses and other investment overhead as part of its normal operations. The index is an unmanaged group of securities, so it does not have these expenses. These differences between an index fund and its index are called tracking differences. The tracking differences are reviewed monthly by AGIM for the Fund. If the Fund does not accurately track an index, AGIM will rebalance the Fund's portfolio by selecting securities which will provide a more representative sampling of the securities in the index as a whole or the sector diversification within the index, as appropriate. Financial futures will be used to hedge cashflows and maintain liquidity in the Fund's portfolio. Main Risks . Derivatives Risk (the risk that the value of the Fund's derivative investments will decline as a result of imperfect correlation or improper valuation). Although financial futures track the underlying Index fairly closely there is the risk that, at times, their results will diverge from the Index. . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, investment strategies and policies as does the Fund, and was managed by the same portfolio managers. For periods prior to the inception of Institutional Class I shares (7/7/00), the table also shows estimated historical performance for Institutional Class I Shares based on the performance of Class A shares, adjusted to reflect that there are no sales charges paid by Institutional Class I shares. The table compares the Fund's average annual returns to those of a broad based index. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........20.39% 2000..........-9.92% BEST QUARTER: QUARTER ENDED 12/31/99 14.39% WORST QUARTER: QUARTER ENDED 12/31/00 -7.97% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Life of Fund One Year (since 11/2/98) - ------------------------------------------------- Class A -15.10% 6.07% - ------------------------------------------------- Institutional Class I -9.92% 9.01% - ------------------------------------------------- S&P 500 Index(TM) -9.10% 10.21%
- -------------------------------------------------------------------------------- - ------- 11 Global Equity Fund Investment Goal and Strategies The investment objective of the Global Equity Fund is long-term capital appre- ciation. To achieve this objective, Founders Asset Management, LLC ("Found- ers"), the Fund's subadvisor, invests in a globally diversified portfolio of equity securities. The Fund normally invests at least 65% of total assets in equity securities of growth companies in a variety of markets throughout the world. The Fund may purchase securities in any foreign country, as well as the United States, and emphasizes common stocks of both emerging and established growth companies that generally have proven performance records and strong market positions. The Fund's portfolio will always invest at least 65% of its total assets in three or more countries. The Fund will not invest more than 50% of its total assets in the securities of any one foreign country. The Fund may participate in the initial public offering ("IPO") market, and a portion of the Fund's returns may be attributable to the Fund's investments in IPOs. There is no guarantee that as the Fund's assets grow it will be able to experience significant improvement in performance by investing in IPOs. Main Risks . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally, including, in particular, the risks associated with invest- ments in growth stocks and in IPOs) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Sector Risk (the risk that securities of companies within specific sectors of the economy can perform differently than the overall market) The bar chart and table provide an indication of risk by showing the variabil- ity of the Fund's historical returns. Founders assumed subadvisory duties March 13, 2000. For periods prior to the inception of Institutional Class I shares (7/700), the table also shows estimated historical performance for Institu- tional Class I Shares based on the performance of Class C shares, adjusted to reflect that there are no sales charges paid by Institutional Class I shares. The table compares the Fund's average annual returns to those of a broad based index. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR C SHARES Annual Total Return 1991..........11.34% 1992..........-2.87% 1993..........29.58% 1994...........1.20% 1995...........6.43% 1996..........10.71% 1997..........19.98% 1998..........10.59% 1999...........2.33% 2000.........-30.97% BEST QUARTER: QUARTER ENDED 12/31/98 15.23% WORST QUARTER: QUARTER ENDED 9/30/98 -14.52% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Past Past One Year Five Years Ten Years - ------------------------------------------------------ Class C -31.66% 0.11% 4.59% - ------------------------------------------------------ Institutional Class I -30.97% 0.74% 4.59% - ------------------------------------------------------ MSCI WORLD Index(TM) -13.18% 12.12% 10.22%
- -------------------------------------------------------------------------------- ------- 12 International Equity Fund Investment Goal and Strategies The investment objective of the International Equity Fund is to seek long-term capital appreciation. Morgan Stanley Asset Management ("MSAM"), the Fund's subadvisor, pursues this objective by investing primarily, in accordance with country and sector weightings determined by MSAM, in equity securities of non- U.S. issuers which, in the aggregate, replicate broad market indices. MSAM seeks to maintain a diversified portfolio of international equity securi- ties based on a top-down approach that emphasizes country and sector selection and weighting rather than individual stock selection. MSAM capitalizes on the sig-nificance of country and sector selection in international equity portfolio returns by over- and underweighting countries and/or sectors based primarily on three factors: (i) valuation, (ii) fundamental change, and (iii) market momentum/technicals. The Fund may use various instruments that derive their values from those of specified securities, indices, currencies or other points of reference for both hedging and non-hedging purposes. Derivatives may include futures, options, forward contracts, swaps, and structured notes. These derivatives, including those used to manage risk, are themselves subject to risks of the different markets in which they trade and, therefore, may not serve their intended purposes. The Fund's investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and a higher amount of short-term capital gains, which are generally taxable to you at your ordinary income tax rate. Main Risks . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Derivatives Risk (the risk that the value of the Fund's derivative investments will decline as a result of imperfect correlation or improper valuation). In particular, the Fund may, but is not required to, buy or sell foreign curren- cies and options and futures contracts on foreign currencies for hedging pur- poses in connection with its foreign investments. . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Sector Risk (the risk that securities of companies within specific sectors of the economy can perform differently than the overall market) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. MSAM assumed subadvisory duties April 1, 1999. For periods prior to the inception of Institutional Class I shares (7/7/00), the table also shows estimated historical performance for Institutional Class I Shares based on the performance of Class A shares, adjusted to reflect that there are no sales charges paid by Institutional Class I shares. The table compares the Fund's average annual returns to those of a broad based index. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..........12.12% 1997..........-0.47% 1998...........8.19% 1999..........28.29% 2000.........-15.71% BEST QUARTER: QUARTER ENDED 12/31/98 20.69% WORST QUARTER: QUARTER ENDED 9/30/98 -20.56% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past One Past Five Life of Fund Year Years (since 1/9/95) - ---------------------------------------------------------- Class A -20.55% 4.24% 4.85% - ---------------------------------------------------------- Institutional Class I -15.71% 5.48% 5.89% - ---------------------------------------------------------- MSCI EAFE Index(TM) -14.17% 7.13% 7.81%
- -------------------------------------------------------------------------------- - ------- 13 International Small Cap Fund Investment Goal and Strategies The investment objective of the International Small Cap Fund is to seek capital appreciation. To achieve this objective, Founders Asset Management, LLC ("Founders"), the Fund's subadvisor, invests primarily in equity securities of foreign small-cap companies. Foreign small-cap companies are generally those with market capitalizations of less than $1.5 billion. This range may fluctuate depending on changes in the value of the stock market as a whole. These companies are located in both established and emerging economies throughout the world. At least 65% of the Fund's total assets will normally be invested in foreign securities from a minimum of three countries. The Fund may invest in larger foreign companies or in U.S. based companies if they represent better prospects for capital appreciation. The Fund may invest without limit in American Depositary Receipts and American Depositary Shares (collectively, "ADRs"). ADRs are receipts representing shares of a foreign corporation held by a U.S. bank that entitle the holder to all dividends and capital gains on the underlying foreign shares. ADRs are denominated in U.S. dollars and trade in the U.S. securities markets. The Fund may also invest in derivatives. The Fund may participate in the initial public offering ("IPO") market, and a portion of the Fund's returns may be attributable to the Fund's investments in IPOs. There is no guarantee that as the Fund's assets grow it will be able to experience significant improvement in performance by investing in IPOs. The Fund's investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and a higher amount of short-term capital gains, which are generally taxable to you at your ordinary income tax rate. The Fund's current and future portfolio turnover rates may differ significantly from their historical turnover rate. In particular, the Fund's turnover rates for 2000 and future years are expected to continue to be significantly higher than the Fund's pre-2000 rate due to the manager's investment style. Main Risks . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally, including, in particular, the risks associated with invest- ing in smaller companies and in IPOs) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Sector Risk (the risk that securities of companies within specific sectors of the economy can perform differently than the overall market) The bar chart and table provide an indication of risk by showing the variabil- ity of the Fund's historical returns. Founders has been the subadvisor to the Fund since its inception. For periods prior to the inception of Institutional Class I shares (7/7/00), the table also shows estimated historical performance for Institutional Class I Shares based on the performance of Class A shares, adjusted to reflect that there are no sales charges paid by Institutional Class I shares. The table compares the Fund's average annual returns to those of a broad based index. No sales charge has been applied to the index used for com- parison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..........-0.36% 1998..........10.18% 1999..........94.45% 2000.........-29.45% BEST QUARTER: QUARTER ENDED 12/31/99 64.58% WORST QUARTER: QUARTER ENDED 9/30/00 -21.20% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Life of Fund One Year (since 3/4/96) - ------------------------------------------------------------- Class A -33.50% 9.75% - ------------------------------------------------------------- Institutional Class I -29.45% 11.10% - ------------------------------------------------------------- MSCI All Country World ex-US Index -13.37% 7.62%
- -------------------------------------------------------------------------------- ------- 14 Balanced Fund Investment Goal and Strategies The investment objective of the Balanced Fund is current income and capital appreciation. To achieve this goal, INVESCO Funds Group, Inc. ("INVESCO"), the Fund's subadvisor, invests in a combination of common stocks and fixed-income securities, including preferred stocks, convertible securities and bonds. The Fund normally invests the majority of its total assets in U.S. and foreign com- mon stocks and approximately 25% of its total assets in investment grade debt securities. The portion of the Fund's portfolio invested in equity securities emphasizes companies INVESCO believes to have better-than-average earnings growth potential, as well as companies within industries that INVESCO believes are well-positioned for the current and expected economic climate. Since cur- rent income is a component of total return, INVESCO also considers companies' dividend payout records. Most of these holdings are traded on national stock exchanges or in the over-the-counter market. The Fund's investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and a higher amount of short-term capital gains, which are generally taxable to you at your ordinary income tax rate. Main Risks . Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations) . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variabil- ity of the Fund's historical returns. INVESCO assumed subadvisory duties March 13, 2000. For periods prior to the inception of Institutional Class I shares (7/7/00), the table also shows estimated historical performance for Institu- tional Class I Shares based on the performance of Class C shares, adjusted to reflect that there are no sales charges paid by Institutional Class I shares. The table compares the Fund's average annual returns to those of a broad based index for common stocks and one for fixed-income securities. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR C SHARES Annual Total Return 1991..........21.45% 1992..........12.89% 1993..........10.07% 1994..........-2.80% 1995..........23.53% 1996..........10.15% 1997..........16.30% 1998..........13.12% 1999..........-3.78% 2000..........-0.52% BEST QUARTER: QUARTER ENDED 6/30/97 10.31% WORST QUARTER: QUARTER ENDED 12/31/00 -7.62% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Past Past 10 One Year Five Years Years - ----------------------------------------------------------- Class C -1.52% 6.76% 9.66% - ----------------------------------------------------------- Institutional Class I -0.52% 6.76% 9.66% - ----------------------------------------------------------- S&P 500 Index(TM) -9.10% 18.33% 17.46% - ----------------------------------------------------------- Lehman Brothers Aggregate 11.63% 6.46% 7.95% Bond Index(TM)
- -------------------------------------------------------------------------------- - ------- 15 Aggressive Growth LifeStyle Fund Investment Goal and Strategies American General Investment Management, L.P., the Fund's subadvisor, seeks growth through investments in a combination of the North American Funds ("Un- derlying Funds"). This Fund is suitable for investors seeking the potential for capital growth that a fund investing predominately in equity securities may offer. Asset allocation among the equity securities of international companies, large capitalization companies, medium capitalization companies, small capitalization companies and bonds is the most critical investment decision that you make as an investor. Selecting the appropriate combination should be based on your per- sonal investment goals, time horizons and risk tolerance. The chart below reflects the projected asset allocation ranges for this Fund. This Fund is managed so that it can serve as a complete investment program for you or as a core part of your larger portfolio. The Underlying Funds have been selected to represent a reasonable spectrum of investment options for the Fund. AGIM has based the target investment percentages for the Fund on the degree to which it believes the Underlying Funds, in combination, to be appropriate for the Fund's investment objective. AGIM may change the asset allocation ranges and the particular Underlying Funds in which the Fund may invest from time to time. The Fund is a non-diversified investment company under the Investment Company Act of 1940 because it invests in a limited number of the Underlying Funds. However, the Underlying Funds themselves are diversified companies. Main Risks The securities that Underlying Funds invest in also involve various risks: . Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations) . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Derivatives Risk (the risk that the Fund's derivative investments will decline as a result of imperfect correlation or improper valuation) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Non-Diversification Risk (the risk that investing in a smaller number of secu- rities increases investment risks) International Equity Securities 15%-35% Domestic Equity Securities 60%-80% Bonds 5%-15% ------- 16 Aggressive Growth LifeStyle Fund Investment Goal and Strategies . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Non-Diversification Risk (the risk that investing in a smaller number of secu- rities increases investment risks) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, investment strategies and policies as does the Fund, and was managed by the same portfolio managers. The table compares the Fund's average annual returns to those of its benchmark and a broad based index. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR I SHARES Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........28.85% 2000..........-4.73% BEST QUARTER: QUARTER ENDED 12/31/99 20.47% WORST QUARTER: QUARTER ENDED 12/31/00 -8.23% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Life of Fund One Year (since 11/2/98) - --------------------------------------------------------------- Institutional Class I -4.73% 13.89% - --------------------------------------------------------------- Aggressive Growth LifeStyle Blended Benchmark Index -6.93% 11.92% - --------------------------------------------------------------- S&P 500 Index(TM) -9.10% 10.21% - ---------------------------------------------------------------
- ------- 17 Conservative Growth LifeStyle Fund Investment Goal and Strategies American General Investment Management, L.P., the Fund's subadvisor, seeks cur- rent income and low to moderate growth of capital through investments in a com- bination of the North American Funds ("Underlying Funds"). This Fund is suit- able for investors who wish to invest in equity securities, but who are not willing to assume the market risks of either the Aggressive Growth Lifestyle Fund or the Moderate Growth Lifestyle Fund. Asset allocation among the equity securities of international companies, large capitalization companies, medium capitalization companies, small capitalization companies and bonds is the most critical investment decision that you make as an investor. Selecting the appropriate combination should be based on your per- sonal investment goals, time horizons and risk tolerance. The chart below reflects the projected asset allocation ranges for this Fund. This Fund is managed so that it can serve as a complete investment program for you or as a core part of your larger portfolio. The Underlying Funds have been selected to represent a reasonable spectrum of investment options for the Fund. AGIM has based the target investment percentages for the Fund on the degree to which it believes the Underlying Funds, in combination, to be appropriate for the Fund's investment objective. AGIM may change the asset allocation ranges and the particular Underlying Funds in which the Fund may invest from time to time. The Fund is a non-diversified investment company under the Investment Company Act of 1940 because it invests in a limited number of the Underlying Funds. However, the Underlying Funds themselves are diversified companies. Main Risks The securities that Underlying Funds invest in also involve certain risks: . Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations) . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Derivatives Risk (the risk that the Fund's derivative investments will decline as a result of imperfect correlation or improper valuation) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Non-Diversification Risk (the risk that investing in a smaller number of secu- rities increases investment risks) International Equity Securities 5%-15% Domestic Equity Securities 20%-50% Bonds 45%-65% ------- 18 Conservative Growth LifeStyle Fund Investment Goal and Strategies .Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) .Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) .Non-Diversification Risk (the risk that investing in a smaller number of secu- rities increases investment risks) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, and had substantially similar investment strategies and policies as does the Fund, and was also managed by the same portfolio managers. The table compares the Fund's average annual returns to those of its benchmark and a broad based index. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR I SHARES Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........13.63% 2000...........1.95% BEST QUARTER: QUARTER ENDED 12/31/99 10.88% WORST QUARTER: QUARTER ENDED 12/31/00 -3.35% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Life of Fund One Year (since 11/2/98) - ------------------------------------------------------------ Institutional Class I 1.90% 10.26% - ------------------------------------------------------------ Aggressive Growth LifeStyle Blended Benchmark Index -6.93% 8.61% - ------------------------------------------------------------ S&P 500 Index(TM) -9.10% 10.21%
- -------------------------------------------------------------------------------- - ------- 19 Moderate Growth LifeStyle Fund Investment Goal and Strategies American General InvestmentManagement, L.P., the Fund's subadvisor, seeks growth and current income through investments in a combination of the North American Funds ("Underlying Funds"). This Fund is suitable for investors who wish to invest in equity securities, but who are not willing to assume the sub- stantial market risks of the Aggressive Growth Lifestyle Fund. Asset allocation among the equity securities of international companies, large capitalization companies, medium capitalization companies, small capitalization companies and bonds is the most critical investment decision that you make as an investor. Selecting the appropriate combination should be based on your per- sonal investment goals, time horizons and risk tolerance. The chart below reflects the projected asset allocation ranges for this Fund. This Fund is managed so that it can serve as a complete investment program for you or as a core part of your larger portfolio. The Underlying Funds have been selected to represent a reasonable spectrum of investment options for the Fund. AGIM has based the target investment percentages for the Fund on the degree to which it believes the Underlying Funds, in combination, to be appropriate for the Fund's investment objective. AGIM may change the asset allocation ranges and the particular Underlying Funds in which the Fund may invest from time to time. The Fund is a non-diversified investment company under the Investment Company Act of 1940 because it invests in a limited number of the Underlying Funds. However, the Underlying Funds themselves are diversified companies. Main Risks The securities that Underlying Funds invest in also involve certain risks: . Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations) . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Derivatives Risk (the risk that the Fund's derivative investments will decline as a result of imperfect correlation or improper valuation) . Equity Risk (the risk that the value of the Fund's equity investments will decline as a result of factors affecting the particular issuers or financial markets generally) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Non-Diversification Risk (the risk that investing in a smaller number of secu- rities increases investment risks) International Equity Securities 10%-20% Domestic Equity Securities 35%-65% Bonds 25%-45% ------- 20 Moderate Growth LifeStyle Fund Investment Goal and Strategies . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . Non-Diversification Risk (the risk that investing in a smaller number of secu- rities increases investment risks) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, investment strategies and policies as does the Fund, and was managed by the same portfolio managers. The table compares the Fund's average annual returns to those of its benchmark and a broad based index. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR I SHARES Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999..........18.89% 2000..........-0.75% BEST QUARTER: QUARTER ENDED 12/31/99 14.20% WORST QUARTER: QUARTER ENDED 12/31/00 -5.24% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Life of Fund One Year (since 11/2/98) - ------------------------------------------------------------ Institutional Class I -0.62% 11.65% - ------------------------------------------------------------ Aggressive Growth LifeStyle Blended Benchmark Index -6.93% 8.78% - ------------------------------------------------------------ S&P 500 Index(TM) -9.10% 10.21%
- -------------------------------------------------------------------------------- - ------- 21 Core Bond Fund (formerly Investment Quality Bond Fund) Investment Goal and Strategies The investment objective of the Core Bond Fund is to provide a high level of current income consistent with the maintenance of principal and liquidity. American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor, invests at least 65% of the Fund's total assets in medium to high quality fixed-income securities, or in securities issued or guaranteed by the U.S. Government, mortgage-backed, or asset-backed securities (U.S. Government secu- rities are securities issued or guaranteed by the U.S. Government which are supported by the full faith and credit of the U.S. Government, or by the right of the issuer to borrow from the U.S. Treasury, or by the credit of the issu- ing government agency, or by the authority of the U.S. Government to purchase obligations of the agency). A portion of the 65% may be invested in U.S. dol- lar-denominated fixed-income securities issued by foreign issuers, although the Fund currently intends to limit these investments to no more than 40% of its total assets. These fixed-income securities will be rated investment grade or higher at the time of purchase. AGIM is not required to dispose of a secu- rity if its rating is downgraded, however. Up to 35% of the Fund's total assets may be invested in interest-bearing short-term investments, such as commercial paper, bankers' acceptances, bank certificates of deposit, or other cash equivalents and cash. Main Risks . Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations, including, in particular, the risks associated with junk bonds) . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Foreign Investment Risk (the risk that the value of the Fund's foreign investments will decline as a result of foreign political, social or economic changes) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regu- lar basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. AGIM assumed sub-advisory duties March 13, 2000. For periods prior to the inception of Institutional Class I shares (7/7/00), the table also shows estimated historical performance for Institutional Class I Shares based on the performance of Class A shares, adjusted to reflect that there are no sales charges paid by Institutional Class I shares. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. Effective March 1, 2001, the Fund has selected the Lehman Brothers Aggregate Index as its benchmark for index comparison purposes, rather than the index comprised 50% Lehman Brothers Corporate/50% Lehman Brothers Government. The Lehman Brothers Aggregate Index better matches the securities in which the Fund may invest, and will better align the goals of the Fund with its benchmark index, by focusing on those medium to high grade fixed- income securities in the Fund's portfolio. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991..............0% 1992...........8.27% 1993...........9.29% 1994..........-5.43% 1995..........18.79% 1996...........2.17% 1997...........9.28% 1998...........7.61% 1999..........-2.55% 2000...........7.94% BEST QUARTER: QUARTER ENDED 6/30/95 6.23% WORST QUARTER: QUARTER ENDED 3/34/94 -4.53% - ------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Past Life of Fund One Year Five Years (Class A) - --------------------------------------------------------------- Class A 2.81% 3.78% 6.22% - --------------------------------------------------------------- Institutional Class I 7.94% 4.79% 6.75% - --------------------------------------------------------------- 100% Lehman Brothers 11.63% 6.46% 7.80% Aggregate Index(TM) - --------------------------------------------------------------- 50% Lehman Brothers 11.32% 6.11% 7.97% Corporate(TM) Index and 50% Lehman Brothers Government(TM) Index
- ------------------------------------------ ------- 22 High Yield Bond Fund Investment Goal and Strategies The High Yield Bond Fund seeks the highest possible total return consistent with conservation of capital through investment in a diversified portfolio of high yielding, high risk fixed-income securities. To achieve this objective, American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor, invests at least 65% of the Fund's total assets in below-investment grade U.S. and foreign junk bonds. These high yield- ing, high risk fixed-income securities are rated below Baa3 by Moody's and BBB- by S&P or comparable investment quality at the time of purchase. Up to 15% can be rated below Caa3 by Moody's or CCC- by S&P or comparable investment quality at the time of purchase. The Fund may also invest up to 35% of total assets in below-investment grade foreign fixed-income securities. Main Risks . Credit Risk (the risk that the issuers in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations, including, in particular, the risks associated with junk bonds) . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. AGIM assumed subadvisory duties March 13, 2000. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, investment strategies and policies as does the Fund, and was also subadvised by AGIM. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR I SHARES Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..............0% 1995..............0% 1996..............0% 1997..............0% 1998..............0% 1999...........4.21% 2000..........-6.68% BEST QUARTER: QUARTER ENDED 3/31/99 3.89% WORST QUARTER: QUARTER ENDED 12/31/00 -6.86% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Life of Fund One Year (since 11/2/98) - ------------------------------------------------------------ Institutional Class I -6.68% -0.74% - ------------------------------------------------------------ Salomon Smith Barney High Yield Market Index(TM) -5.68% 0.32%
- -------------------------------------------------------------------------------- - ------- 23 Strategic Income Fund Investment Goal and Strategies The investment objective of the Strategic Income Fund is to seek a high level of total return consistent with preservation of capital. To achieve this goal, American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor, invests at least 65% of the Fund's total assets in a broad range of fixed- income securities, including investment grade bonds (rated Baa or higher by Moody's and BBB or higher by S&P at the time of purchase), U.S. Government and agency obligations, mortgage-backed securities, and U.S. and foreign high-risk, high-yield bonds (rated C or higher by Moody's and CC or higher by S&P, or of comparable investment quality at time of purchase, commonly known as "junk bonds"). Up to 25% of the Fund's total assets may be invested in foreign emerg- ing market debt, and up to an additional 25% in non-U.S. dollar bonds. The Fund may invest up to 20% of total assets in equity securities, such as common and preferred stocks, convertible securities, and warrants. Main Risks . Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations including, in particular, the risks associated with junk bonds) . Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) . Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes, including, in particular, the risks associated with investments in developing countries, as these countries are generally more volatile than the markets of developed countries) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the vari- ability of the Fund's historical returns. AGIM assumed subadvisory duties March 13, 2000. For periods prior to the inception of Institutional Class I shares (7/7/00), the table also shows estimated historical performance for Institu- tional Class I Shares based on the performance of Class A shares, adjusted to reflect that there are no sales charges paid by Institutional Class I shares. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991..............0% 1992..............0% 1993..............0% 1994..........-6.79% 1995..........18.57% 1996..........14.82% 1997..........10.76% 1998...........0.72% 1999...........1.36% 2000...........3.20% BEST QUARTER: QUARTER ENDED 6/30/95 8.22% WORST QUARTER: QUARTER ENDED 3/31/94 -5.76% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Past Life of Fund One Year Five Years (Class A) - ------------------------------------------------------------ Class A -1.70% 5.00% 5.09% - ------------------------------------------------------------ Institutional Class I 3.20% 4.79% 5.81% - ------------------------------------------------------------ Lehman Brothers 11.63% 6.46% 6.47% Aggregate Bond Index(TM)
- -------------------------------------------------------------------------------- ------- 24 U.S. Government Securities Fund Investment Goal and Strategies The investment objective of the U.S. Government Securities Fund is to obtain a high level of current income consistent with preservation of capital and main- tenance of liquidity. American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor, pursues this objective by emphasizing investments in debt obligations and mortgage-backed securities, issued or guaranteed by the U.S. Government or its agencies (including the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association). The Fund may also invest in derivative invest- ments (such as privately-issued mortgage obligations collateralized by such securities), dollar rolls and related repurchase agreements. The Fund's investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and a higher amount of short-term capital gains, which are generally taxable to you at your ordinary income tax rate. Main Risks . Credit Risk (the risk that the issuers in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations) . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. AGIM assumed subadvisory duties March 13, 2000. For periods prior to the inception of Institutional Class I shares (7/7/00), the table also shows estimated historical performance for Institutional Class I Shares based on the performance of Class A shares, adjusted to reflect that there are no sales charges paid by Institutional Class I shares. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. Effective March 1, 2001, the Fund has selected the Lehman Intermediate Government Index as its benchmark for index comparison purposes, rather than the Merrill Lynch 1-10 Year Government Index. The Lehman Intermediate Government Index better matches the securities in which the Fund may invest, and will better align the goals of the Fund with its benchmark index, by focusing on these debt obligations held in the Fund's portfolio. The Lehman Intermediate Government Index is a broad market index that includes public obligations of the U.S. Treasury in the intermediate maturity range. The Merrill Lynch 1-10 Year Government Index is a broad market index that includes securities issued in the U.S. market including government bonds, corporate bonds, mortgage pass through securities, and asset-backed securities. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991..........13.36% 1992...........6.63% 1993...........7.64% 1994..........-1.59% 1995..........15.28% 1996...........3.04% 1997...........7.99% 1998...........6.86% 1999..........-0.96% 2000...........9.88% BEST QUARTER: QUARTER ENDED 6/30/95 5.42% WORST QUARTER: QUARTER ENDED 3/31/94 -1.65% - -------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Past Past 10 One Year Five Years Years - ----------------------------------------------------------- Class A 4.66% 4.25% 6.16% - ----------------------------------------------------------- Institutional Class I 9.88% 5.27% 6.68% - ----------------------------------------------------------- Merrill Lynch 1-10 year 10.19% 6.14% 7.18% Government Index(TM) - ----------------------------------------------------------- Lehman Intermediate 10.47% 6.19% 7.19% Government Index
- ------------------------------------------ - ------- 25 Money Market Fund Investment Goal and Strategies The investment objective of the Money Market Fund is to obtain maximum current income consistent with preservation of principal and liquidity. American Gen- eral Investment Management, L.P. ("AGIM") is the Fund's subadvisor. The Fund invests in short-term money market securities to provide you with liquidity, protection of your investment and current income. In accordance with Rule 2a-7 of the Investment Company Act, such securities must mature in 13 months or less and the Fund must have a dollar-weighted average portfolio maturity of 90 days or less. The investments of the Fund may include securities issued or guaran- teed by the U.S. Government (and its agencies or instrumentalities), certifi- cates of deposit and other obligations of domestic banks that have total assets in excess of $1 billion, commercial paper sold by corporations and finance com- panies, corporate debt obligations with remaining maturities of 13 months or less, repurchase agreements, money market instruments of foreign issuers pay- able in U.S. dollars (limited to no more than 20% of the Fund's net assets), asset-backed securities, loan participations, adjustable rate securities, vari- able rate demand notes, and Rule 144A securities. The Fund may invest in investment companies, real estate securities, and reverse repurchase agree- ments. Main Risks . Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) . Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) . An investment in the Money Market Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. AGIM assumed subadvisory duties March 13, 2000. For periods prior to the inception of Institutional Class I shares (7/7/00), the table also shows estimated historical performance for Institutional Class I Shares based on the performance of Class A shares. The Fund's past performance does not necessarily indicate how it will perform in the future. Effective March 1, 2001, the Fund has selected the Lehman Intermediate Government Index as its benchmark for index comparison purposes, rather than the Merrill Lynch 1-10 Year Government Index. The Lehman Intermediate Government Index better matches the securities in which the Fund may invest, and will better align the goals of the Fund with its benchmark index, by focusing on these debt obligations held in the Fund's portfolio. CALENDAR YEAR TOTAL RETURNS FOR A SHARES Annual Total Return 1991...........5.97% 1992...........3.42% 1993...........2.76% 1994...........3.88% 1995...........5.66% 1996...........5.08% 1997...........5.19% 1998...........5.05% 1999...........4.62% 2000...........5.79% BEST QUARTER: QUARTER ENDED 6/30/91 1.64% WORST QUARTER: QUARTER ENDED 6/30/93 0.66% ------------------------------------------------------------------------------- Average Annual Total Returns as of 12/31/00
Past Past Past Life of Fund One Year Five Years Ten Years (Class A) ---------------------------------------------------- Class A 5.79% 5.15% 4.74% 4.88%
------------------------------------------------------------------------------- To obtain the Fund's current 7-day yield, please call 1-800-872-8037. ------- 26 Descriptions of Main Risks The value of your investment in a Fund can change for many reasons, and may decrease. The primary reasons for possible decreases in a Fund's value are called "Main Risks," and are explained in this section. Section II of the Prospectus includes more information about other risks that could affect the Funds' values. Credit Risk Credit risk is the risk that the issuer or the guarantor (the entity that agrees to pay the debt if the issuer cannot) of a debt or fixed income securi- ty, or the counterparty to a derivatives contract or a securities loan, will not repay the principal and interest owed to the investors or otherwise honor its obligations. There are different levels of credit risk. Debt securities rated in one of the four highest rating categories by a rating agency (and com- parable unrated securities) are known as "investment grade." Debt securities rated below the four highest rating categories by a rating agency (and compara- ble unrated securities) are known as "lower-rated" or "junk bonds." Funds that invest in lower-rated securities have higher levels of credit risk. Lower-rated or unrated securities of equivalent quality have very high levels of credit risk. Securities that are highly rated have lower levels of credit risk. Funds may be subject to greater credit risk because they may invest in debt securities issued in connection with corporate restructurings by highly leveraged (indebted) issuers and in debt securities not current in the payment of interest or principal, or in default. Funds that invest in foreign securities are also subject to increased credit risk because of the difficulties of requiring foreign entities, including issuers of sovereign (national) debt, to honor their contractual commitments, and because a number of foreign governments and other issuers are already in default. Currency Risk Funds that invest in securities that are denominated in and/or are receiving revenues in foreign currencies are subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar. In the case of hedging positions, it is the risk that the U.S. dollar will decline in value relative to the currency hedged. Derivatives Risk Derivatives are financial contracts whose value depends on, or is derived from, the change in value of an underlying asset or index. When the value of the underlying security or index changes, the value of the derivative changes as well. As a result, derivatives can lose all of their value very quickly. Deriv- atives involve credit risk if the other party to the derivative should fail to meet its obligations to the Fund. Additional risks associated with derivatives include imperfect correlation (between the values of the derivative and the underlying investment) and improper valuation. Derivatives risk for some Funds will be increased by their investments in structured securities. Equity Risk Equity securities, such as a company's common stock, may fall in value in response to factors relating to the issuer, such as management decisions or falling demand for a company's goods or services. Additionally, factors affect- ing a company's particular industry, such as increased production costs, may affect the value of its equity securities. Equity securities also rise and fall in value as a result of factors affecting entire financial markets, such as political or economic developments, or changes in investor psychology. Growth stocks are the stocks of companies that have earnings that are expected to grow relatively rapidly. As a result, the values of growth stocks may be more sensitive to changes in current or expected earnings than the values of other stocks. Value stocks are the stocks of companies that are undervalued, or are inexpen- sive, relative to the value of the company and its business as a whole. These companies may have experienced recent troubles that have caused their stocks to be out of favor with investors. If the market does not recognize the value of the company over time, - ------- 27 the price of its stock may fall, or simply may not increase as expected. Market capitalization refers to the total value of a company's outstanding stock. Smaller companies are more likely than larger companies to have limited product lines, smaller markets for their products and services, and they may depend on a small or inexperienced management group. Small company stocks may not trade very actively, and their prices may fluctuate more than stocks of larger companies. Stocks of smaller companies may be more vulnerable to nega- tive changes than stocks of larger companies. Smaller companies also may have more limited financial resources, inexperienced management and unproven prod- ucts or services. The risks associated with equity securities are typically higher for equity securities purchased in initial public offerings ("IPOs"). Issuers in IPOs typ- ically have a limited operating history, and the prices of equity securities are often very volatile for some time following an IPO. Foreign Investment Risk There are risks associated with investing in foreign securities. These risks include unforeseen changes in tax laws, political changes, and changes in for- eign currency values and exchange rates. There may be less publicly available information about foreign issuers. Foreign issuers, including foreign branches of U.S. banks, are subject to different accounting and reporting requirements, which are generally less extensive than the requirements for domestic issuers. Foreign stock markets generally have substantially less volume than the U.S. exchanges and securities of foreign issuers are generally less liquid and more volatile, relative to U.S. issuers. There is frequently less governmental regulation of foreign exchanges, broker- dealers and issuers than in the United States, and brokerage costs may be high- er. In addition, investments in foreign companies may be subject to the possi- bility of nationalization or other changes in policy. Policy changes may allow foreign governments to withhold dividends, expropriate (confiscate, or keep) investment returns, or raise taxes to extremely high levels, among other things. Also, should a foreign issuer default, it may be difficult to recover anything in a bankruptcy proceeding. The possibility of political instability or diplomatic developments in foreign countries could trigger nationalization of companies and industries, expropria- tion (confiscation of property), extremely high levels of taxation, and other negative developments. In the event of nationalization, expropriation or other confiscation, a Fund could lose its entire investment. Funds that invest in sovereign debt obligations are exposed to the risks of political, social and economic change in the countries that issued the bonds. Emerging Market Risk. The above risks can be more extreme for investments in emerging markets. A country that is in the initial stages of its industrial cycle is considered to be an emerging markets country. Such countries are sub- ject to more economic, political, and business risk than major industrialized nations, and the securities issued by companies located there may have more volatile share prices and be less liquid than those of securities issued by companies in countries at later stages of the industrial cycle. Interest Rate Risk (Market Risk) Interest rate risk, or market risk, is the risk that a change in interest rates will negatively affect the value of a security. This risk applies primarily to debt securities such as bonds, notes and asset backed securities. Debt securi- ties are obligations of the issuer to make payments of principal and/ or inter- est on future dates. As interest rates rise, an investment in a Fund can lose value, because the value of the securities the Fund holds may fall. Market risk is generally greater for Funds that invest in debt securities with longer maturities. This risk may be increased for Funds that invest in mort- gage-backed or other types of asset-backed securities that are often prepaid. Even Funds that invest in the highest quality debt securities are subject to interest rate risk. Liquidity Risk Liquidity risk is the risk that a Fund will not be able to sell a security because there are too few people ------- 28 who actively buy and sell, or trade, that security on a regular basis. A Fund holding an illiquid security may not be able to sell the security at its cur- rent price. Liquidity risk increases for Funds investing in derivatives, for- eign investments or restricted securities. Management Risk Management risk is the risk that the subadvisor of a Fund, despite using vari- ous investment and risk analysis techniques, may not produce the desired investment results. Non-Diversification Risk Investment professionals believe that investment risk can be reduced through diversification, which is simply the practice of choosing more than a limited number of investments. On the other hand, concentrating investments in a smaller number of securities increases risk. Sector Risk Securities of companies within specific sectors of the economy can perform dif- ferently than the overall market. This may be due to changes in such things as the regulatory or competitive environment or to changes in investor perceptions regarding a sector. Because the Funds may allocate relatively more assets to certain industry sectors than others, the Funds' performance may be more sus- ceptible to any developments which affect those sectors emphasized by the Funds. Social Criteria Risk This risk applies only to the Socially Responsible Fund. If a company stops meeting the Fund's social criteria after the Fund invested in it, the Fund will sell these investments even if this means the Fund loses money. Also, if the Fund changes its social criteria and the companies the Fund has already invested in no longer qualify, the Fund will sell these investments, even if this means the Fund loses money. Social criteria screening will limit the availability of investment opportunities for the Fund more than for funds hav- ing no such criteria. Science & Technology Company Risk Companies in the rapidly changing fields of science and technology often face unusually high price volatility, both in terms of gains and losses. The poten- tial for wide variation in performance is based on the special risks common to these stocks. For example, products or services that at first appear promising may not prove commercially successful or may become obsolete quickly. Earnings disappointments can result in sharp price declines. A portfolio focused primar- ily on these stocks is, therefore, likely to be much more volatile. Unseasoned Company Risk Investments in smaller or unseasoned companies often involve greater risks than investments in larger, more established companies because small and unseasoned companies may lack the management experience, financial resources, product diversification and competitive strengths of larger companies. - ------- 29 Section II: Fees and Expenses of the North American Funds--Institutional Class I Shares This table describes the fees and expenses that you may pay if you invest in the Funds. Shareholder Fees (fees paid directly from your investment)
Institutional Class I - ------------------------------------------------------------------------------- Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None Maximum Deferred Sales Charge (as a percentage of original purchase price or redemption price, whichever is lower) None Annual Fund Operating Expenses (expenses that are deducted from fund assets) Institutional Class I - ------------------------------------------------------------------------------- Growth & Income Fund Management Fees 0.67% Other Expenses 0.88% Total Annual Fund Operating Expenses 1.55% Fee Waiver and/or Expense Reimbursement 0.19% Net Expenses/1/ 1.29% - ------------------------------------------------------------------------------- Large Cap Growth Fund (formerly Growth Equity) Management Fees 0.90% Other Expenses 0.86% Total Annual Fund Operating Expenses 1.76% Fee Waiver and/or Expense Reimbursement 0.49% Net Expenses/1/ 1.27% - ------------------------------------------------------------------------------- Mid Cap Growth Fund (formerly Small/Mid Cap) Management Fees 0.93% Other Expenses 0.88% Total Annual Fund Operating Expenses 1.81% Fee Waiver and/or Expense Reimbursement 0.38% Net Expenses/1/ 1.43% - ------------------------------------------------------------------------------- Mid Cap Value Fund Management Fees 0.90% Other Expenses 0.78% Total Annual Fund Operating Expenses 1.68% Fee Waiver and/or Expense Reimbursement 0.00% Net Expenses/1/ 1.68% - -------------------------------------------------------------------------------
------- 30
Institutional Fund Class I - --------------------------------------------------------------- Science & Technology Fund Management Fees 0.90% Other Expenses 0.75% Total Annual Fund Operating Expenses 1.65% Fee Waiver and/or Expense Reimbursement 0.25% Net Expenses/1/ 1.40% - --------------------------------------------------------------- Small Cap Growth Fund (formerly Emerging Growth) Management Fees 0.95% Other Expenses 0.77% Total Annual Fund Operating Expenses 1.72% Fee Waiver and/or Expense Reimbursement 0.22% Net Expenses/1/ 1.50% - --------------------------------------------------------------- Small Cap Index Fund Management Fees 0.28% Other Expenses 1.12% Total Annual Fund Operating Expenses 1.40% Fee Waiver and/or Expense Reimbursement 0.00% Net Expenses/1/ 1.40% - --------------------------------------------------------------- Socially Responsible Fund Management Fees 0.65% Other Expenses 0.89% Total Annual Fund Operating Expenses 1.54% Fee Waiver and/or Expense Reimbursement 0.34% Net Expenses/1/ 1.20% - --------------------------------------------------------------- Stock Index Fund Management Fees 0.27% Other Expenses 0.80% Total Annual Fund Operating Expenses 1.07% Fee Waiver and/or Expense Reimbursement 0.42% Net Expenses/1/ 0.65% - --------------------------------------------------------------- Global Equity Fund Management Fees 0.90% Other Expenses 1.26% Total Annual Fund Operating Expenses 2.16% Fee Waiver and/or Expense Reimbursement 0.09% Net Expenses/1/ 2.07% - ---------------------------------------------------------------
- ------- 31
Institutional Fund Class I - ------------------------------------------------------------------- International Equity Fund Management Fees 0.90% Other Expenses 1.04% Total Annual Fund Operating Expenses 1.94% Fee Waiver and/or Expense Reimbursement 0.34% Net Expenses/1/ 1.60% - ------------------------------------------------------------------- International Small Cap Fund Management Fees 1.05% Other Expenses 1.41% Total Annual Fund Operating Expenses 2.46% Fee Waiver and/or Expense Reimbursement 0.61% Net Expenses/1/ 1.85% - ------------------------------------------------------------------- Balanced Fund Management Fees 0.77% Other Expenses 0.86% Total Annual Fund Operating Expenses 1.63% Fee Waiver and/or Expense Reimbursement 0.02% Net Expenses/1/ 1.61% - ------------------------------------------------------------------- Aggressive Growth LifeStyle Fund Management Fees 0.10% Other Expenses 0.00% Total Annual Fund Operating Expenses 0.10% Estimated Total Annual Combined Indirect Expenses/2/ 1.45% - ------------------------------------------------------------------- Moderate Growth LifeStyle Fund Management Fees 0.10% Other Expenses 0.00% Total Annual Fund Operating Expenses 0.10% Estimated Total Annual Combined Indirect Expenses/2/ 1.39% - ------------------------------------------------------------------- Conservative Growth LifeStyle Fund Management Fees 0.10% Other Expenses 0.00% Total Annual Fund Operating Expenses 0.10% Estimated Total Annual Combined Indirect Expenses/2/ 1.33% - ------------------------------------------------------------------- Core Bond Fund (formerly Investment Quality Bond) Management Fees 0.60% Other Expenses 0.63% Total Annual Fund Operating Expenses 1.23% Fee Waiver and/or Expense Reimbursement 0.00% Net Expenses/1/ 1.23% - -------------------------------------------------------------------
------- 32
Institutional Fund Class I - ------------------------------------------------------ High Yield Bond Fund Management Fees 0.83% Other Expenses 0.64% Total Annual Fund Operating Expenses 1.47% Fee Waiver and/or Expense Reimbursement 0.00% Net Expenses/1/ 1.47% - ------------------------------------------------------ Strategic Income Fund Management Fees 0.74% Other Expenses 1.11% Total Annual Fund Operating Expenses 1.85% Fee Waiver and/or Expense Reimbursement 0.38% Net Expenses/1/ 1.47% - ------------------------------------------------------ U.S. Government Securities Fund Management Fees 0.60% Other Expenses 0.84% Total Annual Fund Operating Expenses 1.44% Fee Waiver and/or Expense Reimbursement 0.24% Net Expenses/1/ 1.20% - ------------------------------------------------------ Money Market Fund Management Fees 0.20% Other Expenses 0.86% Total Annual Fund Operating Expenses 1.06% Fee Waiver and/or Expense Reimbursement 0.26% Net Expenses/1/ 0.80% - ------------------------------------------------------
1 Reflects AGAM's contractual obligation to waive and to the extent necessary reimburse certain fees and expenses of the Fund through February 28, 2002. 2 These estimates are based upon the Funds' Expenses shown above and the expenses of the Underlying Funds' Institutional Class I shares shown in the current prospectus for such shares. The estimates assume the following con- stant allocation by the Funds of their assets among the Underlying Funds:
Aggressive Growth Moderate Growth Conservative Growth Lifestyle Fund Lifestyle Fund Lifestyle Fund International Equity Fund 25% 15% 8% Small Cap Growth Fund 20% 13% 8% Mid Cap Value Fund 10% 9% 6% Mid Cap Growth Fund 5% 3% 2% Large Cap Growth Fund 20% 15% 13% Growth & Income Fund 10% 15% 13% Core Bond Fund 10% 30% 50% High Yield Bond Fund 0% 0% 0%
The Funds' actual expense may be higher or lower as a result of the allocation of their assets among the Underlying Funds, the expenses of the Underlying Funds, and/or the Funds' own expenses. The Total Fund Operating Expenses and Estimated Total Annual Combined Indirect Expenses shown above with respect to the LifeStyle Funds are combined and used to calculate the 1 year and 3, 5 and 10 years examples, respectively, shown on the following pages with respect to such Funds. - ------- 33 By translating "Total Annual Fund Operating Expenses" into dollar amounts, these examples help you compare the costs of investing in a particular Fund, or a particular class of shares, with the costs of investing in other mutual funds. The examples assume that you: . Invest $10,000 in a Fund for the time period indicated and then redeem all of your shares at the end of those periods. . Your investment earns a 5% return each year and that each Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
Fund 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------------------------- Growth & Income Fund Institutional Class I Shares $131 $409 $ 708 $1,556 - ------------------------------------------------------------------------------- Large Cap Growth Fund (formerly Growth Equity) Institutional Class I Shares 129 403 697 1,534 - ------------------------------------------------------------------------------- Mid Cap Growth Fund (formerly Small Mid Cap) Institutional Class I Shares 146 452 782 1,713 - ------------------------------------------------------------------------------- Mid Cap Value Fund Institutional Class I Shares 171 530 913 1,987 - ------------------------------------------------------------------------------- Science & Technology Institutional Class I Shares 143 443 766 1,680 - ------------------------------------------------------------------------------- Small Cap Growth Fund (formerly Emerging Growth) Institutional Class I Shares 153 474 818 1,791 - ------------------------------------------------------------------------------- Socially Responsible Fund Institutional Class I Shares 122 381 660 1,455 - ------------------------------------------------------------------------------- Small Cap Index Fund Institutional Class I Shares 143 443 766 1,680 - ------------------------------------------------------------------------------- Stock Index Fund Institutional Class I Shares 66 208 362 810 - ------------------------------------------------------------------------------- Global Equity Fund Institutional Class I Shares 210 649 1,114 2,400 - ------------------------------------------------------------------------------- International Equity Fund Institutional Class I Shares 163 505 871 1,900 - ------------------------------------------------------------------------------- International Small Cap Fund Institutional Class I Shares 188 582 1,001 2,169 - ------------------------------------------------------------------------------- Balanced Fund Institutional Class I Shares 164 508 876 1,911 - ------------------------------------------------------------------------------- Aggressive Growth LifeStyle Fund Institutional Class I Shares 158 490 845 1,845 - ------------------------------------------------------------------------------- Conservative Growth LifeStyle Fund Institutional Class I Shares 146 452 782 1,713 - ------------------------------------------------------------------------------- Moderate Growth LifeStyle Fund Institutional Class I Shares 152 471 813 1,779 - ------------------------------------------------------------------------------- Core Bond Fund (formerly Investment Quality Bond) Institutional Class I Shares 125 390 676 1,489 - ------------------------------------------------------------------------------- High Yield Bond Fund Institutional Class I Shares 150 465 803 1,757 - ------------------------------------------------------------------------------- Strategic Income Fund Institutional Class I Shares 150 465 803 1,757 - ------------------------------------------------------------------------------- U.S. Government Securities Fund Institutional Class I Shares 122 381 660 1,455 - ------------------------------------------------------------------------------- Money Market Fund Institutional Class I Shares 82 255 444 990 - -------------------------------------------------------------------------------
------- 34 More Information About Investment Strategies and Risks This Prospectus does not attempt to disclose all of the different investment techniques that the Funds might use, or all of the types of securities in which the Funds might invest. As with any mutual fund, investors must rely on the professional judgment and skill of the Funds' management. A subadvisor may choose not to use some or all of the investment techniques available to a Fund, and these choices may cause the Fund to lose money or not achieve its invest- ment objective. Each Fund has a unique investment objective (see the Fund Summaries) that it tries to achieve through its investment strategies. The investment objectives of the following Funds cannot be changed without the approval of the holders of a majority of the outstanding shares of each Fund; Growth & Income Fund, Large Cap Growth Fund, Mid Cap Growth Fund, Small Cap Growth Fund, Global Equity Fund, International Equity Fund, International Small Cap Fund, Balanced Fund, Core Bond Fund, Strategic Income Fund, U.S. Government Securities Fund and Money Market Fund. The investment objectives of the other Funds may be changed solely by the Trustees. Except as noted for certain investment restrictions, the strategies a Fund uses to achieve its investment objective also may be changed by the Trustees without approval of the shareholders. Because each Fund is different, they have different investment policies and risks, and will also have different returns over time. This section provides additional information about certain of the Funds, and should be read in conjunction with the Fund Summaries. Growth & Income Fund Wellington Management believes that high quality companies are evidenced by a leadership position within an industry, a strong or improving balance sheet, relatively high return on equity, steady or increasing dividend payout, and strong management skills. The Fund's investments will emphasize primarily divi- dend paying stocks of larger companies. The Fund may invest in securities that can be converted into, or that include the right to buy common stocks, includ- ing convertible securities issued in the Euromarket and preferred stocks. The Fund may also invest in marketable debt securities of domestic issuers and of foreign issuers (payable in U.S. dollars) rated at the time of purchase "A" or better by Moody's or S&P, or unrated securities considered to be of equivalent quality in Wellington Management's judgment. Under normal market conditions, the subadvisor expects that the Fund's portfolio will consist primarily of equity securities. The Fund may invest in derivatives. Large Cap Growth Fund The Fund may invest in preferred stocks and convertible securities, that offer opportunities for capital appreciation. The Fund may also invest in high-qual- ity bonds, debentures and other corporate or government obligations. Although these securities may produce current income, income will not be a substantial factor in selecting these securities. The Fund may invest in investment grade bonds, debentures and corporate obliga- tions rated at the time of purchase of Baa or higher by Moody's or BBB or higher by S&P. The Fund may choose to invest in lower-rated (Ba or lower by Moody's and BB or lower by S&P) convertible and preferred stocks but not rated below B. The Fund may also invest in unrated convertible securities and pre- ferred stocks if Founders believes that they are equivalent in quality to the rated securities the Fund may buy. The Fund will not have more than 5% of its total assets invested in unrated or below-investment-grade fixed income securities, with the exception of preferred stocks. If the Fund holds securities that are downgraded after they are pur- chased, the Fund does not have to sell them unless the Fund assets in unrated and below investment-grade securities reaches 5% of total assets. The Fund may invest up to 30% of its total assets in foreign securities. The Fund may not invest more than 25% of its total assets in any one foreign coun- try. - ------- 35 The Fund is also permitted to use forward foreign currency contracts and futures contracts. The Fund may also purchase and/or write options on securi- ties, on indices, futures contracts and foreign currencies and may invest in Rule 144A securities. Rule 144A securities are unregistered securities eligible for sale to certain buyers, such as mutual funds. The Fund may invest without limit in American Depositary Receipts ("ADRs"). ADRs are receipts representing shares of a foreign corporation held by a U.S. bank that entitle the holder to all dividends and capital gains on the under- lying foreign shares. ADRs are denominated in U.S. dollars and trade in the U.S. securities markets. Mid Cap Growth Fund The Fund invests in equity securities, including common and preferred stocks, and securities that can be converted into or exchanged for equity securities, including warrants and rights. The Fund will typically invest in companies whose securities are traded on domestic stock exchanges or in the over-the- counter market. To give the Fund the flexibility to take advantage of new opportunities that can help to meet the Fund's investment objectives, the Fund can invest in money market instruments, bank and thrift obligations, obligations issued or guaran- teed by the U.S. Government or by its agencies or instrumentalities, foreign bank obligations and obligations of foreign branches of domestic banks, vari- able rate master demand notes and repurchase agreements. The Fund may invest in derivatives. Mid Cap Value Fund Although primarily investing in equity securities of mid cap companies using a value-oriented approach, the Fund may use certain practices and securities involving additional risks. Borrowing and derivatives could create leverage, meaning that certain gains or losses could be amplified, increasing NAV price movements. In using certain derivatives to gain stock market exposure for excess cash holdings, the Fund increases its risk of loss. Although they may add diversification, foreign securities can be riskier, because foreign markets tend to be more volatile and exchange rates fluctuate. The Fund may invest up to 10% of its total assets in foreign securities. When the Fund anticipates adverse market, economic, political or other condi- tions, it may temporarily depart from its goal and invest substantially in high-quality short-term fixed-income investments. This could help the Fund avoid losses but may also mean lost opportunities. Science & Technology Fund Since this Fund is focused on the science and technology industries, it is less diversified than stock funds investing in a broader range of industries and, therefore, could experience significant volatility. Companies in the rapidly changing fields of science and technology often face unusually high price vola- tility, in terms of both gains and losses. The potential for wide variation in performance is based on the special risks common to these stocks. For example, products or services that at first appear promising may not prove commercially successful or may become obsolete quickly. Earnings disappointments can result in sharp price declines. The level of risk will rise to the extent that the Fund has significant expo- sure to smaller or unseasoned companies (those with less than a three-year operating history), which may not have established products or more experienced management. Foreign stock holdings are subject to the risk that some holdings may lose value because of declining foreign currencies or adverse political or economic events overseas. Investment in futures and options, if any, are subject to additional volatility and potential losses. Small Cap Growth Fund The Fund will usually invest at least 65% of its total assets in common and preferred stocks, securities convertible into common stocks and warrants of small U.S. growth companies. In seeking to identify growth companies the Fund's subadvisor often look for: companies still in the developmental stage; older companies that appear to be entering a new stage of growth; and companies provid- ------- 36 ing products or services with a high unit-volume growth rate. Some companies may outgrow the definition of a small company after the Fund has purchased their securities. These companies continue to be considered small for purposes of the Fund's minimum 65% allocation to small company equi- ties. In addition, the Fund may invest in companies of any size once the 65% policy is met. As a result, the Fund's average market capitalization may some- times exceed that of the largest company in the Russell 2000 Index. Although the Fund will typically invest in smaller companies, the Fund may invest in emerging growth companies of any size. Emerging growth companies generally benefit from new products or services, technological developments, changes in management or other factors. The Fund may also invest in companies experiencing unusual developments affecting their market value, called "spe- cial situation" companies. These companies may be involved in acquisitions or consolidations, reorganization, recapitalization, mergers, liquidation, or distribution of cash, securities or other assets, tender or exchange offers, a breakup or workout of a holding company, lawsuits which, if resolved favor- ably, would improve the value of the company's stock, or a change in corporate control. Investing in securities of emerging growth and small-sized companies can involve greater risks because these securities may have limited marketability. Because small and medium-sized companies normally have fewer shares outstand- ing than larger companies, it may be more difficult for the Fund to buy or sell large numbers of shares without affecting current prices. Small- and medium-sized companies are typically subject to a greater degree of changes in earnings and business prospects than are larger, more established companies. There is typically less publicly available information concerning small- and medium-sized companies than for larger, more established ones. And companies with small market capitalizations may also be dependent upon a single proprie- tary product or market niche, may have limited product lines, markets or financial resources, or may depend on a limited management group. The Fund may invest up to 20% of its total assets in investment grade debt securities (other than money market obligations) and preferred stocks that are not convertible into common stock. The Fund may also invest up to 10% of its total assets in the securities of foreign issuers, which have certain risks associated with them. The Fund's status is non-diversified , although its portfolio managers have typically diversified the Fund's investments. The interest income to be derived may be considered as one factor in selecting debt securities for investment. Because the market value of debt obligations can be expected to vary inversely with changes in prevailing interest rates, investing in debt obligations may provide an opportunity for capital apprecia- tion when interest rates are expected to decline. The success of such a strat- egy is dependent upon the manager's ability to accurately forecast changes in interest rates. A security will be considered investment grade if it is rated within the four highest grades by Moody's or S&P or, if unrated, is determined by the manager to be of comparable quality. Bonds rated in the fourth highest grade may have speculative characteristics. If a security held by the Fund is no longer rat- ed, or is rated below the Fund's minimum allowed rating, the manager factors this information into the decision about whether the Fund should continue to hold the securities. The Fund can normally invest up to 20% of its total assets in domestic and foreign short-term money market obligations. The Fund may invest in derivatives. Small Cap Index Fund The Fund's subadvisor pursues the Fund's objective by investing in companies that are listed in the Russell 2000(TM) Index (the "Index"), except for a small portion in cash, to be available for redemptions. Since it may not be possible to buy every stock included in the Index, or in the same proportions, the Fund invests in a sampling of common stocks in the Index. The common stocks of the Index will be selected utilizing a statistical sampling tech- nique known as "optimization". This process selects stocks for the Fund so that - ------- 37 various industry weightings, market capitalizations and fundamental character- istics (e.g., price-to-book, price-to-earnings, debt-to-asset ratios and divi- dend yields) closely approximate those of the Index. The common stocks held by the Fund are weighted to make the Fund's aggregate investment characteristics similar to those of the Index as a whole. Socially Responsible Fund The manager of the Fund determines whether a company "significantly" engages in prohibited activities by screening the Fund's investable universe against a proprietary database of stocks. Companies in the database generating more that 5% of revenues from any violating activity are not purchased by the Fund. In addition to this database, the manager uses various other resources to screen out companies whose operations appear to violate the social criteria. At least once a year, the Investor Responsibility Research Center surveys state laws to see if there are any new or revised state laws that govern or affect the investments of public funds. If the survey shows that at least 20 states have adopted laws that restrict public funds from being invested in a clearly definable category of investments, this category is automatically added to the Fund's social criteria list. The manager of the Fund determines whether a company "significantly pollutes the environment" by screening the Fund's investable universe against a list of the top 75 global emitters. Emissions data is collected from various sources including, but not limited to, government agencies and company filings. In addition to this list, the manager uses various publications to screen out com- panies whose operations appear to violate the social criteria. Stock Index Fund The Fund's subadvisor pursues the Fund's objective by investing in companies that are listed in the S&P 500 Index (the "Index"), except for a small portion in cash, to be available for redemptions. Since it may not be possible to buy every stock included in the Index, or in the same proportions, the Fund invests in a sampling of common stocks in the Index. The common stocks of the Index will be selected utilizing a statistical sampling technique known as "optimiza- tion". This process selects stocks for the Fund so that various industry weightings, market capitalizations and fundamental characteristics (e.g., price-to-book, price-to-earnings, debt-to-asset ratios and dividend yields) closely approximate those of the Index. The common stocks held by the Fund are weighted to make the Fund's aggregate investment characteristics similar to those of the Index as whole. Global Equity Fund The Fund invests primarily in equity securities of issuers throughout the world, including issuers in the U.S. and emerging market countries. While the Fund generally emphasizes investments in equity securities, such as common stocks and preferred stocks, it may also invest in fixed-income securi- ties when these investments offer opportunities for capital appreciation. Fixed-income securities that the Fund may invest in include bonds, debentures and other corporate or government obligations. The Fund may invest without limit in ADRs. ADRs are receipts representing shares of a foreign corporation held by a U.S. bank that entitle the holder to all dividends and capital gains on the underlying foreign shares. ADRs are denominated in U.S. dollars and trade in the U.S. securities markets. International Equity Fund MSAM's Active International Allocation team analyzes both the global economic environment and the economies of the industrialized countries comprising the MSCI Europe, Australasia, Far East (EAFE) Index. EAFE countries include Japan, most nations in Western Europe, Australia, New Zealand, Hong Kong and Singapore. MSAM views each country and sector as unique investment opportunities and evaluates prospects for value, growth, inflation, interest rates, corporate earnings, liquidity and risk characteristics, investor sentiment and currency outlook. After determining to invest in a country or sector, MSAM establishes overweight, underweight or neutral positions relative to the broad market index for that country or sector. Within the countries or sectors selected for investment, MSAM purchases optimized ------- 38 baskets of equity securities designed to track the local market index. The Fund does not invest in securities of U.S. issuers. The Fund will limit its use of derivatives for non-hedging purposes to 33 1/3% of its total assets measured by the aggregate notional amount of outstanding derivatives. While the use of derivatives may be advantageous to the Fund, if MSAM is not successful in employing them, the Fund's performance may be worse than if it did not make such investments. The Fund may invest in emerging market countries and, with regard to such investments, may make global and regional allocations to emerging markets, as well as allocations to specific emerging market countries. Emerging market countries are countries that major international financial institutions, such as the World Bank, generally consider to be less economically mature than developed nations, such as the United States or most nations in Western Europe. Emerging market countries can include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most countries located in Western Europe. Emerging market countries may be more likely to experience political turmoil or rapid changes in economic conditions than more developed countries, and the financial condition of issuers in emerging market countries may be more precarious than in other countries. The characteristics result in greater risk of price volatility in emerging market countries, which may be heightened by currency fluctuations relative to the U.S. dollar. International Small Cap Fund The Fund may invest a significant portion of its assets in the securities of small companies. The securities of small companies may have limited marketabil- ity and may experience more abrupt or erratic movements in price than securi- ties of larger companies or the market averages in general. Because of this, the net asset value of the Fund may fluctuate more widely than popular market averages. The Fund may also invest in convertible securities, preferred stocks, bonds, debentures and other corporate obligations when Founders believes that these investments offer opportunities for capital appreciation. The Fund may invest in investment-grade bonds, debt securities and corporate obligations. For purposes of this Fund, investment grade securities are those rated Baa or higher by Moody's, or BBB or higher by S&P. The Fund may choose to invest in lower-rated convertible securities and preferred stocks (securities rated Ba or lower by Moody's and BB or lower by S&P) or of comparable invest- ment quality at the time of purchase. The Fund may also invest in unrated con- vertible securities and preferred stocks if Founders believes they are equiva- lent in quality to the rated securities that the Fund may buy. The Fund will not invest more than 5% of its total assets in unrated or below investment-grade fixed-income securities, with the exception of preferred stocks. If the Fund holds securities that are downgraded to below investment grade after they are purchased, the Fund does not have to sell them unless the Fund's investments in unrated and below investment grade securities are equal to or greater than 5% of total fund assets. Since the Fund's assets will be invested primarily in foreign securities and since substantially all of the Fund's revenues will be received in foreign cur- rencies, the Fund's net asset values will be affected by changes in currency exchange rates. The Fund will pay dividends in dollars and will incur currency conversion costs. Balanced Fund The Fund may invest in convertible securities, preferred stocks, bonds, deben- tures, and other corporate obligations when INVESCO believes that these invest- ments offer opportunities for capital appreciation. Current income is also a factor in the selection of these securities. The Fund may invest up to 25% of its total assets in foreign securities and will be subject to certain risks as a result of these investments. The Fund may also purchase ADRs or Canadian securities that are not included in the 25% for- eign securities limitation. The Fund may also take positions in securities traded on regional or foreign exchanges. The portion of the Fund's portfolio invested in - ------- 39 debt securities may include obligations of the U.S. government, government agencies, and investment grade corporate bonds. Obligations issued by U.S. Gov- ernment agencies may include some supported only by the credit of the issuing agency rather than by the full faith and credit of the U.S. Government. The Fund may hold securities of any maturity, with the average maturity of the portfolio varying depending upon economic and market conditions. The Fund may invest in derivatives. Aggressive Growth LifeStyle Fund The Fund is managed so that it can serve as a complete investment program or as a core part of your larger portfolio. The combination of the North American Funds ("Underlying Funds") has been selected to represent a reasonable spectrum of investment options for the Fund. The manager may change the asset allocation ranges and the particular Underlying Funds in which the Fund may invest from time to time. Conservative Growth LifeStyle Fund The Fund is managed so that it can serve as a complete investment program or as a core part of your larger portfolio. The combination of the North American Funds ("Underlying Funds") has been selected to represent a reasonable spectrum of investment options for the Fund. The manager may change the asset allocation ranges and the particular Underlying Funds in which the Fund may invest from time to time. Moderate Growth LifeStyle Fund The Fund is managed so that it can serve as a complete investment program or as a core part of your larger portfolio. The combination of the North American Funds ("Underlying Funds") has been selected to represent a reasonable spectrum of investment options for the Fund. The manager may change the asset allocation ranges and the particular Underlying Funds in which the Fund may invest from time to time. Core Bond Fund Credit research on corporate bonds includes examining both quantitative (mathe- matical) and qualitative criteria established by AGIM. These criteria include an issuer's industry, operating and financial profiles, business strategy, man- agement quality, and projected financial and business conditions. Up to 10% of the Fund's total assets may be invested in lower quality fixed- income securities, those rated below Baa3 by Moody's and BBB by S&P or comparable investment qual-ity at the time of purchase. Equity securities, including common or preferred stocks, convertible securities, and warrants, may comprise up to 20% of the Fund's total assets. The Fund may invest in ADRs, foreign currency, futures and options, investment companies, loan participations, real estate securities, repurchase agreements, reverse repurchase agreements, dollar rolls, structured securities, variable amount master demand notes, variable rate demand notes, and when-issued securities.The Fund may invest in derivatives. High Yield Bond Fund The Fund may invest up to 35% in investment grade securities, those rated Baa3 or higher by Moody's and BBB- or higher by S&P or comparable investment quality at the time of purchase. In addition, the Fund may invest up to 15% in zero coupon securities (securities not paying current cash interest), and up to 20% of total assets in equity securities. Equity securities include common or pre- ferred stocks, warrants, and convertible securities. The Fund may invest in derivatives. Strategic Income Fund The Fund may invest in debt obligations issued or guaranteed by a foreign sov- ereign government or one of its agencies or political subdivisions, and debt obligations issued or guaranteed by international organizations designated or supported by governmental entities to promote economic reconstruction or devel- opment and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development, the European Coal and Steel Community, the Asian Development Bank and the Inter- American Development Bank. These securities may be denominated in multi- national currency units. The purpose of investing a portion of the Fund's assets in below investment grade, mortgage, and international debt securities, is to ------- 40 provide investors with a higher yield than a high-quality domestic corporate bond fund, and with less risk than a fund that invests principally in below investment grade securities. Some of the debt securities the Fund may select may be considered comparable to securities having, the lowest ratings for non- subordinated debt instruments assigned by Moody's or S&P (i.e., rated C by Moody's or CCC or lower by S&P) or comparable investment quality at time of purchase. The Fund may invest in derivatives. The Fund may also invest in asset-backed securities, foreign currency, futures and options, illiquid securities, investment companies, loan participations, money market securities, mortgage-related securities, real estate securities, repurchase agreements, reverse repurchase agreements, dollar rolls, structured securities, swaps, variable amount master demand notes, variable rate demand notes, and when-issued securities. U.S. Government Securities Fund The Fund may invest in: . Mortgage-backed securities guaranteed by the Government National Mortgage Association ("GNMA"), popularly known as "Ginnie Maes," that are backed by the full faith and credit of the U.S. Government. These are known as a "modified pass through" type of mortgage- backed security ("GNMA Certificates"). These securities entitle the holder to receive all interest and principal payments due whether or not payments are actually made on the underlying mortgages; . U.S. Treasury obligations; . Obligations issued or guaranteed by agencies or instrumentalities of the U.S. Government. These securities are backed by their own credit, and may not be backed by the full faith and credit of the U.S. Government; . Mortgage-backed securities guaranteed by agencies or instrumentalities of the U.S. Government which are supported by their own credit but not the full faith and credit of the U.S. Government, such as the Federal Home Loan Mort- gage Corporation and the Federal National Mortgage Association; . Collateralized mortgage obligations issued by private issuers for which the underlying mortgage-backed securities serving as collateral are backed (i) by the credit alone of the U.S. Government agency or instrumentality which issues or guarantees the mortgage backed securities, or (ii) by the full faith and credit of the U.S. Government; and . Repurchase agreements collateralized by any of the foregoing. Money Market Fund The Fund invests in high quality, U.S. dollar-denominated money market instru- ments, as described on page 26. A money market instrument is high quality when it is rated in one of two highest credit categories by a Nationally Recognized Statistical Rating Organization such as Moody's or S&P. - ------- 41 Other Risks of Investing in the North American Funds Although a Fund may have the flexibility to use some or all of the investments or strategies described in this Prospectus and the Statement of Additional Information, its subadvisor may choose not to use these investments or strate- gies for a variety of reasons. These choices may cause a Fund to miss opportu- nities, lose money or not achieve its goal. High Yield/High Risk Securities High yield securities (often known as "junk bonds") include debt instruments that have an equity security attached to them. Securities rated below invest- ment grade and comparable unrated securities offer yields that fluctuate over time, but generally offer higher yields than do higher rated securities. Howev- er, securities rated below investment grade also involve greater risks than higher-rated securities. Under rating agency guidelines, medium- and lower- rated securities and comparable unrated securities will likely have some qual- ity and protective characteristics that are outweighed by large uncertainties or major risk exposures to adverse conditions. Some of the debt securities in which the Funds may choose to invest may be, or may be similar to, the lowest rated non-subordinated debt (securities rated C by Moody's or CCC or lower by S&P or comparable investment quality at the time of purchase). This type of security is very risky, as issuers may not have the ability to repay principal and interest, and may even default. If this should occur, the value of shares of the Fund holding them would likely fall. Illiquid Securities An illiquid security is one that may not be frequently traded or cannot be dis- posed of promptly within seven days and in the usual course of business without taking a materially reduced price. Illiquid securities include, but are not limited to, time deposits and repurchase agreements not maturing within seven days and restricted securities. Each Fund other than the Money Market Fund and the Municipal Money Market Fund may invest up to 15% of its net assets in illiquid securities. This limit is 10% for the Money Market Fund. This restric- tion applies at all times to all assets. A restricted security is one that has not been registered with the Securities and Exchange Commission ("SEC") and, therefore, cannot be sold to the general public. Under procedures adopted by the Trust's Trustees, certain restricted securities may be deemed liquid, and will not be counted toward the 15%/10% limits. Lending Fund Securities Each Fund, except the Lifestyle Funds, may lend up to 33% (30% for the Stock Index Fund and the Small Cap Index Fund, 33 1/3% for the High Yield Bond Fund, the Mid Cap Value Fund, the Socially Responsible Fund and the Science & Tech- nology Fund of its total portfolio assets, or securities, to brokers, dealers and other financial institutions. These loans must be callable (the Fund may ask that the loan be repaid in full) at any time by the Fund. The loans must be at all times fully secured by cash, or liquid assets and marked-to-market (priced at market value) to the value of loaned securities on a daily basis. As with any extensions of credit, there may be risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of Fund securities will only be made to firms deemed by the subadvisors to be creditworthy. Leverage Risk Funds that borrow money to buy securities are using leverage. Leverage risk is the risk that leverage, or debt, will enable a Fund to buy more of a security that falls in value. In this case, the Fund would still need to repay the money it borrowed. Funds can create leverage, or borrow money, by using different types of techniques including reverse repurchase agreements, dollar rolls, and derivatives including inverse floating rate instruments. Hedging and Other Strategic Transactions Individual Funds may be authorized to use a variety of investment strategies described below for hedging purposes only, including hedging various market risks (such as interest rates, currency exchange rates and broad or specific market movements), and managing the effective maturity or duration of debt instruments held by the Fund. Hedging is simply believing that certain securi- ties will fall, or rise, in value, and structuring transactions that take advantage of those changes. These transactions are generally used to ------- 42 protect against possible changes in the market value of securities a Fund already owns or plans to buy, to protect unrealized gains or to improve the Fund's return in some way. Where allowed, individual Funds may purchase and sell (or write) exchange- listed and over-the-counter put and call options on securities, index futures contracts, financial futures contracts and fixed-income indices and other financial instruments, enter into financial futures contracts, enter into interest rate transactions, and enter into currency transactions. This category includes derivative transactions. A "derivative" is generally defined as an instrument whose value is based upon, or derived from, some underlying index or rate. Interest rate transactions may include swaps, caps, floors and collars, and currency transactions may include currency forward contracts, currency futures contracts, currency swaps and options on currencies or currency futures contracts. Frequent Trading A Fund's investments may be bought and sold relatively fre-quently. A high turnover rate may result in higher brokerage commissions and a higher amount of short-term capital gains, which are generally taxable to you at your ordinary income tax rate. Temporary Defensive Strategies A Fund's subadvisor may at certain times decide that pursuing the Fund's investment strategies is inconsistent with market conditions. A subadvisor may then employ defensive strategies designed mostly to limit losses. However, the subadvisor may choose not to use defensive strategies, even in volatile or unsettled market conditions. Such defensive strategies may cause the Fund to miss opportunities or to not achieve its goal. - ------- 43 Management of the Funds Under the federal securities laws, Massachusetts law and the Trust's Agreement and Declaration of Trust and By-Laws, the business and affairs of the Trust are managed under the direction of the Trustees. American General Asset Management Corp. ("AGAM"), formerly CypressTree Asset Management Corporation, Inc., is the investment adviser for the Trust. AGAM was formed in 1996 to advise, acquire and distribute mutual funds through broker- dealers, banks and other intermediaries. AGAM's address is 286 Congress Street, Boston, Massachusetts 02210. According to its Advisory Agreement with the Trust (the "Advisory Agreement"), AGAM: . Oversees the administration of all aspects of the business and affairs of the Funds . Selects, contracts with and compensates subadvisors to manage the assets of the Funds The following table shows the management fees each Fund paid (or, in the case of new Funds will pay) to AGAM for the last fiscal year under the Advisory Agreement as a percentage of the Fund's average daily net asset value.
Funds Management Fees Between Between Excess Over First $50 Million & $200 Million & $500 $50 Million $200 Million $500 Million Million - ------------------------------------------------------------------------------- Growth & Income Fund 0.725% 0.675% 0.625% 0.550% Large Cap Growth Fund 0.900% 0.850% 0.825% 0.800% Mid Cap Growth Fund 0.925% 0.900% 0.875% 0.850% Mid Cap Value Fund 0.900% See Below/1/ Science and Technology 0.900% 0.900% 0.900% 0.900% Fund Small Cap Growth Fund 0.950% 0.950% 0.950% 0.950% Small Cap Index Fund 0.280% 0.280% 0.280% 0.270% Socially Responsible 0.650% 0.650% 0.650% 0.650% Fund Stock Index Fund 0.270% 0.270% 0.270% 0.260% Global Equity Fund 0.900% 0.900% 0.700% 0.700% International Equity 0.900% 0.850% 0.800% 0.750% Fund International Small Cap 1.050% 1.000% 0.900% 0.800% Fund Balanced Fund 0.775% 0.725% 0.675% 0.625% Aggressive Growth 0.100% 0.100% 0.100% 0.100% Lifestyle Fund Conservative Growth 0.100% 0.100% 0.100% 0.100% Lifestyle Fund Moderate Growth 0.100% 0.100% 0.100% 0.100% Lifestyle Fund Core Bond Fund 0.600% 0.600% 0.525% 0.475% High Yield Bond Fund 0.825% 0.825% 0.725% 0.675% Strategic Income Fund 0.750% 0.700% 0.650% 0.600% U.S. Government 0.600% 0.600% 0.525% 0.475% Securities Fund Money Market Fund 0.200% 0.200% 0.200% 0.145%
- -------------------------------------------------------------------------------- /1/ The management fee schedule for the Mid Cap Value Fund is as follows: 0.900% on the first $100 million, 0.875% between $100 million and $250 million, 0.850% between $250 million and $500 million, 0.825% between $500 mil-lion and $750 million, and 0.800% on the excess over $750 million of the aver-age net assets of the Fund. ------- 44 . Makes recommendations to the Trustees regarding the hiring, termination and replacement of subadvisors . Reimburses the Fund if the total of certain expenses allocated to any Fund exceeds certain limitations . Reviews the performance of the subadvisors . Periodically reports to the Trustees Under an order granted to the Funds by the SEC, AGAM is permitted to appoint a subadvisor, to create a subadvisory agreement, and to terminate or amend a subadvisory agreement, in each case without shareholder approval. This "Manager of Managers" structure permits the Funds to change subadvisors or the fees paid to subadvisors without the expense and delays associated with obtaining share- holder approval. AGAM has ultimate responsibility under the Manager of Managers structure to oversee the subadvisors, including making recommendations to the Trust regarding the hiring, termination and replacement of subadvisors. - ------- 45 Subadvisory Agreements American General Investment Management, L.P. ("AGIM") AGIM has been the subadvisor to the Strategic Income Fund, the Core Bond Fund, the U.S. Government Securities Fund, and the Money Market Fund since March, 2000, and of the High Yield Bond Fund since inception. The portfolio managers of the Small Cap Index Fund, the Stock Index Fund, the Socially Responsible Fund, the Aggressive Growth LifeStyle Fund, the Conservative Growth LifeStyle Fund and the Moderate Growth LifeStyle Fund previously managed the corresponding AGSPC 2 Fund. AGIM was formed in 1998 as a successor to the investment management division of American General Corporation ("American General"), and is an indirect wholly-owned subsidiary of American General. AGIM also provides investment management and advisory services to pension and profit sharing plans, financial institutions and other investors. Accounts managed by AGIM had combined assets, as of December 31, 2000, of approximately $72.2 billion. AGIM is located at 2929 Allen Parkway, Houston, Texas 77019. Albert Gutierrez is Executive Vice President responsible for portfolio management and trading since April, 2000, and is primarily responsible for implementing the investment strategies of the Core Bond Fund, the U.S. Government Securities Fund, the Aggressive Growth LifeStyle Fund, the Conservative Growth LifeStyle Fund and the Moderate Growth LifeStyle Fund. Prior to working at AGIM, Mr. Gutierrez was Senior Vice President responsible for non-equity research, trading and various insurance company portfolios with Conseco Capital Management from 1987 to 2000. Magali E. Azema-Barac is responsible for AGIM's equity group. She heads the team making investment decisions for each of the Index Funds, as well as for the Socially Responsible Fund. Ms. Azema-Barac joined American General in Sep- tember, 1999. Prior to that, she worked on the equity desk of US West Invest- ment Management Company in Englewood, Colorado, where she managed an enhanced equity portfolio. Steven Guterman, Executive Vice President and portfolio manager of the Strate- gic Income Fund, joined AGIM in 1998. Mr. Guterman served as Managing Director at Salomon Brothers, Inc. from 1996 to 1998 and as Senior Portfolio Manager and head of the U.S. Fixed Income Portfolio Group from 1990 to 1998. Investment decisions for the High Yield Bond Fund are made by a team, headed by Gordon Massie. Mr. Massie, Executive Vice President, has been the lead portfolio manager of AGIM or its indirect parent, American General since August 1985. Currently, Mr. Massie is AGIM's Head of Public High Yield Portfolio Management and Trading. Teresa Moro, Vice President, serves as the portfolio manager of the Money Mar- ket Fund and has served as Vice President and Investment Officer of the Money Market Fund of North American Funds Variable Product Series I since 1991. She is responsible for managing money market instruments for AGIM. Credit Suisse Asset Management, LLC. Credit Suisse Asset Management, LLC., the subadvisor to the Small Cap Growth Fund ("CSAM"), is located at 466 Lexington Ave., New York, New York, 10017. CSAM is a professional investment counseling firm which provides investment services to investment companies, employee benefit plans, endowment funds, foundations and other institutions and individuals. As of November 30, 2000, CSAM managed approximately $93 billion of assets, and together with its global affiliates, managed $223 billion worldwide. The co-fund managers of the Small Cap Growth Fund are Elizabeth B. Dater, Stephen J. Lurito and Sammy Oh. Ms. Dater, a managing director, has been a fund manager of the Small Cap Growth Fund since its inception and has been a fund manager since 1978. Mr. Lurito, a managing director, has been a fund manager of the Small Cap Growth Fund since its inception and has been with the firm since 1987. Mr. Oh, a director, has been a fund manager of the Small Cap Growth Fund since March 1999. Prior to that, he worked at Warburg Pincus as a fund manager since 1997. Previously, Mr. Oh was Vice President of Bessemer Trust from 1995 to 1997. ------- 46 Founders Asset Management, LLC. Investment decisions for the Large Cap Growth Fund, International Small Cap Fund and Global Equity Funds are made by their subadvisor, Founders Asset Man- agement, LLC ("Founders"), located at 2930 East Third Avenue, Denver, Colorado 80206. Founders is a registered investment adviser first established as an asset manager in 1938, and is a subsidiary of Mellon Financial Corporation. As of December 31, 2000, Founders had over $7.24 billion of assets under manage- ment, including approximately $7.12 billion in mutual fund accounts and $120 million in other advisory accounts. To facilitate the day-to-day investment management of the Large Cap Growth Fund, International Small Cap Fund, and Global Equity Fund, Founders employs a unique team-and-lead-manager system. The management team is composed of several members of the Investment Department, including portfolio managers, portfolio traders and research analysts. Team members share responsibility for providing ideas, information, knowledge and expertise in the management of the Funds. Each team member has one or more areas of expertise that is applied to the man- agement of the Fund. Daily decisions on Fund selection for the Fund rests with a fund manager assigned to the Fund. Tracy P. Stouffer, Vice President of Investments, has been the lead fund man- ager for the International Small Cap Fund since July 1999. Previously, Ms. Stouffer was a vice president and portfolio manager with Federated Global Incorporated from 1995 to July 1999 and a vice president and portfolio manager with Clariden Asset Management from 1988 to 1995. Thomas M. Arrington, Vice President of Investments, is a Chartered Financial Analyst who has been the co-portfolio manager, along with Scott Chapman, of the Large Cap Growth Fund since December 1998. Mr. Arrington has served as co-port- folio manager to the Global Equity Fund since March 2000. Prior to joining Founders, he was vice president and director of income equity strategy at HighMark Capital Management, a subsidiary of Union BanCal Corp., where he man- aged the HighMark Income Equity Fund, a large-cap fund. He received a bache- lor's degree in economics from the University of California, Los Angeles and an MBA from San Francisco State University. Scott Chapman, Vice President of Investments, is a Chartered Financial Analyst who has been the co-portfolio manager, along with Thomas Arrington, of the Large Cap Growth Fund since December 1998. Mr. Chapman has served as co-portfo- lio manager to the Global Equity Fund since March 2000. Before joining Found- ers, Chapman was vice president and director of growth strategy for HighMark Capital. He has more than 10 years experience in equity investment management, including security analysis positions with McCullough, Andrews and Cappiello and Cooper Development Co. Chapman received a bachelor of science degree in accounting from Santa Clara University and an MBA in finance from Golden Gate University. Douglas A. Loeffler, Vice President of Investments, is a Chartered Financial Analyst who has served as the co-portfolio manager of the Global Equity Fund since March, 2000. Prior to joining Founders in 1995, Mr. Loeffler was an investment professional at Scudder, Stevens & Clark for seven years. INVESCO Funds Group, Inc. ("INVESCO") INVESCO, with principal offices at 7800 E. Union Blvd., Denver, Colorado 80237, has been the subadvisor to the Balanced Fund and the Mid Cap Growth Fund since March 2000. Established in 1932, INVESCO Funds Group is one of the oldest existing mutual fund management companies in the United States. Some of the world's largest institutions and more than two million individual investors rely on the knowledge of INVESCO's investment specialists. As of December 31, 2000, INVESCO and its affiliates managed approximately $402.6 billion in assets. Charles P. Mayer, Director of Equity Income Investments & Senior Vice Presi- dent, manages the equity portion of the Balanced Fund. Mr. Mayer, who joined INVESCO in 1993, has been an investment professional since 1969. Mr. Mayer holds a BA from St. Peter's College, and an MBA from St. John's University. Donovan J. Paul, Director of Fixed Income Investments and - ------- 47 Senior Vice President, co-manages the fixed-income portion of the Balanced Fund. Mr. Paul, who joined INVESCO in 1994, has been an investment professional since 1976. Mr. Paul holds a BBA from the University of Iowa, and an MBA from the University of Northern Iowa. Peter Lovell, Vice President, is the lead manager of the Balanced Fund. Mr. Lovell, who joined INVESCO in 1994, has been an investment professional since 1976. Mr. Lovell holds a BBA from Colorado State University, and an MBA from Regis University. Timothy J. Miller, Chief Investment Officer, Director and Senior Vice Presi- dent, is lead manager of the Mid Cap Growth Fund. Mr. Miller, who joined INVESCO in 1992, has been an investment professional since 1979. Mr. Miller holds a BSBA from St. Louis University, and an MBA from the University of Missouri. Morgan Stanley Dean Witter Investment Management Inc. Morgan Stanley Dean Witter Investment Management Inc., with principal offices at 1221 Avenue of the Americas, New York, New York 10020, has been the subadvisor to the International Equity Fund since April 1, 1999. On December 1, 1998, Morgan Stanley Asset Management Inc. changed its name to Morgan Stanley Dean Witter Investment Management Inc., but continues to do business in certain instances using the name Morgan Stanley Asset Management ("MSAM"). MSAM, a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co., conducts a worldwide fund management business, providing a broad range of fund management services to customers in the United States and abroad. As of December 31, 2000, MSAM, together with its affiliated institutional asset management companies, managed investments totaling approximately $170.2 billion. Ann D. Thivierge shares portfolio management responsibility for the Interna- tional Equity Fund with Barton M. Biggs. Ms. Thivierge is a Managing Director of MSAM. She joined MSAM in 1986 and holds a B.A. in International Relations from James Madison College, Michigan State University, and an M.B.A. in Finance from New York University. Barton M. Biggs has been Chairman and a director of MSAM since 1980. He is also a director and chairman of various registered investment companies to which MSAM and certain of its affiliates provide investment advisory services. Mr. Biggs holds a B.A. from Yale University and an M.B.A. from New York University. Neuberger Berman Management, Inc. ("NBM") 605 Third Avenue, Second Floor, New York, New York 10158-0180 NBM is the subadvisor for the Mid Cap Value Fund. NBM and its predecessor firms have specialized in the management of no-load mutual funds since 1950. As of December 31, 2000, NBM and its affiliates managed approximately $55.5 billion in aggregate net assets. Robert I. Gendelman serves as manager of the Mid Cap Value Fund. Mr. Gendelman is a Vice President of NBM and managing director of Neuberger Berman, LLC. Mr. Gendelman has been associated with NBM since 1994. T. Rowe Price Associates, Inc., ("T. Rowe Price") 100 East Pratt St., Baltimore, MD 21202 T. Rowe Price is the subadvisor for the Science & Technology Fund. Founded in 1937 by Thomas Rowe Price, Jr., the Baltimore-based investment management firm is one of the nation's leading providers of no-load mutual funds for individual investors and corporate retirement programs. T. Rowe Price Group, Inc. owns 100% of the stock of T. Rowe Price. T. Rowe Price Group was formed in 2000 as a holding company for the T. Rowe Price affiliated companies. As of December 31, 2000, T. Rowe Price and its affiliates served as investment advisor to more than 80 stock, bond, and money market funds and managed about $166.7 billion. The Fund is managed by an investment advisory committee, chaired by Charles A. Morris. Mr. Morris has day-to-day responsibility for managing the portfolio and works with the committee to develop and execute the Fund's investment program. Mr. Morris joined T. Rowe Price in 1987, and has been managing investments since 1991. ------- 48 Wellington Management Company, LLP Wellington Management Company, LLP, the subadvisor to the Growth & Income Fund ("Wellington Management"), is located at 75 State Street, Boston, Massachusetts 02109. Wellington Management and its predecessor organizations have provided invest- ment management services to investment companies, employee benefit plans, endowments, foundations and other institutions and individuals since 1928. As of September 30, 2000, Wellington Management had investment management author- ity with respect to approximately $267 billion of assets. Matthew E. Megargel, Senior Vice President of Wellington Management, is a chartered financial analyst who has served as fund manager to the Growth & Income Fund since February 1992. Mr. Megargel joined Wellington Management in 1983 as a research analyst and took on additional responsibilities as a fund manager in 1988. In 1991, he became solely a fund manager with Wellington Management. - ------- 49 Section III: Investing in the North American Funds Institutional Classes of Shares Institutional Class I shares of each Fund are available to you through your employer plan. Institutional Class I shares are available to any qualifying employer plan once the plan establishes a minimum account balance of $1 million with the Trust. A plan's account balance is equal at any time to the aggregate of all amounts contributed by the plan to the Trust, less the cost of all redemptions by such plan from the Trust. American General Funds Distributors, Inc. (the "Distributor") may waive the minimum account balance requirement if it reasonably anticipates that the size of the plan and/or the anticipated amount of contributions will present economies of scale. As a participant in an employer retirement plan, you do not purchase Institutional Class I shares of the Funds directly. Rather, Institutional Class I shares of a Fund are pur- chased for you when you elect to allocate your retirement contributions to a Fund plan that is available as an investment option in your retirement or sav- ings plan. You may be permitted to elect different investment options, alter the amounts contributed to your plan, or change how contributions are allocated among your investment options in accordance with your plan's specific provi- sions. See your plan administrator or employee benefits office for more details. Investments by individual participants in employer retirement plans are made through their plan sponsor or administrator, who is responsible for transmitting instructions for all orders for the purchase, redemption and exchange of Fund shares. The availability of an investment by a plan partici- pant in the Funds, and the procedures for investing depend upon the provisions of the plan and whether the plan sponsor or administrator has contracted with the Trust or designated agent for special processing services. For more information on how to participate in the Funds through an employee retirement plan, please refer to your plan materials or contact your employee benefits office. Institutional Class I shares are also available for purchase by or through: 1. Certain broker-dealers and other financial institutions that have entered into an agreement with the Distributor which includes a requirement that such shares be sold for the benefit of clients participating in a "wrap account" or a similar managed account program under which clients: (i) pay an asset-based fee; and (ii) will have at least $1 million invested in Institutional Class I shares. 2. Registered investment advisers offering a "wrap account" or a similar man- aged account program under which clients: (i) pay an asset-based fee; and (ii) will have at least $1 million invested in Institutional Class I shares. 3. Trust institutions and bank trust departments that: (i) charge an asset- based fee; and (ii) will have at least $1 million invested in Institutional Class I shares. 4. A charitable organization (as defined for purposes of Section 501(c) (3) of the Internal Revenue Code) investing $1 million or more. Institutional Class I shares are also available for purchase by the Aggressive, Moderate and Conservative Growth Lifestyle Funds. The Distributor may waive the minimum investment requirement in certain instances due to sales efficiencies and competitive considerations. Transfer or exchange of balances An employer retirement plan may allow you to exchange all or part of your existing plan balance from one investment option to another. Check with your plan administrator for details on the rules governing exchanges in your plan. Exchanges will be accepted by the Trust only as permitted by your plan. Your plan administrator can explain how frequently exchanges are allowed. The Trust reserves the right to re-fuse any exchange purchase request. ------- 50 Pricing of Fund Shares The price of the shares of each Fund is the net asset value per share (next determined following receipt of a properly completed order). The net asset value of the shares of each class of each Fund is calculated sep- arately and, except as described below, is determined once daily as of the close of regularly scheduled trading on the New York Stock Exchange (generally, 4:00 p.m., Eastern Time). The net asset value per share of each class of each Fund is calculated by dividing the value of the portion of the Fund's securities and other assets attributable to that class, less the liabilities attributable to that class, by the number of shares of that class outstanding. No determination is required on days when the New York Stock Exchange is closed (for example, national holi- days). Generally, trading in non-U.S. Government securities as well as U.S. Government Securities and money market instruments, is substantially completed each day at various times prior to the close of regularly scheduled trading on the New York Stock Exchange. The values of such securities used in computing the net asset value of the shares of a class of a Fund are generally determined as of such times. Occasionally, events which affect the values of such securi- ties may occur between the times at which they are generally determined and the close of regularly scheduled trading on the Exchange and would therefore not be reflected in the computation of a class's net asset value. If events materially affecting the value of such securities occur during such period, then these securities will be valued at their fair value as determined in good faith by the subadvisors under procedures established and regularly reviewed by the Trustees. All instruments held by the Money Market Fund and short-term debt instruments with a remaining maturity of 60 days or less held by the other Funds are valued on an amortized cost basis. Unless you request cash payment, all dividends and distributions will be rein- vested. All Funds except the Money Market Fund declare and pay capital gains, if any, annually. - ------- 51 Dividends and Distributions from North American Funds These Funds declare and pay income dividends annually: . Aggressive Growth LifeStyle Fund . Balanced Fund . Conservative Growth LifeStyle Fund . Global Equity Fund . Growth & Income Fund . International Equity Fund . International Small Cap Fund . Large Cap Growth Fund . Mid Cap Growth Fund . Mid Cap Value Fund . Moderate Growth LifeStyle Fund . Science & Technology Fund . Small Cap Growth Fund . Small Cap Index Fund . Socially Responsible Fund . Stock Index Fund These Funds declare income dividends daily and pay annually: . Core Bond Fund . High Yield Bond Fund . Money Market Fund . Strategic Income Fund . U.S. Government Securities Fund ------- 52 Taxes It is expected that each Fund of the Trust will qualify as a "regulated invest- ment company" under the Internal Revenue Code, as amended. If each Fund quali- fies it will not be subject to United States federal income taxes on its net investment income and net capital gain, if any, that it distributes to its shareholders in each taxable year. A Fund's distributions derived from interest, dividends and certain other income, including gains from investments that the Fund held for one year or less, will generally result in taxable ordinary income to the shareholders of the Fund. Distributions of net gains from investments held by a Fund for more than one year are taxable as long-term gains (generally at a 20% rate for non- corporate shareholders). Distributions will be treated as described above for federal income tax purposes whether they are paid in cash or reinvested in additional shares and regardless of how long a shareholder has held shares in the Fund. Distributions are taxed as described in this paragraph even if such distributions economically represent a return of a particular shareholder's investment. Distributions that represent a return of a particular shareholder's investment are likely to occur in respect of shares purchased at a time when a Fund's net asset value reflects gains that are either unrealized, or realized but not distributed. Because a Fund may invest in foreign securities or currencies, it may be required to pay withholding or other taxes to foreign governments on dividends and interest. The investment yield of the Fund's investment in foreign securi- ties or currencies will be reduced by these foreign taxes. Shareholders will bear the cost of any foreign taxes, but may not be able to claim a foreign tax credit or deduction for these taxes for any taxable year, the shareholders will be notified. The ability of the shareholders to utilize such a foreign tax credit is subject to a holding period requirement. In addition, if the Fund invests in securities of passive foreign investment companies, it may be sub- ject to U.S. federal income taxes (and interest on such taxes) as a result of such investments. The investment yield of such investments will be reduced by these taxes and interest. Shareholders will bear the cost of these taxes and interest, but will not be able to claim a deduction for these amounts. The redemption, sale or exchange of Fund shares (including the exchange of shares of one Fund for shares of another) is a taxable event and may result in a gain or loss. Gain or loss, if any, recognized on the sale or other disposi- tion of shares of the Fund are taxed as a long-term capital gain or loss if the shares are capital assets in the shareholder's hands and if the shareholder held the shares have been held for more than one year. (Such gains are gen- erally taxed at a 20% rate for noncorporate shareholders). If a shareholder sells or otherwise disposes of a share of the Fund before holding it for more than six months, any loss on the sale or other disposition of such share shall be treated as a long-term capital loss to the extent of any capital gain dividends received by the shareholder with respect to such share. Descriptions of tax consequences set forth in this Prospectus and in the State- ment of Additional Information are intended to be a general guide. Investors should consult their tax advisers with respect to the specific tax consequences of an investment in the Fund, including the effect and applicability of state, local, foreign, and other tax laws and the possible effects of changes in fed- eral or other tax laws. This discussion is not intended as a substitute for careful tax planning. - ------- 53 Section IV: Privacy Notice and Other Information Privacy Notice The Trust, an affiliate of American General, understands your privacy is impor- tant. You have received this notice in accordance with applicable state and federal laws and because you are a current or potential customer of one of the Funds. This notice will help you understand what types of nonpublic personal information--information about you that is not publicly available--we may col- lect, how we use it, and how we protect your privacy. This notice describes our privacy practices for both current and former customers. Types of Nonpublic Personal Information We Collect and Disclose . American General's employees, representatives, agents, and selected third parties--companies or individuals not affiliated with American General--may collect nonpublic personal information about our customers, including: --Information provided to us, such as on applications or other forms (account balances, income, assets and marital status). --Information about transactions with us, our affiliates, or third parties. --Information from others, such as employers, and federal and state agencies. Protection of Nonpublic Personal Information . We restrict access to nonpublic personal information to those employees, agents, representatives or third parties who need to know the information to provide products and services to our customers. . We have policies and procedures that give direction to our employees, agents, and representatives on how to protect and use nonpublic personal information. . We maintain physical, electronic, and procedural safeguards to protect non- public personal information. Sharing of Nonpublic Personal Information . We do not share nonpublic personal information about our customers to anyone, including other affiliated American General companies or third parties, except as permitted by law. . We do not sell nonpublic personal information about our customers to third- parties who are not part of the American General family of companies. . We may disclose all of the types of nonpublic personal information we collect when needed, to: (i) affiliated companies, agents, employees, representa- tives, and third parties that market our services and products, and adminis- ter and service customer accounts on our behalf, (ii) financial service prov- iders, or (iii) other financial institutions with whom we have joint market- ing agreements. . Examples of the types of companies and individuals to whom we may disclose nonpublic personal information include, but are not limited to, banks, third- party administrators, registered broker/dealers, auditors, regulators, and transfer agents. Customers of Broker/Dealers . If you own shares of the Funds through a financial intermediary such as a broker/dealer, bank or trust company, you may receive the privacy policy of the financial intermediary that would address how it shares your nonpublic personal information with nonaffiliated third parties. Changes in Privacy Policy . We reserve the right to change any of our privacy policies and related proce- dures at any time, in accordance with applicable federal and state laws. You will receive appropriate notice if our Privacy Policy changes. Other Information Mailings to Shareholders To reduce expenses and to note our concern for the environment, we may deliver a single copy of most financial reports, proxy and information statements and prospectuses to investors who share an address, even if the accounts are regis- tered under different names. If you would like to receive separate mailings, please call us and we will begin individual delivery within 30 days. In most cases, we also will deliver account statements for all the investors in a household in a single envelope. ------- 54 Financial Highlights [LOGO OF FINANCIAL HIGHLIGHTS] The financial highlights tables are intended to help you understand each Fund's financial performance for the past five years or, if shorter, the period of a Fund's operations. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the return that an investor would have earned or lost on an investment in a Fund (assuming reinvestment of all dividends and distributions). This information has been derived from each Fund's financial statements, which have been audited by either PricewaterhouseCoopers LLP (Growth & Income Fund, Large Cap Growth Fund, Mid Cap Growth Fund, Science & Technology Fund, Small Cap Growth Fund, International Equity Fund, Balanced Fund, Core Bond Fund, Strategic Income Fund, and the Money Market Fund) or by Ernst & Young LLP (Mid Cap Value Fund, Socially Responsible Fund, Aggressive Growth LifeStyle Fund, Conservative Growth LifeStyle Fund, Moderate Growth LifeStyle Fund, and the High Yield Bond Fund). Since there have been no sales of Institution Class I shares as of October 31, 2000 for the Small Cap Index Fund, Stock Index Fund, Global Equity Fund, International Small Cap Fund and U.S. Government Securities Fund, there are no financial highlights for these Funds. The annual report of PricewaterhouseCoopers LLP, along with the above listed funds' financial statements, is included in the Trust's annual report, which is available upon request. - ------- 55 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Growth & Income Fund -------------------- Class I -------------------- 7/10/00* to 10/31/00** - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $28.25 - -------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.02) Net realized and unrealized gain/(loss) on investments and foreign currency (1.12) ------------- Total from investment operations (1.14) ------------- Distributions Dividends from net investment income Distributions from realized capital gains ------------- Total distributions - -------------------------------------------------------------------------------- Net Asset Value, End of Period $27.11 - -------------------------------------------------------------------------------- Total Return (4.04%)+ - -------------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------------- Net assets, end of period (000's) $10,267 - -------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.27%# - -------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (0.26%)# - -------------------------------------------------------------------------------- Portfolio turnover rate 31%+ - -------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.44%# - --------------------------------------------------------------------------------
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Large Cap Growth Fund (formerly Growth Equity Fund) ------------------- Class I ------------------- 7/10/00* to 10/31/00* - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $22.08 - -------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.03) Net realized and unrealized gain/(loss) on investments and foreign currency (1.93) ------------- Total from investment operations (1.96) ------------- Distributions Dividends from net investment income Distributions from realized capital gains (1.70) ------------- Total distributions (1.70) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $ 18.42 - -------------------------------------------------------------------------------- Total Return (9.04%)+ - -------------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------------- Net assets, end of period (000's) $19,117 - -------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.07%# - -------------------------------------------------------------------------------- Ratio of net investment income/(loss) to average net assets (0.47%)# - -------------------------------------------------------------------------------- Portfolio turnover rate 196%+ - -------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.64%# - --------------------------------------------------------------------------------
* Commencement of Operations ** Net investment income per share has been calculated using the average share method # Annualized + Non-annualized -------- 56 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Mid Cap Growth Fund (formerly Small/Mid Cap Fund) ------------------- Class I ------------------- 7/10/00* to 10/31/00** - ------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $21.70 - ------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.08) Net realized and unrealized gain/(loss) on investments and foreign currency (0.15) ------------------- Total from investment operations (0.23) ------------------- Distributions Distributions from realized capital gains (3.50) - ------------------------------------------------------------------------------- Net Asset Value, End of Period $17.97 - ------------------------------------------------------------------------------- Total Return (0.85%)+ - ------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------- Net assets, end of period (000's) $11,647 - ------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.37%# - ------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (1.14%)# - ------------------------------------------------------------------------------- Portfolio turnover rate 210%+ - ------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.67%# - -------------------------------------------------------------------------------
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Mid Cap Value Fund/1/ --------------------------- Class I --------------------------- Year Year Ended Ended 10/31/00** 10/31/99 - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $11.95 $10.00 - -------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.02) 0.07 Net realized and unrealized gain/(loss) on investments and foreign currency 3.89 1.94 ----------------------------- Total from investment operations 3.87 2.01 ----------------------------- Distributions Dividends from net investment income (0.06) Distributions from realized capital gains (2.24) ----------------------------- Total distributions (2.24) (0.06) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $13.58 $11.95 - -------------------------------------------------------------------------------- Total Return 36.17% 20.18% - -------------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------------- Net assets, end of period (000's) $11,501 $1,507 - -------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.49% 1.17% - -------------------------------------------------------------------------------- Ratio of net investment income/(loss) to average net assets (0.17%) 0.64% - -------------------------------------------------------------------------------- Portfolio turnover rate 191% 177% - -------------------------------------------------------------------------------- Expense ratio before expense reimbursement by advisor 1.78% 2.51% - --------------------------------------------------------------------------------
/1/The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 Mid Cap Value Fund, which was reorganized into North American Mid Cap Value Fund on that date. * Commencement of Operations ** Net investment income per share has been calculated using the average share method # Annualized + Non-annualized - -------- 57 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Science & Technology Fund/1/ ---------------------------- Class I ---------------------------- 3/01/00* to 10/31/00** - ------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $10.00 - ------------------------------------------------------------------------------ Investment Operations: Net investment income/(loss) (0.03) Net realized and unrealized gain/(loss) on investments and foreign currency (1.89) ---------------------------- Total from investment operations (1.92) - ------------------------------------------------------------------------------ Net Asset Value, End of Period $8.08 - ------------------------------------------------------------------------------ Total Return (19.20%)+ - ------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------ Net assets, end of period (000's) $539 - ------------------------------------------------------------------------------ Ratio of total expenses to average net assets 1.20%# - ------------------------------------------------------------------------------ Ratio of net investment income/(loss) to average net assets (0.48%)# - ------------------------------------------------------------------------------ Portfolio turnover rate 120%+ - ------------------------------------------------------------------------------ Expense ratio before expense reimbursement by advisor 1.88%# - ------------------------------------------------------------------------------
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Small Cap Growth Fund (formerly Emerging Growth Fund) ------------------ Class I ------------------ 7/10/00* to 10/31/00** - ------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $19.82 - ------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.07) Net realized and unrealized gain/(loss) on investments and foreign currency (1.42) ------------------ Total from investment operations (1.49) Distributions Distributions from realized capital gains (1.00) - ------------------------------------------------------------------------------- Net Asset Value, End of Period $17.33 - ------------------------------------------------------------------------------- Total Return (7.34%)+ - ------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------- Net assets, end of period (000's) $14,154 - ------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.11%# - ------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets (0.37%)# - ------------------------------------------------------------------------------- Portfolio turnover rate 222%+ - ------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.69%# - -------------------------------------------------------------------------------
/1/The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 Science & Technology Fund, which was reorganized into North American Science & Technology Fund on that date. * Commencement of Operations ** Net investment income per share has been calculated using the average month- end share method # Annualized + Non-annualized -------- 58 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Socially Responsible Fund/1/ -------------------------------- Class I -------------------------------- Year Year Ended Ended 10/31/00** 10/31/99 - ------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $ 12.16 $10.00 - ------------------------------------------------------------------------------ Investment Operations: Net investment income/(loss) 0.11 0.11 Net realized and unrealized gain/(loss) on investments and foreign currency 0.23 2.16 --------------------------------- Total from investment operations 0.34 2.27 --------------------------------- Distributions Dividends from net investment income (0.08) (0.11) Distributions from realized capital gains (0.49) - --------------------------------- Total distributions (0.57) (0.11) - ------------------------------------------------------------------------------ Net Asset Value, End of Period $11.93 $12.16 - ------------------------------------------------------------------------------ Total Return 2.72% 22.73% - ------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------ Net assets, end of period (000's) $5,966 $2,098 - ------------------------------------------------------------------------------ Ratio of total expenses to average net assets 0.88% 0.68% - ------------------------------------------------------------------------------ Ratio of net investment income to average net assets 0.97% 0.97% - ------------------------------------------------------------------------------ Portfolio turnover rate 52% 24% - ------------------------------------------------------------------------------ Expense ratio before expense reimbursement by advisor 1.25% 1.89% - ------------------------------------------------------------------------------
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International Equity Fund ------------------------- Class I ------------------------- 7/10/00* to 10/31/00** - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $11.74 - -------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) (0.01) Net realized and unrealized gain/(loss) on investments and foreign currency (1.26) ------------------------- Total from investment operations (1.27) ------------------------- Distributions Dividends from net investment income Distributions from realized capital gains - ------------------------- Total distributions - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.47 - -------------------------------------------------------------------------------- Total Return (10.82%)+ - -------------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------------- Net assets, end of period (000's) $16,656 - -------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.39%# - -------------------------------------------------------------------------------- Ratio of net investment income/(loss) to average net assets (0.19%)# - -------------------------------------------------------------------------------- Portfolio turnover rate 126% - -------------------------------------------------------------------------------- Expense ratio before expense reimbursement by advisor 1.83%# - --------------------------------------------------------------------------------
/1/The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 Socially Responsible Fund, which was reorganized into North American Socially Responsible Fund on that date. * Commencement of Operations ** Net investment income per share has been calculated using the average month- end share method # Annualized + Non-annualized - -------- 59 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Balanced Fund ------------- Class I ------------- 7/10/00* to 10/31/00** - -------------------------------------------------------------------------- Net Asset Value, Beginning of Period $9.34 - -------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.14 Net realized and unrealized gain/(loss) on investments and foreign currency (0.04) ------------- Total from investment operations 0.10 ------------- Distributions Dividends from net investment income - Distributions from realized capital gains - ------------- Total distributions - - -------------------------------------------------------------------------- Net Asset Value, End of Period $9.45 - -------------------------------------------------------------------------- Total Return 1.07%+ - -------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------- Net assets, end of period (000's) $5,923 - -------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.41%# - -------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 1.47%# - -------------------------------------------------------------------------- Portfolio turnover rate 217%+ - -------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.54%# - --------------------------------------------------------------------------
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Core Bond Fund (formerly Investment Quality Bond Fund) ----------------------- Class I Class II ----------- ----------- 7/10/00* to 7/10/00* to 10/31/00** 10/31/99** - ------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $9.65 $9.64 - ------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.19 0.19 Net realized and unrealized gain/(loss) on investments and foreign currency (0.02) (0.03) ----------------------- Total from investment operations 0.17 0.16 ----------------------- Distributions Dividends from net investment income (0.20) (0.20) - ------------------------------------------------------------------------------- Net Asset Value, End of Period $9.62 $9.60 - ------------------------------------------------------------------------------- Total Return 1.85%+ 1.81%+ - ------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------- Net assets, end of period (000's) $19,971 $317,842 - ------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.16%# 0.95%# - ------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 6.18%# 6.39%# - ------------------------------------------------------------------------------- Portfolio turnover rate 94%+ 94%+ - ------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.16%# 0.96%# - -------------------------------------------------------------------------------
* Commencement of Operations ** Net investment income per share has been calculated using the average share method # Annualized + Non-annualized -------- 60 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
High Yield Bond Fund/1/ ---------------------------- Class I ---------------------------- Year Year Ended Ended 10/31/00** 10/31/99 - ------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $9.43 $10.00 - ------------------------------------------------------------------------------ Investment Operations: Net investment income/(loss) 0.93 0.83 Net realized and unrealized gain/(loss) on investments and foreign currency (0.90) (0.57) ------------------------------- Total from investment operations 0.03 0.26 ------------------------------- Distributions Dividends from net investment income (0.90) (0.83) - ------------------------------------------------------------------------------ Net Asset Value, End of Period $8.56 $9.43 - ------------------------------------------------------------------------------ Total Return 0.04% 2.44% - ------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------ Net assets, end of period (000's) $14 $14 - ------------------------------------------------------------------------------ Ratio of total expenses to average net assets 1.22% 1.13% - ------------------------------------------------------------------------------ Ratio of net investment income to average net assets 10.14% 5.57% - ------------------------------------------------------------------------------ Portfolio turnover rate 57% 72% - ------------------------------------------------------------------------------ Expense ratio before expense reimbursement by advisor 1.79% 2.05% - ------------------------------------------------------------------------------
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Strategic Income Fund ----------- Class I ----------- 7/10/00* to 10/31/00 - ------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $8.22 - ------------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.20 Net realized and unrealized gain/(loss) on investments and foreign currency (0.20) ----------- Total from investment operations - ----------- Distributions Dividends from net investment income (0.22) Distributions from realized capital gains - ----------- Total distributions (0.22) - ------------------------------------------------------------------------------- Net Asset Value, End of Period $8.00 - ------------------------------------------------------------------------------- Total Return (0.10%)+ - ------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------- Net assets, end of period (000's) $2,636 - ------------------------------------------------------------------------------- Ratio of total expenses to average net assets 1.45%# - ------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets 7.87%# - ------------------------------------------------------------------------------- Portfolio turnover rate 46%+ - ------------------------------------------------------------------------------- Expense ratio before expense reimbursement by adviser 1.71%# - -------------------------------------------------------------------------------
/1/The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 High Yield Bond Fund, which was reorganized into North American High Yield Bond Fund on that date. * Commencement of Operations ** Net investment income per share has been calculated using the average month- end share method # Annualized + Non-annualized - -------- 61 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Money Market Fund ----------------- Class I ----------------- 7/10/00* to 10/31/00 - ------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $1.00 - ------------------------------------------------------------------------------ Investment Operations: Net investment income/(loss) 0.02 Distributions Dividends from net investment income (0.02) - ------------------------------------------------------------------------------ Net Asset Value, End of Period $1.00 - ------------------------------------------------------------------------------ Total Return 1.84%+ - ------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------ Net assets, end of period (000's) $6,125 - ------------------------------------------------------------------------------ Ratio of total expenses to average net assets 0.77%# - ------------------------------------------------------------------------------ Ratio of net investment income (loss) to average net assets 5.88%# - ------------------------------------------------------------------------------ Expense ratio before expense reimbursement by adviser 0.80%# - ------------------------------------------------------------------------------
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Aggressive Growth LifeStyle Fund/1/ ------------------- Class I ------------------- Year Year Ended Ended 10/31/00** 10/31/99 - ---------------------------------------------------------------------------- Net Asset Value, Beginning of Period $11.91 $10.00 - ---------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 1.59 0.07 Net realized and unrealized gain/(loss) on investments 0.34 1.90 -------------------- Total from investment operations 1.93 1.97 Distributions Dividends from net investment income (0.96) (0.06) Distributions from realized capital gains (0.15) - -------------------- Total distributions (1.11) (0.06) - ---------------------------------------------------------------------------- Net Asset Value, End of Period $12.73 $11.91 - ---------------------------------------------------------------------------- Total Return 16.22% 19.71% - ---------------------------------------------------------------------------- Ratios/Supplemental Data - ---------------------------------------------------------------------------- Net assets, end of period (000's) $5,004 $1,547 - ---------------------------------------------------------------------------- Ratio of total expenses to average net assets 0.15% 0.10% - ---------------------------------------------------------------------------- Ratio of net investment income to average net assets 12.62% 0.62% - ---------------------------------------------------------------------------- Portfolio turnover rate 53% 9% - ---------------------------------------------------------------------------- Expense ratio before expense reimbursement by advisor 0.15% 0.10% - ----------------------------------------------------------------------------
/1/ The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 Aggressive Growth LifeStyle Fund, which was reorganized into North American Aggressive Growth LifeStyle Fund on that date. * Commencement of Operations ** Net investment income per share has been calculated using the average month- end share method # Annualized + Non-annualized -------- 62 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
Moderate Growth LifeStyle Fund/1/ ------------------- Class I ------------------- Year Year Ended Ended 10/31/00** 10/31/99 - ---------------------------------------------------------------------------- Net Asset Value, Beginning of Period $11.39 $10.00 - ---------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 1.16 0.15 Net realized and unrealized gain/(loss) on investments 0.32 1.38 -------------------- Total from investment operations 1.48 1.53 -------------------- Distributions Dividends from net investment income (0.72) (0.14) Distributions from realized capital gains (0.09) - -------------------- Total distributions (0.81) (0.14) - ---------------------------------------------------------------------------- Net Asset Value, End of Period $12.06 $11.39 - ---------------------------------------------------------------------------- Total Return 13.10% 15.35% - ---------------------------------------------------------------------------- Ratios/Supplemental Data - ---------------------------------------------------------------------------- Net assets, end of period (000's) $5,439 $1,537 - ---------------------------------------------------------------------------- Ratio of total expenses to average net assets 0.15% 0.10% - ---------------------------------------------------------------------------- Ratio of net investment income to average net assets 9.91% 1.42% - ---------------------------------------------------------------------------- Portfolio turnover rate 47% 11% - ---------------------------------------------------------------------------- Expense ratio before expense reimbursement by advisor 0.15% 0.10% - ----------------------------------------------------------------------------
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Conservative Growth LifeStyle Fund/1/ ------------------- Class I ------------------- Year Year Ended Ended 10/31/00** 10/31/99 - ---------------------------------------------------------------------------- Net Asset Value, Beginning of Period $11.03 $10.00 - ---------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.91 0.21 Net realized and unrealized gain/(loss) on investments 0.33 1.02 -------------------- Total from investment operations 1.24 1.23 -------------------- Distributions Dividends from net investment income (0.58) (0.20) Distributions from realized capital gains (0.10) - -------------------- Total distributions (0.68) (0.20) - ---------------------------------------------------------------------------- Net Asset Value, End of Period $11.59 $11.03 - ---------------------------------------------------------------------------- Total Return 11.54% 12.24% - ---------------------------------------------------------------------------- Ratios/Supplemental Data - ---------------------------------------------------------------------------- Net assets, end of period (000's) $4,484 $1,508 - ---------------------------------------------------------------------------- Ratio of total expenses to average net assets 0.15% 0.10% - ---------------------------------------------------------------------------- Ratio of net investment income to average net assets 8.15% 2.01% - ---------------------------------------------------------------------------- Portfolio turnover rate 45% 10% - ---------------------------------------------------------------------------- Expense ratio before expense reimbursement by advisor 0.15% 0.10% - ----------------------------------------------------------------------------
/1/ The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 Conservative Growth Life- Style Fund, which was reorganized into North American Conservative Growth LifeStyle Fund on that date. ** Net investment income per share has been calculated using the average month- end share method - -------- 63 North American Funds 286 Congress Street Boston, Massachusetts 02210 (800) 872-8037 For Additional Information More Information about the Funds, including the SAI, is available to you free of charge. To request additional information: By Telephone Call 1-800-872-8037 By Mail from the Funds (There is no fee) Write to: North American Funds 286 Congress Street Boston, MA 02210 By Mail or in Person from the Public Reference Room of the Securities and Exchange Commission (SEC). (You will pay a duplication fee.) Visit or Write to: SEC's Public Reference Section 450 Fifth Street, NW Washington, DC, 20549-6009 1-800-SEC-0330 Online at the SEC's Internet Site Text-only versions of fund documents can be viewed online or downloaded from http://www.sec.gov. Statement of Additional Information (SAI) The SAI provides additional information about the Trust and the Funds. The SAI and the auditor's report and financial statements included in the Trust's most recent Annual Report to its shareholders are incorporated by reference as part of this Prospectus. Annual and Semi-annual Reports The Annual and Semi-annual Reports describe the Funds' performance, list portfolio holdings and include additional information about the Funds' investments. The Annual Report discusses the market conditions and investment strategies that significantly affected the Fund's performance during their last fiscal year. Investment Company Act File: 811-05797 North American Funds 286 Congress Street, Boston, MA 02210 www.northamericanfunds.com [(background graphics is a listing of all subadvisors)] Privacy Notice Included - ---------------------- 0201:90201I North American Funds Prospectus 2001 Institutional Class II Shares Income Funds Core Bond Fund High Yield Bond Fund The Securities and Exchange Commission has not approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representative to the contrary is a criminal offense. March 1, 2001 [LOGO OF AMERICAN GENERAL FINANCIAL GROUP] Table of Contents Organization of Information This Prospectus includes information about 2 Funds. .Section I includes a summary of each Fund. .Section II includes additional information about the Funds' investment strategies, additional risk information and information about the Funds' management. .Section III includes information about how to invest and manage your North American Funds account. Section I: Summaries of the Funds...................... Page 1 .Investment Objective .Principal Investment Strategies .Main Investing Risks .Investment Performance .Description of Main Risks North American Funds Core Bond Fund...................................... Page 2 High Yield Bond Fund................................ Page 3 Section II: Other Information about Each Fund.......... Page 6 .Fees and Expenses .More Information About Investment Strategies .Other Risks of Investing .Fund Management Section III: Investing in the Funds.................... Page 12 This section includes the information you need about how to invest and how to redeem shares. It also includes other important information about pricing of fund shares, dividends and distributions and taxes. Section IV: Privacy Notice and Other Information....... Page 16
Additional Information If you'd like information additional to that included in this Prospectus, the back cover lists a number of places to call or to visit for additional materials. Section I: Fund Summaries North American Funds (the "Trust") is a group of mutual funds that includes 24 separate investment portfolios, or Funds. Each Fund has a specific investment objective. Each Fund also has a subadvisor, a firm responsible for making investment decisions for the Fund. This Prospectus includes information about Institutional Class II shares for 2 of the Funds. The summaries on the next 2 pages describe each Fund's investment objective and principal investment strategies, list the main risks of investing in the Fund, and show the Fund's past investment performance. Explanations of the main risks of investing in each Fund starts on page 7. Below the Funds' descriptions are a bar chart and a table. The bar chart shows each Fund's annual return of one class of shares for each full calendar year in the life of the Fund. For the Core Bond Fund, the class shown in the bar chart (Class A shares) is not offered by this Prospectus, but the performance would have been substantially similar for Institutional Class II shares of the same Fund, differing only to the extent that the classes have different expenses. The bar chart does not reflect any sales charges that you may be required to pay upon purchase or redemption of a Fund's shares. Any sales charge will reduce your return. The table (the Average Annual Total Return Table) following each bar chart shows how that Fund's average annual returns for different periods, depending on when the Fund began operations, compared to returns of a broad-based securities market index. Like the bar chart, in certain cases the table shows performance information for either Class A shares or Class C shares, depending on the Fund, neither of which are offered by this Prospectus. Where applicable, the table reflects sales charges, including the maximum initial sales charge for Class A shares, and the maximum applicable deferred sales charge for Class C shares. A Fund's bar chart and table provide indications of the historical risk/return of an investment in the Fund. It is important to remember that past performance does not predict future performance and that as with any investment, it is possible to lose money by investing in the Funds. An investment in either of the Funds is not a deposit in a bank and is not insured by the Federal Deposit Insurance Corporation or any other government agency. - ------ 1 Core Bond Fund (formerly Investment Quality Bond Fund) Investment Goal and Strategies The investment objective of the Core Bond Fund is to provide a high level of current income consistent with the maintenance of principal and liquidity. American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor, invests at least 65% of the Fund's total assets in medium to high quality fixed-income securities, or in securities issued or guaranteed by the U.S. Gov- ernment, mortgage-backed, or asset-backed securities (U.S. Government securi- ties are securities issued or guaranteed by the U.S. Government which are sup- ported by the full faith and credit of the U.S. Government, or by the right of the issuer to borrow from the U.S. Treasury, or by the credit of the issuing government agency, or by the authority of the U.S. Government to purchase obli- gations of the agency). A portion of the 65% may be invested in U.S. dollar- denominated fixed-income securities issued by foreign issuers, although the Fund currently intends to limit these investments to no more than 40% of its total assets. These fixed-income securities will be rated investment grade or higher. AGIM will not be required to dispose of a security if its rating is downgraded, however. Up to 35% of the Fund's total assets may be invested in interest-bearing short-term investments, such as commercial paper, bankers' acceptances, bank certificates of deposit, or other cash equivalents and cash. Main Risks .Credit Risk (the risk that the companies in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations, including, in particular, the risks associated with junk bonds) .Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) .Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) .Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) .Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) .Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the vari- ability of the Fund's historical returns. For periods prior to the inception of Institutional Class II shares (7/7/00), the table also shows estimated historical performance for Institutional Class II shares based on the performance of Class A shares adjusted to reflect that there are no sales charges paid by Institutional Class II shares. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. Effective March 1, 2001, the Fund has selected the Lehman Brothers Aggregate Index as its benchmark for index comparison purposes, rather than the index comprised of 50% Lehman Brothers Corporate/50% Lehman Brothers Government. The Lehman Brothers Aggregate Index better matches the securities in which the Fund may invest, and will better align the goals of the Fund with its benchmark index, by focusing on those medium to high grade fixed-income securities in the Fund's portfolio. The Lehman Brothers Aggregate Index is a broad market index that represents securities that are U.S. domestic, taxable, and dollar denominated. The index covers the U.S. fixed rate bond market rated investment grade or higher by Moody's Investor Service, Standard & Poor's Corporation or Fitch Investors Services, in that order, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. The Lehman Brothers Government Index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more and publicly issued debt of U.S. Government agencies, quasi-federal corporations, and corporate or foreign debt. The Lehman Brothers Corporate Index includes publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the maturity, liquidity and quality requirements. CORE BOND FUND Calendar Year Total Returns for A shares Annual Total Return 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 8.27% 9.29% -5.43% 18.79% 2.17% 9.28% 7.61% -2.55% 7.94% Best quarter: quarter ended 6/30/95 6.23% Worst quarter: quarter ended 3/31/94 -4.53% - -------------------------------------------------------------------------------- CORE BOND Average Annual Total Returns as of 12/31/00
Past One Year Past Five Years Life of Fund (since 5/1/91) - -------------------------------------------------------------------- Class A 2.81% 3.78% 6.22% - -------------------------------------------------------------------- Institutional 7.94% 4.79% 6.75% Class II - -------------------------------------------------------------------- Lehman Brothers 11.63% 6.46% 7.80% Aggregate Index - -------------------------------------------------------------------- 50% Lehman 11.32% 6.11% 7.97% Brothers Corporate Index and 50% Lehman Brothers Government Index
- ------------------------------------------ ------- 2 High Yield Bond Fund Investment Goal and Strategies The High Yield Bond Fund seeks the highest possible total return consistent with conservation of capital through investment in a diversified portfolio of high yielding, high risk fixed-income securities. To achieve this objective, American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor, invests at least 65% of the Fund's total assets in below-investment grade U.S. and foreign junk bonds. These high yield- ing, high risk fixed-income securities are rated below Baa3 by Moody's and BBB- by S&P. Up to 15% can be rated below Caa3 by Moody's or CCC- by S&P. The Fund may also invest up to 35% of total assets in below-investment grade foreign fixed-income securities. Main Risks .Credit Risk (the risk that the issuers in which the Fund invests, or with which it does business, will fail financially or otherwise fail to honor their obligations, including, in particular, risks associated with junk bonds) .Currency Risk (the risk that the Fund's investments in securities denominated in foreign currencies will decline as a result of changes in exchange rates) .Foreign Investment Risk (the risk that the value of the Fund's foreign invest- ments will decline as a result of foreign political, social or economic changes) .Interest Rate Risk (the risk that the value of the Fund's debt securities will decline as a result of a change in interest rates) .Liquidity Risk (the risk that the Fund may be unable to sell a security because there are too few people who actively trade that security on a regular basis) .Management Risk (the risk that the Fund's subadvisor may not produce the desired investment results) The bar chart and table provide an indication of risk by showing the variability of the Fund's historical returns. Performance information shown for periods prior to July 7, 2000 is that of the corresponding series of American General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective, investment strategies and policies as the Fund, and was also subadvised by AGIM. No sales charge has been applied to the index used for comparison in the table. The Fund's past performance does not necessarily indicate how it will perform in the future. HIGH YIELD BOND FUND Calendar Year Total Returns for II Shares Annual Total Return 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 4.58% -6.43% Best quarter: quarter ended 3/31/99 3.89% Worst quarter: quarter ended 12/31/00 -6.86% - -------------------------------------------------------------------------------- HIGH YIELD BOND Average Annual Returns as of 12/31/00
Past One Year Life of Fund (since 11/2/98) - -------------------------------------------------------- Institutional Class II -6.43% -0.47% - -------------------------------------------------------- Salomon Smith Barney High Yield Market Index -5.68% 0.32%
- ------------------------------------------------------------------------------- - ------- 3 Descriptions of Main Risks The value of your investment in a Fund can change for many reasons, and may decrease. The primary reasons for possible decreases in a Fund's value are called "Main Risks," and are explained in this section. Section II of the Prospectus includes more information about other risks that could affect the Funds' values. Credit Risk Credit risk is the risk that the issuer or the guarantor (the entity that agrees to pay the debt if the issuer cannot) of a debt or fixed-income securi- ty, or the counterparty to a derivatives contract or a securities loan, will not repay the principal and interest owed to the investors or otherwise honor its obligations. There are different levels of credit risk. Debt securities rated in one of the four highest rating categories by a rating agency (and com- parable unrated securities) are known as "investment grade." Debt securities rated below the four highest rating categories by a rating agency (and compara- ble unrated securities) are known as "lower-rated" or "junk bonds." Funds that invest in lower-rated securities have higher levels of credit risk. Lower-rated or unrated securities of equivalent quality have very high levels of credit risk. Securities that are highly rated have lower levels of credit risk. Funds may be subject to greater credit risk because they may invest in debt securities issued in connection with corporate restructurings by highly leveraged (indebted) issuers and in debt securities not current in the payment of interest or principal, or in default. Funds that invest in foreign securities are also subject to increased credit risk because of the difficulties of requiring foreign entities, including issuers of sovereign (national) debt, to honor their contractual commitments, and because a number of foreign governments and other issuers are already in default. Currency Risk Funds that invest in securities that are denominated in and/or are receiving revenues in foreign currencies are subject to currency risk. Currency risk is the risk that foreign currencies will decline in value relative to the U.S. dollar. In the case of hedging positions, it is the risk that the U.S. dollar will decline in value relative to the currency hedged. Foreign Investment Risk There are risks associated with investing in foreign securities. These risks include unforeseen changes in tax laws, political changes, and changes in for- eign currency values and exchange rates. There may be less publicly available information about foreign issuers. Foreign issuers, including foreign branches of U.S. banks, are subject to different accounting and reporting requirements, which are generally less extensive than the requirements for domestic issuers. Foreign stock markets generally have substantially less volume than the U.S. exchanges and securities of foreign issuers are generally less liquid and more volatile, relative to U.S. issuers. There is frequently less governmental regulation of foreign exchanges, broker- dealers and issuers than in the United States, and brokerage costs may be high- er. In addition, investments in foreign companies may be subject to the possi- bility of nationalization or other changes in policy. Policy changes may allow foreign governments to withhold dividends, expropriate (confiscate, or keep) investment returns, or raise taxes to extremely high levels, among other things. Also, should a foreign issuer default, it may be difficult to recover anything in a bankruptcy proceeding. The possibility of political instability or diplomatic developments in foreign countries could trigger nationalization of companies and industries, expropria- tion (confiscation of property), extremely high levels of taxation, and other negative developments. In the event of nationalization, expropriation or other confiscation, a Fund could lose its entire investment. Funds that invest in sovereign debt obligations are exposed to the risks of political, social and economic change in the countries that issued the bonds. The above risks can be more extreme for investments in emerging markets. A country that is in the initial stages of its industrial cycle is considered to be an emerging markets country. Such countries are subject to more economic, political, and business risk than major industrialized nations, and the securi- ties issued by companies located there may have more volatile share prices and be less liquid than those of securities issued by companies in countries at later stages of the industrial cycle. Interest Rate Risk (Market Risk) Interest rate risk, or market risk, is the risk that a change in interest rates will negatively affect the value of a security. This risk applies primarily to debt securities such as bonds, notes and asset-backed securities. Debt securi- ties are obligations of the issuer to make payments of principal and/ or inter- est on future dates. As interest rates rise, an investment in a Fund can lose value, because ------- 4 the value of the securities the Fund holds may fall. Market risk is generally greater for Funds that invest in debt securities with longer maturities. This risk may be increased for Funds that invest in mort- gage-backed or other types of asset-backed securities that are often prepaid. Even Funds that invest in the highest quality debt securities are subject to interest rate risk. Liquidity Risk Liquidity risk is the risk that a Fund will not be able to sell a security because there are too few people who actively buy and sell, or trade, that security on a regular basis. A Fund holding an illiquid security may not be able to sell the security at its current price. Liquidity risk increases for Funds investing in derivatives, foreign investments or restricted securities. Management Risk Management risk is the risk that the subadvisor of a Fund, despite using vari- ous investment and risk analysis techniques, may not produce the desired investment results. - ------- 5 Section II: Fees and Expenses Institutional Class II Shares This table describes the fees and expenses that you may pay if you invest in the Funds. Shareholder Fees (fees paid directly from your investment)
- ----------------------------------------------------------------------- Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None Maximum Deferred Sales Charge (as a percentage of original purchase price or redemption price, whichever is lower) None Annual Fund Operating Expenses (expenses that are deducted from Fund assets) Fund - ----------------------------------------------------------------------- Core Bond Fund (formerly Investment Quality Bond) Management Fees 0.60% Other Expenses 0.56% Total Annual Fund Operating Expenses 1.16% Fee Waiver and/or Expense Reimbursement 0.18% Net Expenses/1/ 0.98% - ----------------------------------------------------------------------- High Yield Bond Fund Management Fees 0.83% Other Expenses 0.96% Total Annual Fund Operating Expenses 1.79% Fee Waiver and/or Expense Reimbursement 0.64% Net Expenses/1/ 1.15% - -----------------------------------------------------------------------
1 Reflects AGAM's contractual obligation to waive and to the extent necessary reimburse certain fees and expenses of the Fund through February 28, 2002. By translating "Total Annual Fund Operating Expenses" into dollar amounts, these examples help you compare the costs of investing in a particular Fund, or a particular class of shares, with the costs of investing in other mutual funds. The examples assume that you: . Invest $10,000 in a Fund for the time period indicated and then redeem all of your shares at the end of those periods. . Your investment earns a 5% return each year and that each Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
Fund 1 Year 3 Years 5 Years 10 Years - ----------------------------------------------------- Core Bond $100 $312 $542 $1,201 - ----------------------------------------------------- High Yield Bond 117 365 633 1,398 - -----------------------------------------------------
------- 6 More Information About Investment Strategies and Risks This Prospectus does not attempt to disclose all of the different investment techniques that the Funds might use, or all of the types of securities in which the Funds might invest. As with any mutual fund, investors must rely on the professional judgment and skill of the Funds' management. A subadvisor may choose not to use some or all of the investment techniques available to a Fund, and these choices may cause the Fund to lose money or not achieve its investment objective. Each Fund has a unique investment objective (see the Fund Summaries) that it tries to achieve through its investment strategies. The investment objective of the Core Bond Fund cannot be changed without the approval of the holders of a majority of the outstanding shares of the Fund. The investment objective of the High Yield Bond Fund may be changed by the Trustees. Except as noted for certain investment restrictions, the strategies a Fund uses to achieve its investment objective also may be changed by the Trustees without approval of the shareholders. Because each Fund is different, they have different invest- ment policies and risks, and will also have different returns over time. This section provides additional information about the Funds, and should be read in conjunction with the Fund Summaries. Core Bond Fund Credit research on corporate bonds includes examining both quantitative (math- ematical) and qualitative criteria established by AGIM. These criteria include an issuer's industry, operating and financial profiles, business strategy, management quality, and projected financial and business conditions. Up to 10% of the Fund's total assets may be invested in lower quality fixed- income securities, those rated below Baa3 by Moody's and BBB by S&P or comparable investment quality at the time of purchase. Equity securities, including common or preferred stocks, convertible securities, and warrants, may comprise up to 20% of the Fund's total assets. The Fund may invest in ADRs, foreign currency, futures and options, investment companies, loan participations, real estate securities, repurchase agreements, reverse repurchase agreements, dollar rolls, structured securities, variable amount master demand notes, variable rate demand notes, and when-issued securities. The Fund may invest in derivatives. The Fund may invest up to 35% in investment grade securities, those rated Baa3 or higher by Moody's and BBB- or higher by S&P. In addition, the Fund may invest up to 15% in zero coupon securities (securities not paying current cash interest), and up to 20% of total assets in equity securities. Equity securi- ties include common or preferred stocks, warrants, and convertible securities. AGIM is not required to dispose of a bond that is downgraded to below-invest- ment grade. - ------- 7 Other Risks of Investing in the North American Funds Although a Fund may have the flexibility to use some or all of the investments or strategies described in this Prospectus and the Statement of Additional Information, its subadvisor may choose not to use these investments or strate- gies for a variety of reasons. These choices may cause a Fund to miss opportu- nities, lose money or not achieve its goal. High Yield/High Risk Securities High yield securities (often known as "junk bonds") include debt instruments that have an equity security attached to them. Securities rated below invest- ment grade and comparable unrated securities offer yields that fluctuate over time, but generally offer higher yields than do higher rated securities. Howev- er, securities rated below investment grade also involve greater risks than higher- rated securities. Under rating agency guidelines, medium- and lower- rated securities and comparable unrated securities will likely have some qual- ity and protective characteristics that are outweighed by large uncertainties or major risk exposures to adverse conditions. Some of the debt securities in which the Funds may choose to invest may be, or may be similar to, the lowest rated non-subordinated debt (securities rated C by Moody's or CCC or lower by S&P). This type of security is very risky, as issuers may not have the ability to repay principal and interest, and may even default. If this should occur, the value of shares of the Fund holding them would likely fall. Illiquid Securities An illiquid security is one that may not be frequently traded or cannot be dis- posed of promptly within seven days and in the usual course of business without taking a materially reduced price. Illiquid securities include, but are not limited to, time deposits and repurchase agreements not maturing within seven days and restricted securities. Each Fund may invest up to 15% of its net assets in illiquid securities. This restriction applies at all times to all assets. A restricted security is one that has not been registered with the Securities and Exchange Commission ("SEC") and, therefore, cannot be sold to the general public. Under procedures adopted by the Trust's Trustees, certain restricted securities may be deemed liquid, and will not be counted toward the 15% limits. Lending Fund Securities The Core Bond Fund and the High Yield Bond Fund may lend up to 33% and 33 1/3%, respectively, of its total portfolio assets, or securities, to brokers, dealers and other financial institutions. These loans must be callable (the Fund may ask that the loan be repaid in full) at any time by the Fund. The loans must be at all times fully secured by cash, or liquid assets and marked-to-market (priced at market value) to the value of loaned securities on a daily basis. As with any extensions of credit, there may be risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of Fund securities will only be made to firms deemed by the subadvisors to be creditworthy. Leverage Risk Funds that borrow money to buy securities are using leverage. Leverage risk is the risk that leverage, or debt, will enable a Fund to buy more of a security that falls in value. In this case, the Fund would still need to repay the money it borrowed. Funds can create leverage, or borrow money, by using different types of techniques including reverse repurchase agreements, dollar rolls, and derivatives including inverse floating rate instruments. ------- 8 Hedging and Other Strategic Transactions Individual Funds may be authorized to use a variety of investment strategies described below for hedging purposes only, including hedging various market risks (such as interest rates, currency exchange rates and broad or specific market movements), and managing the effective maturity or duration of debt instruments held by the Fund. Hedging is simply believing that certain securi- ties will fall, or rise, in value, and structuring transactions that take advantage of those changes. These transactions are generally used to protect against possible changes in the market value of securities a Fund already owns or plans to buy, to protect unrealized gains or to improve the Fund's return in some way. Where allowed, individual Funds may purchase and sell (or write) exchange- listed and over-the-counter put and call options on securities, index futures contracts, financial futures contracts and fixed-income indices and other financial instruments, enter into financial futures contracts, enter into interest rate transactions, and enter into currency transactions. This category includes derivative transactions. A "derivative" is generally defined as an instrument whose value is based upon, or derived from, some underlying index or rate. Interest rate transactions may include swaps, caps, floors and collars, and currency transactions may include currency forward contracts, currency futures contracts, currency swaps and options on currencies or currency futures contracts. Frequent Trading A Fund's investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and a higher amount of short-term capital gains, which are generally taxable to you at your ordinary income tax rate. Temporary Defensive Strategies A Fund's subadvisor may at certain times decide that pursuing the Fund's investment strategies is inconsistent with market conditions. A subadvisor may then employ defensive strategies designed mostly to limit losses. However, the subadvisor may choose not to use defensive strategies, even in volatile or unsettled market conditions. Such defensive strategies may cause the Fund to miss opportunities or to not achieve its goal. - ------- 9 Management of the Funds Under the federal securities laws, Massachusetts law and the Trust's Agreement and Declaration of Trust and By-Laws, the business and affairs of the Trust are managed under the direction of the Trustees. American General Asset Management Corp. ("AGAM"), formerly CypressTree Asset Management Corporation, Inc., is the investment adviser for the Trust. AGAM was formed in 1996 to advise, acquire and distribute mutual funds through broker- dealers, banks and other intermediaries. AGAM's address is 286 Congress Street, Boston, Massachusetts 02210. According to its Advisory Agreement with the Trust (the "Advisory Agreement"), AGAM: .Oversees the administration of all aspects of the business and affairs of the Funds .Selects, contracts with and compensates subadvisors to manage the assets of the Funds .Makes recommendations to the Trustees regarding the hiring, termination and replacement of subadvisors .Reimburses the Fund if the total of certain expenses allocated to any Fund exceeds certain limitations .Reviews the performance of the subadvisors .Periodically reports to the Trustees The following table shows the management fees the Core Bond Fund paid (or, in the case of the High Yield Bond Fund will pay) to AGAM for the last fiscal year under the Advisory Agreement as a percentage of the Fund's average daily net asset value.
Funds Management Fees - ---------------------------------------------------------- Core Bond Fund .60% High Yield Bond Fund 0.825% on the first $200 million 0.725% on the next $300 million 0.675% on assets over $500 million
- ---------------------------------------------------------- Under an order granted to the Funds by the Securities and Exchange Commission, AGAM is permitted to appoint a subadvisor, to create a subadvisory agreement, and to terminate or amend a subadvisory agreement, in each case without share- holder approval. This "Manager of Managers" structure permits the Funds to change subadvisors or the fees paid to subadvisors without the expense and delays associated with obtaining shareholder approval. AGAM has ultimate responsibility under the Manager of Managers structure to oversee the subadvisors, including making recommendations to the Trust regarding the hir- ing, termination and replacement of subadvisors. ------- 10 Subadvisory Agreements American General Investment Management, L.P. ("AGIM") AGIM has been the subadvisor to the Core Bond Fund since March, 2000, and to the High Yield Bond Fund since inception. AGIM was formed in 1998 as a successor to the investment management division of American General Corporation ("American General"), and is an indirect wholly-owned subsidiary of American General. AGIM also provides investment management and advisory services to pension and profit sharing plans, financial institutions and other investors. Accounts managed by AGIM had combined assets, as of December 31, 2000, of approximately $72.2 billion. AGIM is located at 2929 Allen Parkway, Houston, Texas 77019. Albert Gutierrez is Executive Vice President responsible for portfolio management and trading since April, 2000, and is primarily responsible for implementing investment strategies of the Core Bond Fund. Prior to working at AGIM, Mr. Gutierrez was Senior Vice President responsible for non-equity research, trading and various insurance company portfolios with Conseco Capital Management from 1987 to 2000. Investment decisions for the High Yield Bond Fund are made by a team, headed by Gordon Massie. Mr. Massie, Executive Vice President, has been the lead portfolio manager of AGIM or its indirect parent, American General, since August 1985. Currently, Mr. Massie is AGIM's Head of Public High Yield Portfolio Management and Trading. - ------- 11 Section III: Investing in the North American Funds Institutional Classes of Shares Institutional Class II shares of the Core Bond Fund and High Yield Bond Fund are available to you through your employer plan. Institutional Class II shares are available to any qualifying employer plan once the plan establishes a mini- mum account balance of $500 million with the Trust. A plan's account balance is equal at any time to the aggregate of all amounts contributed by the plan to the Trust, less the cost of all redemptions by such plan from the Trust. The Distributor may waive the minimum account balance requirement if it reasonably anticipates that the size of the plan and/or the anticipated amount of contri- butions will present economies of scale. As a participant in an employer retirement plan, you do not purchase Institutional Class II shares of the Funds directly. Rather, Institutional Class II shares of a Fund are purchased for you when you elect to allocate your retirement contributions to a Fund plan that is available as an investment option in your retirement or savings plan. You may be permitted to elect different investment options, alter the amounts contrib- uted to your plan, or change how contributions are allocated among your invest- ment options in accordance with your plan's specific provisions. See your plan administrator or employee benefits office for more details. Investments by individual participants in employer retirement plans are made through their plan sponsor or administrator, who is responsible for transmitting instructions for all orders for the purchase, redemption and exchange of Fund shares. The availability of an investment by a plan participant in the Funds, and the pro- cedures for investing depend upon the provisions of the plan and whether the plan sponsor or administrator has contracted with the Trust or designated agent for special processing services. For more information on how to participate in the Funds through an employee retirement plan, please refer to your plan materials or contact your employee benefits office. Transfer or exchange of balances An employer retirement plan may allow you to exchange all or part of your existing plan balance from one investment option to another. Check with your plan administrator for details on the rules governing exchanges in your plan. Exchanges will be accepted by the Trust only as permitted by your plan. Your plan administrator can explain how frequently exchanges are allowed. The Trust reserves the right to refuse any exchange purchase request. ------- 12 Pricing of Fund Shares The price of the shares of each Fund is the net asset value per share (next determined following receipt of a properly completed order). The net asset value of each Fund is calculated separately and, except as described below, is determined once daily as of the close of regularly scheduled trading on the New York Stock Exchange generally, 4:00 p.m., Eastern Time. The net asset value of each Fund is calculated by dividing the value of the portion of the Fund's securities and other assets attributable to that class, less the liabilities attributable to that class, by the number of shares of that class outstanding. No determination is required on days when the New York Stock Exchange is closed (for example, national holidays). Generally, trading in non-U.S. Government securities as well as U.S. Government securities and money market instruments, is substantially completed each day at various times prior to the close of regularly scheduled trading on the New York Stock Exchange. The values of such securities used in computing the net asset value of the shares of a class of a Fund are generally determined as of such times. Occasionally, events which affect the values of such securities may occur between the times at which they are generally determined and the close of regularly scheduled trading on the Exchange and would therefore not be reflected in the computation of a class's net asset value. If events materially affecting the value of such securities occur during such period, then these securities will be valued at their fair value as determined in good faith by the subadvisors under procedures established and regularly reviewed by the Trustees. Unless you request cash payment, all dividends and distributions will be rein- vested. Both Funds declare and pay capital gains annually. - ------- 13 Dividends and Distributions from North American Funds Both Funds declare income dividends daily and pay monthly: ------- 14 Taxes It is expected that each Fund of the Trust will qualify as a "regulated invest- ment company" under the Internal Revenue Code, as amended. If each Fund qualifies it will not be subject to United States federal income taxes on its net investment income and net capital gain, if any, that it distributes to its shareholders in each taxable year. A Fund's distributions derived from interest, dividends and certain other income, including gains from investments that the Fund held for one year or less, will generally result in taxable ordinary income to the shareholders of the Fund. Distributions of net gains from investments held by a Fund for more than one year are taxable as long-term gains (generally at a 20% rate for non- corporate shareholders). Distributions will be treated as described above for federal income tax purposes whether they are paid in cash or reinvested in additional shares and regardless of how long a shareholder has held shares in the Fund. Distributions are taxed as described in this paragraph even if such distributions economically represent a return of a particular shareholder's investment. Distributions that represent a return of a particular shareholder's investment are likely to occur in respect of shares purchased at a time when a Fund's net asset value reflects gains that are either unrealized, or realized but not distributed. Because a Fund may invest in foreign securities or currencies, it may be required to pay withholding or other taxes to foreign governments on dividends and interest. The investment yield of the Fund's investment in foreign securities or currencies will be reduced by these foreign taxes. Shareholders will bear the cost of any foreign taxes, but may not be able to claim a foreign tax credit or deduction for these taxes for any taxable year, the shareholders will be notified. The ability of the shareholders to utilize such a foreign tax credit is subject to a holding period requirement. In addition, if the Fund invests in securities of passive foreign investment companies, it may be subject to U.S. federal income taxes (and interest on such taxes) as a result of such investments. The investment yield of such investments will be reduced by these taxes and interest. Shareholders will bear the cost of these taxes and interest, but will not be able to claim a deduction for these amounts. The redemption, sale or exchange of Fund shares (including the exchange of shares of one Fund for shares of another) is a taxable event and may result in a gain or loss. Gain or loss, if any, recognized on the sale or other disposi- tion of shares of the Fund will be taxed as a long-term capital gain or loss if the shares are capital assets in the shareholder's hands and if the shareholder held the shares for more than one year. (Such gains are generally taxed at a 20% rate for noncorporate shareholders). If a shareholder sells or otherwise disposes of a share of a Fund before hold- ing it for more than six months, any loss on the sale or other disposition of such share shall be treated as a long-term capital loss to the extent of any capital gain dividends received by the shareholder with respect to such share. Descriptions of tax consequences set forth in this Prospectus and in the State- ment of Additional Information are intended to be a general guide. Investors should consult their tax advisers with respect to the specific tax consequences of an investment in a Fund, including the effect and applicability of state, local, foreign, and other tax laws and the possible effects of changes in fed- eral or other tax laws. This discussion is not intended as a substitute for careful tax planning. - ------ 15 IV: PRIVACY NOTICE The Trust, an affiliate of American General, understands your privacy is important. You have received this notice in accordance with applicable state and federal laws and because you are a current or potential customer of one of the Funds. This notice will help you understand what types of nonpublic personal information - information about you that is not publicly available - we may collect, how we use it, and how we protect your privacy. This notice describes our privacy practices for both current and former customers. TYPES OF NONPUBLIC PERSONAL INFORMATION WE COLLECT AND DISCLOSE . American General's employees, representatives, agents, and selected third parties - companies or individuals not affiliated with American General - may collect nonpublic personal information about our customers, including: --Information provided to us, such as on applications or other forms (account balances, income, assets and marital status). --Information about transactions with us, our affiliates, or third parties. --Information from others, such as employers, and federal and state agencies. PROTECTION OF NONPUBLIC PERSONAL INFORMATION . We restrict access to nonpublic personal information to those employees, agents, representatives or third parties who need to know the information to provide products and services to our customers. . We have policies and procedures that give direction to our employees, agents, and representatives on how to protect and use nonpublic personal information. . We maintain physical, electronic, and procedural safeguards to protect nonpublic personal information. SHARING OF NONPUBLIC PERSONAL INFORMATION . We do not share nonpublic personal information about our customers to anyone, including other affiliated American General companies or third parties, except as permitted by law. . We do not sell nonpublic personal information about our customers to third- parties who are not part of the American General family of companies. . We may disclose all of the types of nonpublic personal information we collect when needed, to: (i) affiliated companies, agents, employees, representatives, and third parties that market our services and products, and administer and service customer accounts on our behalf, (ii) financial service providers; or (iii) other financial institutions with whom we have joint marketing agreements. . Examples of the types of companies and individuals to whom we may disclose nonpublic personal information include, but are not limited to, banks, insurance companies third-party administrators, registered broker/dealers, auditors, regulators, and transfer agents. CUSTOMERS OF BROKER/DEALERS . If you own shares of the Funds through a financial intermediary such as a broker/dealer, bank or trust company, you may receive the privacy policy of the financial intermediary that would address how it shares your nonpublic personal information with nonaffiliated third parties. CHANGES TO PRIVACY POLICY . We reserve the right to change any of our privacy policies and related procedures at any time, in accordance with applicable federal and state laws. You will receive appropriate notice if our Privacy Policy changes. OTHER INFORMATION MAILINGS TO SHAREHOLDERS To reduce expenses and to note our concern for the environment, we will deliver a single copy of most financial reports, proxy and information statements and prospectuses to investors who share an address, even if the accounts are registered under different names. If you would like to receive separate mailings, please call us and we will begin individual delivery within 30 days. In most cases, we also will deliver account statements for all the investors in a household in a single envelope. ------- 16 Financial Highlights The financial highlights tables are intended to help you understand each Fund's financial performance for the past five years or, if shorter, the period of a Fund's operations. Certain information reflects financial results for a single Fund share. The total return in the table represents the return that an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been derived from each Fund's financial statements, which have been audited by PricewaterhouseCoopers LLP. The annual report of PricewaterhouseCoopers LLP, along with the Funds' financial statements, is included in the Annual Report of the Trust, which is available upon request. - ------- 17 NORTH AMERICAN FUNDS FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) - --------------------------------------------------------------------------------
CORE BOND FUND (FORMERLY INVESTMENT QUALITY BOND FUND) -------------------- CLASS II ------------- 7/10/00* TO 10/31/00** -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.64 -------------- INVESTMENT OPERATIONS: Net investment income/(loss) 0.19 Net realized and unrealized gain/(loss) on investments and foreign currency (0.03) -------------- Total from investment operations 0.16 -------------- DISTRIBUTIONS Dividends from net investment income (0.20) -------------- NET ASSET VALUE, END OF PERIOD $ 9.60 -------------- TOTAL RETURN 1.81%+ -------------- RATIOS/SUPPLEMENTAL DATA -------------- Net assets, end of period (000's) $317,842 -------------- Ratio of total expenses to average net assets 0.95%# -------------- Ratio of net investment income (loss) to average net assets 6.39%# -------------- Portfolio turnover rate 94%+ -------------- Expense ratio before expense reimbursement by adviser 0.96%# --------------
* Commencement of Operations ** Net investment income per share has been calculated using the average share method + Not annualized # Annualized
High Yield Bond Fund -------------------- Class II -------------------- Year Year Ended Ended 10/31/00 10/31/99 - ---------------------------------------------------------------------------- Net Asset Value, Beginning of Period $9.43 $10.00 - ---------------------------------------------------------------------------- Investment Operations: Net investment income/(loss) 0.95 0.86 Net realized and unrealized gain/(loss) on investments and foreign currency (0.91) (0.57) ------ ------ Total from investment operations 0.04 0.29 ------ ------ Distributions Dividends from net investment income (0.92) (0.86) Net Asset Value, End of Period $8.55 $9.43 ------ ------ Total Return 0.30% 2.74% ------ ------ Ratios/Supplemental Data ------ ------ Net assets, end of period (000's) $62,702 $62,506 ------ ------ Ratio of total expenses to average net assets 0.96% 0.88% ------ ------ Ratio ot net investment income to average net assets 10.41% 8.84% ------ ------ Portfolio turnover rate 57% 72% ------ ------ Expense ratio before expense reimbursement by advisor 1.56% 1.35% ------ ------
(1) The financial information for the fiscal periods prior to July 7, 2000 reflect the financial information for the AGSPC2 High Yield Bond Fund, which was reorganized into North American High Yield Bond Fund on that date. ------- 18 North American Funds 286 Congress Street Boston, Massachusetts 02210 (800) 872-8037 Institutional Class II Shares Income Funds Core Bond Fund High Yield Bond Fund For Additional Information More information about the Funds, including the SAI, is available to you free of charge. To request additional information: By Telephone Call 1-800-872-8037 By Mail from the Funds (There is no fee.) Write to: North American Funds 286 Congress Street Boston, MA 02210 By Mail or In Person from the Public Reference Room of the Securities and Exchange Commission (SEC). (You will pay a duplication fee.) Visit or Write to: SEC's Public Reference Section 450 Fifth Street, NW Washington, DC, 20549-6009 1-800-SEC-0330 Online at the SEC's Internet Site Text-only versions of Fund documents can be viewed online or downloaded from http://www.sec.gov. Statement of Additional Information (SAI) The SAI provides additional information about the Trust and the Funds. The SAI and the auditor's report and financial statements included in the Trust's most recent Annual Report to its shareholders are incorporated by reference as part of this Prospectus. Annual and Semi-annual Reports The Annual and Semi-annual Reports describe the Funds' performance, list portfolio holdings and include additional information about the Funds' investments. The Annual Report discusses the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. File No. 811-5797 [0700:90201II NAF 12695II] March 1, 2001 Josephthal JOSEPHTHAL STRATEGIC GROWTH FUND Prospectus ---------------------------------------------- Class A Shares Class B Shares Class C Shares [Art work for Josephthal (front cover) (description - background graphics)] The Securities and Exchange Commission has not approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. [Strategic Growth Fund Logo] North American Funds Table of Contents Organization of Information This Prospectus includes information about the Josephthal Strategic Growth Fund (the "Fund"). Section I: Summary of the Fund........................................ Page 1 . Investment Objective . Principal Investment Strategies . Main Investing Risks Section II: Other Information about the Fund.......................... Page 3 . Fees and Expenses . More Information About Investment Strategies and Risks . Other Risks of Investing . Fund Management Section III: Investing in the Fund.................................... Page 8 This section includes the information you need about how to invest and how to redeem shares. It also includes other important information about sales charges, pricing of fund shares, dividends and distributions, taxes and account privileges. Section IV: Privacy Notice and Other Information...................... Page 15
More Information The back cover of this prospectus lists a number of places to call or to visit if you would like additional information. Section I: Summary of the Fund The summary below describes the investment objective and principal investment strategies of the Fund. This summary also describes the main risks of investing in the Fund. Investment Objective and Strategies The investment objective of the Fund is to seek capital appreciation. To achieve this objective, Josephthal & Co. ("Josephthal"), the Fund's subadvisor, ordinarily invests at least 75% of the Fund's total assets in equity securities of domestic issuers listed on a nationally recognized securities exchange or traded on the Nasdaq system. Josephthal seeks to identify growth companies, which often are small or medium-size capitalization companies, with growth characteristics such as positive earnings comparisons, potential for accelerated growth and market share gains. The Fund may make significant investments in certain sectors. One of these sectors is science and technology, including (but not limited to) companies that provide computer hardware and software, internet infrastructure, communications, telecommunications equipment and service, semiconductor manufacturers, semiconductor capital equipment manufacturers and electronic manufacturing services. Another sector in which the Fund may make significant investments is healthcare, including (but not limited to) biotechnology companies and pharmaceutical manufacturers. The Fund also may make significant investments in specialty retailing and e-commerce, including (but not limited to) apparel manufacturers, retailers, general merchandise and e-tailers. Finally, the Fund may make significant investments in the financial services sector, including (but not limited to) companies such as commercial banks, savings and loan associations, brokerage companies, insurance companies, real estate-related companies, leasing companies, and consumer and industrial finance companies. The Fund will invest primarily in common stock but also may invest in other types of equity securities that offer opportunities for capital appreciation, including publicly traded partnership interests. The Fund may invest up to 15% of its total assets in investment grade debt securities. The Fund may participate in the initial public offering ("IPO") market, and a portion of the Fund's returns may be attributable to the Fund's investments in IPOs. There is no guarantee that as the Fund's assets grow that it will be able to experience significant improvement in performance by investing in IPOs. Main Investing Risks The value of your investment in the Fund can change for many reasons, and may decrease. The primary reasons for possible decreases in the Fund's value are called "Main Investing Risks," and are explained in this section. Because the types of investments the Fund makes may change over time, the types of risks affecting the Fund may change as well. Section II of the Prospectus includes more information about other risks that could affect the Fund's value. It is important to remember that, as with any investment, it is possible for investors to lose money by investing in the Fund. An investment in the Fund is not a deposit in a bank and is not insured by the Federal Deposit Insurance Corporation or any other government agency. Equity Risk Equity securities, such as a company's common stock, may fall in value in response to factors relating to the issuer, such as management decisions or falling demand for a company's goods or services. Additionally, factors affecting a company's particular industry, such as increased production costs, may affect the value of its equity securities. Equity securities also rise and fall in value as a result of factors affecting entire financial markets, such as political or economic developments, or changes in investor psychology. Growth stocks are the stocks of companies that have earnings that are expected to grow relatively rapidly. As a result, the values of growth stocks may be more sensitive to changes in current or expected earnings than the values of other stocks. Smaller Companies: Market capitalization refers to the total value of a company's outstanding stock. Smaller companies are more likely than larger companies to have limited product lines, smaller markets for their products and services, and they may depend on a small or inexperienced management group. Small company stock may not trade very actively, and their prices may fluctuate more than stocks of larger companies. Stocks of smaller companies may also be more vulnerable to negative changes than stocks of larger companies. 1 IPO Risk The risks associated with equity securities are typically higher for equity securities purchased in IPOs. Issuers in IPOs typically have a limited operating history, and the prices of equity securities are often very volatile for some time following an IPO. Financial Services Company Risk Companies in the financial services sector may be adversely affected by the cost of capital funds, changes in interest rates and price competition. They also may be affected by changes in government regulation. Healthcare Company Risk Certain healthcare companies are subject to intense competition and rapid technological change. They also may be affected by changes in government regulations. Many such companies also face high research and development costs and obsolescence of their products. These factors may have a significant adverse effect on the financial condition and operating results of companies in the healthcare industries. Healthcare companies may also have persistent losses or erratic revenue patterns, which in turn may lead to significant volatility in their share prices. Additionally, the viability of many healthcare companies depends largely on whether such companies can obtain Food and Drug Administration ("FDA") approval of their products or services. If a healthcare company fails to obtain FDA approval for one or more of its products or services, the company may be unable to continue operations, and the Fund's investment in the company may lose some or all of its value. Liquidity Risk Liquidity risk is the risk that the Fund will not be able to sell a security because there are too few people who actively buy and sell, or trade, that security on a regular basis. This risk may be greater for smaller companies. The Fund may not be able to sell an illiquid security at a fair price. Liquidity risk increases if the Fund invests in derivatives, foreign investments or restricted securities. Management Risk Management risk is the risk that the subadvisor of the Fund, despite using various investment and risk analysis techniques, may not produce the desired investment results. Science & Technology Company Risk Companies in the rapidly changing fields of science and technology often face unusually high price volatility, both in terms of gains and losses. The potential for wide variation in performance is based on the special risks common to these stocks. For example, products or services that at first appear promising may not prove commercially successful or may become obsolete quickly. Earnings disappointments can result in sharp price declines. A portfolio focused primarily on these stocks is, therefore, likely to be much more volatile. No performance information is available for the Fund because it has not completed a full calendar year of operations. In the future, the Fund will disclose performance information in a bar chart and performance table. 2 Section II: Other Information about the Fund Fees and Expenses of the Fund This table describes the fees and expenses that you may pay if you invest in the Fund. Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge Imposed Maximum Deferred Sales Charge on Purchases (as a (as a percentage of original percentage of offering purchase price or redemption price) price, whichever is lower) - --------------------------------------------------------------------------------- Class A 5.75% 1%/1/ Class B None 5%/2/ Class C None 1%/3/ - ---------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from fund assets):
Class A Class B Class C - ---------------------------------------------------------------------------- Management fees 0.90% 0.90% 0.90% Distribution (12b-1) fees 0.35% 1.00% 1.00% Other expenses 1.44% 1.45% 1.45% Total Annual Fund Operating Expenses 2.69% 3.35% 3.35% Fee Waiver and/or Expense Reimbursement 0.92% 0.93% 0.93% Net Expenses/4/ 1.77% 2.42% 2.42% - ----------------------------------------------------------------------------
/1/ 1% first year after purchase for purchases of $1 million or more. /2/ 5% first and second year; 4% third year; 3% fourth year; 2% fifth year; 1% sixth year and 0% thereafter. /3/ 0% after first year. The higher Distribution Fees borne by Class B and Class C shares may cause long-term shareholders to pay more in sales charges than the maximum permitted front-end sales charge on Class A shares. /4/ Reflects AGAM's contractual obligation to waive, and to the extent necessary, reimburse certain fees and expenses of the Fund through February 28, 2002. By translating "Total Annual Fund Operating Expenses" into dollar amounts, these examples help you compare the costs of investing in the Fund, or a particular class of shares, with the costs of investing in other mutual funds. The examples below assume that you: . Invest $10,000 in the Fund for the time period indicated and then redeem all of your shares at the end of those periods. . Your investment earns a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years - --------------------------------------------------------- Class A $745 $1,100 $1,479 $2,539 Class B 745 1,155 1,491 2,593 Class B--No Redemption 245 755 1,291 2,593 Class C 345 755 1,291 2,756 Class C--No Redemption 245 755 1,291 2,756 - ---------------------------------------------------------
3 More Information About Investment Strategies and Risks This Prospectus does not attempt to disclose all of the different investment techniques that the Fund might use, or all of the types of securities in which the Fund might invest. As with any mutual fund, investors must rely on the professional judgment and skill of the Fund's management. Josephthal may choose not to use some or all of the investment techniques available to the Fund, and these choices may cause the Fund to lose money or not achieve its goal. The investment objective of the Fund may be changed by the Trustees without the approval of the Fund's shareholders. Except as noted for certain investment restrictions, the strategies the Fund uses to achieve its investment objective also may be changed by the Trustees without approval of the shareholders. This section provides additional information about the Fund, and should be read in conjunction with the Fund Summary. The Fund emphasizes equity securities of growth companies that represent attractive opportunities for capital appreciation. In selecting investments for the Fund, Josephthal seeks to identify companies that it believes will achieve superior growth rates based on its market research and company analysis. The Fund will focus on science and technology companies that are positioned to take advantage of technological change and convergence, including companies in the computer, internet infrastructure, communications, telecommunications, semi- conductor and electronic industries. In addition, the Fund may make significant investments in the healthcare sector, including in particular biotechnology and pharmaceutical companies, and in the consumer sector, including in particular high quality consumer retailers. Certain investments in smaller capitalization companies may offer greater opportunities for capital appreciation than larger companies, but may also involve special risks. The Fund also may buy securities such as convertible debt, preferred stock, options, or other securities exchangeable for shares of common stock and other equity securities, including publicly traded partnership interests. The Fund may buy investment grade debt securities issued by both domestic and foreign issuers; however, the Fund may invest no more than 15% of its total assets in debt securities. The Fund may invest up to 25% of its total assets in securities of foreign issuers, either directly or indirectly through American Depository Receipts (ADRs) or closed-end investment companies. The Fund may hold up to 15% of its net assets in illiquid investments, such as securities for which market quotations are not readily available, in repurchase agreements which have a maturity longer than seven days, and in securities subject to restrictions on resale for which no adequate trading market exists. There is no percentage restriction on the Fund's ability to enter into repurchase agreements with maturities of seven days or less. The Fund may sell securities short and borrow the same security from a broker or other institution to complete the sale; however, the Fund will not sell short securities whose underlying value exceeds 25% of its net assets. All percentage tests are measured at the time of investment. In seeking to achieve its investment objective, the Fund may use certain futures and option strategies. The Fund may engage in such strategies to an unlimited extent for hedging purposes. The Fund may not engage in options, futures or forward transactions for non-hedging purposes if more than 5% of its total assets would be so invested. Other Risks of Investing in the Fund Although the Fund may have the flexibility to use some or all of the investments or strategies described in this Prospectus and the Statement of Additional Information, Josephthal may choose not to use these investments or strategies for a variety of reasons. These choices may cause the Fund to miss opportunities, lose money or not achieve its goal. Credit Risk Credit Risk is the risk that the issuer or the guarantor (the entity that agrees to pay the debt if the issuer cannot) of a debt or fixed income security, or the counterpart to a derivatives contract or a securities loan, will not repay the principal and interest owed to the investors or otherwise honor its obligations. Debt securities rated in one of the four highest rating categories by a rating agency (and comparable unrated securities) are known as "investment grade" and generally have lower levels of credit risk than lower- rated securities. Investments in foreign securities are subject to increased credit risk because of the difficulties of requiring foreign entities, including issuers of sovereign (national) debt, to honor their contractual commitments, and because a number of foreign governments and other issuers are already in default. 4 Foreign Securities There are risks associated with investing in foreign securities. These risks include unforeseen changes in tax laws, political changes, and changes in foreign currency values and exchange rates. There may be less publicly available information about foreign issuers. Foreign issuers including foreign branches of U.S. banks, are subject to different accounting and reporting requirements, which are generally less extensive than the requirements for domestic issuers. Foreign stock markets generally have substantially less volume than the U.S. exchanges and securities of foreign issuers are generally less liquid and more volatile, relative to U.S. issuers. For emerging markets, these risks can be more extreme. There is frequently less governmental regulation of foreign exchanges, broker-dealers and issuers than in the United States, and brokerage costs may be higher. In addition, investments in foreign companies may be subject to the possibility of nationalization or other changes in policy. Policy changes may allow foreign governments to withhold dividends, expropriate (confiscate, or keep) investment returns, or raise taxes to extremely high levels, among other things. Also, should a foreign issuer default, it may be difficult to recover anything in a bankruptcy proceeding. Lending Fund Securities The Fund may lend up to 33% of its total portfolio assets, or securities, to brokers, dealers and other financial institutions. These loans must be callable (the Fund may ask that the loan be repaid in full) at any time by the Fund. The loans must be at all times fully secured by cash, cash equivalents or securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, and marked to market (priced at market value) to the value of loaned securities on a daily basis. As with any extensions of credit, there may be risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of Fund securities will only be made to firms deemed by Josephthal to be creditworthy. Interest Rate Risk (Market Risk) Interest rate risk, or market risk, is the risk that a change in interest rates will negatively affect the value of a security. This risk applies primarily to debt securities such as bonds, notes and asset-backed securities. Debt securities are obligations of the issuer to make payments of principal and/or interest on future dates. Market risk is generally greater for investments in debt securities with longer maturities. This risk may be increased for investments in mortgage-backed or other types of asset-backed securities that are often prepaid. Even investments in the highest quality debt securities are subject to interest rate risk. Leverage Risk Borrowing money to buy securities is using leverage. Leverage risk is the risk that leverage, or debt, will enable the Fund to buy more of a security that falls in value. In this case, the Fund would still need to repay the money it borrowed. The Fund can create leverage, or borrow money, by using different types of techniques including reverse repurchase agreements, dollar rolls, and derivatives including inverse floating rate instruments. Hedging and Other Strategic Transactions The Fund may use a variety of investment strategies described below for hedging purposes only, including hedging various market risks (such as interest rates, currency exchange rates and broad or specific market movements), and managing the effective maturity or duration of debt instruments held by the Fund. Hedging is using forward contracts and options to hedge against fluctuations in the values of securities. These transactions are generally used to protect against possible changes in the market value of securities the Fund already owns or plans to buy, to protect unrealized gains or to improve the Fund's return in some way. The Fund may purchase and sell (or write) exchange-listed and over-the-counter put and call options on securities, index futures contracts, financial futures contracts and fixed-income indices and other financial instruments, enter into financial futures contracts, enter into interest rate transactions, and enter into currency transactions. Such transactions may involve derivatives, which are financial contracts whose value depends on, or is derived from, the change in value of an underlying asset, reference rate or index. When the value of the underlying security or index changes, the value of the derivative changes as well. As a result, derivatives can lose all of their value very quickly. Derivatives involve credit risk if the other party to the derivative should fail to meet its obligations to the Fund. Additional risks associated with derivatives include imperfect correlation (between the values of the derivative and the underlying investment) and improper valuation. Interest rate transactions may include, but are not limited to, swaps, caps, floors and collars, and currency transactions may include currency forward contracts, currency futures contracts, currency swaps and options on currencies or currency futures contracts. 5 Frequent Trading The Fund may buy or sell investments extremely frequently, increasing brokerage commissions and other expenses of the Fund. Frequent trading may also increase the amount of capital gains realized by the Fund, including short-term capital gains, which are generally taxable to shareholders at ordinary income tax rates. Temporary Defensive Strategies Josephthal may at certain times decide that pursuing the Fund's investment strategies is inconsistent with market conditions. Josephthal may then employ defensive strategies designed mostly to limit losses. However, Josephthal may choose not to use defensive strategies, even in volatile or unsettled market conditions. Such defensive strategies may cause the Fund to miss opportunities or to not achieve its goal. Management of the North American Funds Under the federal securities laws, Massachusetts law, and North American Funds' Agreement and Declaration of Trust and By-Laws, the business and affairs of the North American Funds (the "Trust") are managed under the direction of its trustees (the "Trustees"). American General Asset Management Corp. ("AGAM") is the investment adviser for the Trust. AGAM was formed in 1996 to advise, acquire and distribute mutual funds through broker-dealers, banks and other intermediaries. AGAM's address is 286 Congress Street, Boston, Massachusetts 02210. According to its Advisory Agreement with the Trust (the "Advisory Agreement"), AGAM: . Oversees the administration of all aspects of the business and affairs of the Fund . Selects, contracts with and compensates the subadvisor to manage the assets of the Fund . Makes recommendations to the Trustees regarding the hiring, termination and replacement of the subadvisor . Reimburses the Fund if the total of certain expenses allocated to the Fund exceeds certain limitations . Reviews the performance of the subadvisor . Periodically reports to the Trustees Under an order granted to the Trust by the Securities and Exchange Commission, AGAM is permitted to appoint a subadvisor, to create a subadvisory agreement, and to terminate or amend a subadvisory agreement, in each case without shareholder approval. This "Manager of Managers" structure permits the Fund to change subadvisors or the fees paid to subadvisors without the expense and delays associated with obtaining shareholder approval. AGAM has ultimate responsibility under the Manager of Managers structure to oversee the subadvisor, including making recommendations to the Trust regarding the hiring, termination and replacement of the subadvisor. Subadvisory Agreement Josephthal & Co. AGAM has retained Josephthal & Co., Inc. ("Josephthal"), 200 Park Avenue, 25th Floor, New York, New York 10166, as the subadvisor to the Fund. Josephthal is a registered investment adviser and a registered broker-dealer. Josephthal is a research-driven, full service investment banking and brokerage firm which, joined by its affiliated companies, has over 1,000 financial consultants in over 80 domestic and international offices. Pursuant to a subadvisory agreement between AGAM and Josephthal (the "Subadvisory Agreement"), Josephthal will provide continuous investment advisory services to the Fund, including: investment research, advice and management and periodic reporting to AGAM and the Trust. For its services as subadvisor to the Fund, Josephthal receives a fee from AGAM equal to .500% of the average daily net assets of the Fund. Howard S. Schachter serves as the Fund's portfolio manager and is responsible for the day-to-day investment decisions of the Fund. Mr. Schachter is a Managing Director of Josephthal. He joined Josephthal in September 1998 and is based in Josephthal's New York City headquarters. Mr. Schachter has thirty years industry experience and has held a variety of positions. Prior to joining Josephthal, Mr. Schachter spent six years with Needham & Co., where he managed the Needham Growth Fund. 6 The following table shows the management fees that the Fund will pay to AGAM annually under the Advisory Agreement as a percentage of the Fund's average daily net asset value. The subadvisory fee is paid by AGAM to Josephthal out of the advisory fee. Advisory and Subadvisory Fees -----------------------------
Advisory Fee Subadvisory Fee (AGAM) (Josephthal) First $50,000,000 .900% .500% Between $50,000,000 and $200,000,000 .850% .450% Between $200,000,000 and $500,000,000 .825% .425% Excess over $500,000,000 .800% .400%
7 Section III: Investing in the Fund Classes of Shares Three classes of shares (Class A, Class B and Class C) of the Fund are offered by this Prospectus. The initial investment minimum for all classes of shares is $1,000; the minimum for subsequent investments is $50. For retirement plans and other automatic investment programs, the initial purchase minimum is $50. You must maintain a minimum account balance of $500, or $50 for retirement plans and other automatic investment programs. Purchases and redemptions will be made at the share price calculated by North American Funds after the request is received in good order. Confirmations of all transactions will be mailed to you promptly, and a copy will be sent to your broker of record. The Fund may refuse any request to purchase shares.
Buying Fund Shares Redeeming Fund Shares - -------------------------------------------------------------------------------------- By Mail Mail a check and account Send a written request to: application to: North American Funds North American Funds P.O. Box 8505 P.O. Box 8505 Boston, MA 02266-8508 Boston, MA 02266-8508 To add to an existing account, mail a check with your account number to: North American Funds P.O. Box 8505 Boston, MA 02266-8508 Overnight Mailing Address: North American Funds c/o Boston Financial 66 Brooks Drive Braintree, MA 02184 - -------------------------------------------------------------------------------------- By Wire Transfer For wire instructions, Yes, with a minimum of contact Customer Service at $1,000. For wire 1-800-872-8037 instructions, contact Customer Service at 1-800-872-8037 - -------------------------------------------------------------------------------------- By Phone No Yes, simply call 1-800-872- 8037 by 4:00 p.m., Eastern Time, to receive that day's closing price - -------------------------------------------------------------------------------------- Through Broker-Dealers Yes, if a dealer agreement is Yes, if a dealer agreement is in place in place - --------------------------------------------------------------------------------------
8
Class A Shares Class B Shares Class C Shares - -------------------------------------------------------------------------------------------- Sales Charges Purchases of less than Shares are sold Shares are sold $1 million are sold without a front end without a front end with a front end sales sales charge. For sales charge. For charge (see table shares redeemed within shares redeemed within below). six years there is a one year there is a 1% sales charge at sales charge at Purchases over $1 redemption (see table redemption. million are sold below). without a front end Available for sales charge. For Available for purchases under shares redeemed within purchases of $250,000 $1 million. one year there is a 1% or less. back end sales charge at redemption. - -------------------------------------------------------------------------------------------- Programs That Rights of For B and C Shares, Reduce Sales Accumulation--you will the back end sales Charges pay the sales charge charge is equal to the applicable to your lesser of the net total account balance asset value at in all classes of redemption, or the shares. original purchase price. Statement of intention--agree to invest a certain amount over 13 months and you will pay the sales charge based on your goal. - -------------------------------------------------------------------------------------------- For qualified group retirement plans, please see the Statement of Additional information (SAI) for a more detailed discussion.
Sales Charge Tables Class A Shares Sales Charge Table - ---------------------------------
Amount of Purchase Sales Charge Sales Charge Concession to Payment as a as a Broker Dealer as Percentage of Percentage of a Percentage of the Offering Price the Net Amount Offering Price Invested - ----------------------------------------------------------------------------- Less than $50,000 5.75% 6.10% 5.00% - ----------------------------------------------------------------------------- $50,000 but less than $100,000 4.75% 4.99% 4.00% - ----------------------------------------------------------------------------- $100,000 but less than $250,000 4.00% 4.17% 3.25% - ----------------------------------------------------------------------------- $250,000 but less than $500,000 3.00% 3.09% 2.50% - ----------------------------------------------------------------------------- $500,000 but less than $1 million 2.25% 2.30% 1.75% - ----------------------------------------------------------------------------- $1 million or more None* None* See below** - -----------------------------------------------------------------------------
Class B Shares Sales Charge Table*** - ---------------------------------
Year(s) Since Purchase Deferred Sales Charge as Percentage of Amount Redeemed - ------------------------------------------------------------ Up to 2 years 5% - ------------------------------------------------------------ 2 years or more but less than 3 years 4% - ------------------------------------------------------------ 3 years or more but less than 4 years 3% - ------------------------------------------------------------ 4 years or more but less than 5 years 2% - ------------------------------------------------------------ 5 years or more but less than 6 years 1% - ------------------------------------------------------------ 6 or more years 0% - ------------------------------------------------------------
9 Class A shares of the Fund are available at net asset value (NAV) to investors if purchased with redemption proceeds from other mutual fund complexes on which they had previously paid a front-end or a contingent deferred sales charge (CDSC) no more than 60 days prior to purchase. American General Funds Distributor, Inc. (the "Distributor") will require satisfactory evidence of your qualification for this waiver. Please call for more information. The redemption of the shares from the other mutual fund is, for federal income tax purposes, a sale upon which a gain or loss may be realized. Class C Shares*** Class C shares are offered for sale at net asset value and are offered for purchases of less than $1 million. Class C shares are sold without a front end sales charge. Class C shares are subject to a deferred sales charge of 1% of the dollar amount subject thereto during the first year after purchase. Class C shares will be redeemed or exchanged in order of the date purchased, with the shares purchased earlier being redeemed or exchanged first, unless a shareholder specifically requests that specific shares be redeemed or exchanged. Redemption in Kind The Fund reserves the right to redeem proceeds in whole or in part by a distribution in kind of marketable securities held by the Fund. Payment Following Redemption The Fund will normally send the proceeds from a redemption (less any applicable deferred sales charge) on the next business day, but may delay payment for up to seven days. Payment may be delayed if the shares to be redeemed were purchased by a check that has not cleared. The Fund may suspend the right of redemption and may postpone payment for more than seven days when the New York Stock Exchange (the "Exchange") is closed for other than weekends or holidays, or if permitted by the rules of, or action by, the SEC. - ---------------------------- * A CDSC (contingent deferred sales charge) may apply. ** For purchases of Class A shares of $1 million or more the Distributor will pay a commission to dealers as follows: 1.00% on sales up to $5 million, plus 0.50% of the amount in excess of $5 million; provided, however, that the Distributor may pay a commission on sales in excess of $5 million of up to 1.00% to certain dealers which, at the Distributor's invitation, enter into an agreement with the Distributor in which the dealer agrees to return any commission paid to it on the sale (or a pro rata portion thereof) if the shareholder redeems his shares within a period of time after purchase as specified by the Distributor. Purchases of $1 million or more for each shareholder account will be aggregated over a 12-month period (commencing from the date of the first such purchase) for purposes of determining the level of commission to be paid during that period with respect to such account. *** Any shares in the redeeming shareholder's account that can be redeemed without charge will be redeemed prior to those subject to a charge. 10 Pricing of Fund Shares; Dividends and Distributions The public offering price of the Class A shares of the Fund is the net asset value per share (next determined following receipt of an order) plus a front end sales charge, if applicable. The share price for Class B shares and Class C shares is the net asset value per share (next determined following receipt of an order). The net asset value of the shares of each class of the Fund is calculated separately and, except as described below, is determined once daily as of the close of regularly scheduled trading on the Exchange (generally 4:00 p.m., Eastern time). The net asset value per share of each class of the Fund is calculated by dividing the value of the portion of the Fund's securities and other assets attributable to that class, less the liabilities attributable to that class, by the number of shares of that class outstanding. No determination is required on days when the Exchange is closed (for example, national holidays). Generally, trading in non-U.S. securities, as well as U.S. Government securities and money market instruments, is substantially completed each day at various times prior to the close of regularly scheduled trading on the Exchange. The values of such securities used in computing the net asset value of the shares of a class of the Fund are generally determined as of such times. Occasionally, events which affect the values of such securities may occur between the times at which they are generally determined and the close of regularly scheduled trading on the Exchange and would therefore not be reflected in the computation of a class's net asset value. If events materially affecting the value of such securities occur during such period, then these securities are valued at their fair value as determined in good faith by Josephthal under procedures established and regularly reviewed by the Trustees. Short-term debt instruments with a remaining maturity of 60 days or less held by the Fund are valued on an amortized cost basis. Unless you request cash payment, all dividends and distributions will be reinvested. The Fund declares and pays capital gains and income dividends annually. 11 Taxes It is expected that the Fund will qualify as a "regulated investment company" under the Internal Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the Fund will not be subject to United States federal income taxes on its net investment income and net capital gain, if any, that it distributes to its shareholders in each taxable year. It is expected that each Fund of the Trust will qualify as a "regulated investment company" under the Code and that it will not be subject to United States federal income taxes on its net investment income and net capital gain, if any, that it distributes to its shareholders in each taxable year. A Fund's distributions derived from interest, dividends and certain other income, including gains from investments that the Fund held for one year or less, will generally result in taxable ordinary income to the shareholders of the Fund. Distributions of net gains from investments held by a Fund for more than one year are taxable as long-term gains (generally at a 20% rate for non- corporate shareholders). Distributions will be treated as described above for federal income tax purposes whether they are paid in cash or reinvested in additional shares and regardless of how long a shareholder has held shares in the Fund. Distributions are taxed as described in this paragraph even if such distributions economically represent a return of a particular shareholder's investment. Distributions that represent a return of a particular shareholder's investment are likely to occur in respect of shares purchased at a time when a Fund's net asset value reflects gains that are either unrealized, or realized but not distributed. Because the Fund may invest in foreign securities or currencies, it may be required to pay withholding or other taxes to foreign governments on dividends and interest. The investment yield of the Fund's investment in foreign securities or currencies will be reduced by these foreign taxes. Shareholders will bear the cost of any foreign taxes, but may not be able to claim a foreign tax credit or deduction for these taxes for any taxable year, the shareholders will be notified. The ability of the shareholders to utilize such a foreign tax credit is subject to a holding period requirement. In addition, if the Fund invests in securities of passive foreign investment companies, it may be subject to U.S. federal income taxes (and interest on such taxes) as a result of such investments. The investment yield of such investments will be reduced by these taxes and interest. Shareholders will bear the cost of these taxes and interest, but will not be able to claim a deduction for these amounts. The redemption, sale or exchange of Fund shares (including the exchange of shares of one North American Fund for shares of another) is a taxable event and may result in a gain or loss. Gain or loss, if any, recognized on the sale or other disposition of shares of the Fund will be taxed as a long-term capital gain or loss if the shares are capital assets in the shareholder's hands and if the shareholder held the shares have been held for more than one year. (such gains are generally taxed at a 20% rate for noncorporate shareholders). If a shareholder sells or otherwise disposes of a share of the Fund before holding it for more than six months, any loss on the sale or other disposition of such share shall be treated as a long-term capital loss to the extent of any capital gain dividends received by the shareholder with respect to such share. Descriptions of tax consequences set forth in this Prospectus and in the Statement of Additional Information are intended to be a general guide. Investors should consult their tax advisers with respect to the specific tax consequences of an investment in the Fund, including the effect and applicability of state, local, foreign, and other tax laws and the possible effects of changes in federal or other tax laws. This discussion is not intended as a substitute for careful tax planning. 12 Rule 12b-1 Fees The Trust has adopted a distribution plan under Rule 12b-1 of the Investment Company act of 1940, as amended, that allows the Fund to pay distribution fees for the sale and distribution of Fund shares. Portions of the fees are used to provide payments for services provided to shareholders ("service fees"), as indicated below. Class A shares of the Fund are subject to Rule a 12b-1 fee of up to .35% of average daily net assets, of which .25% is a "service fee." Class B shares of the Fund are subject to a Rule 12b-1 fee of up to 1.00% of average annual net assets, of which .25% is a "service fee." Class C shares of the Fund are subject to a Rule 12b-1 fee of up to 1.00% of average annual net assets, of which .25% is a "service fee." Because these fees are paid out of the Fund's assets on an ongoing basis, over time they will increase the cost of your investment and may cost you more than paying other types of sales charges. The higher fees for Class B and Class C shares may therefore cost you more than paying the maximum permitted front-end sales charge on Class A Shares. 13 Account Services To use any of these programs, simply fill out the appropriate section of your account application, or request the appropriate form. Automatic Dividend Diversification With this program, you can have all dividends and other distributions from one North American Fund automatically invested in the same class of shares of another North American Fund. Automatic Investment Plan Shareholders can set up an Automatic Investment Plan. Once each month the shareholder's account will be debited the amount (at least $50) specified by the shareholder. Exchange Privilege Shareholders may make free unlimited exchanges by mail or telephone within classes of shares of all other North American Funds without any sales charge. Other North American Funds are: International Small Cap Fund, International Equity Fund, Global Equity Fund, Small Cap Growth Fund, Mid Cap Growth Fund, Large Cap Growth Fund, Growth & Income Fund, Science & Technology Fund, Balanced Fund, Strategic Income Fund, Core Bond Fund, U.S. Government Securities Fund, Money Market Fund, Mid Cap Value Fund, Municipal Bond Fund, Municipal Money Market Fund, Stock Index Fund, Small Cap Index Fund, Socially Responsible Fund, High Yield Bond Fund, Aggressive Growth LifeStyle Fund, Moderate Growth LifeStyle Fund and Conservative Growth LifeStyle Fund. Shares of one class may not be exchanged for shares of any other class of any North American Fund. Be aware that exchanges are regarded as sales for federal and state income tax purposes and could result in a gain or loss, depending on the original cost of shares exchanged. Exchanges usually occur on the same day they are requested. The terms of the exchange privilege may change and the privilege may be revoked at any time without notice. The Fund will not be responsible for any losses resulting from unauthorized telephone transactions if it follows reasonable procedures designed to verify the identity of the caller. The Fund will request personal or other information from the caller, and will record calls. By establishing an account with the Fund, you consent to all recording of telephone calls. You may make exchanges over the telephone by calling 1-800-872-8037. Reinstatement Privilege If you redeem Class A shares (under $1 million) and reinvest within 90 days, you will not have to pay a sales charge. If you redeem Class A shares over $1 million, or Class B or C shares and pay a deferred sales charge and then reinvest within 90 days, your account will be credited the amount of the deferred sales charge. Systematic Withdrawal Plan If you have an account balance of at least $10,000, you can set up a plan to have redemptions paid to you, or someone you designate, on a monthly, quarterly, semi-annual or annual basis. You can withdraw up to 12% of the account value annually, if a monthly plan, up to 1% per month, without a deferred sales charge. If you request this service after completing our application and payments are to be made to someone other than yourself, you will have to provide a signature guarantee. Redemption checks are generally mailed within two days after redemption. The availability of this service may end, and a fee of up to $5 per withdrawal may be charged with 30 days written notice to you. Transfer of Shares You may transfer Fund shares to family members and others at any time without a sales charge. Consult your tax adviser concerning such transfers. 14 Section IV: Privacy Notice and Other Information Privacy Notice The Trust, an affiliate of American General, understands your privacy is important. You have received this notice in accordance with applicable state and federal laws and because you are a current or potential customer of one of the Funds. This notice will help you understand what types of nonpublic personal information--information about you that is not publicly available--we may collect, how we use it, and how we protect your privacy. This notice describes our privacy practices for both current and former customers. Types of Nonpublic Personal Information We Collect and Disclose . American General's employees, representatives, agents, and selected third parties--companies or individuals not affiliated with American General--may collect nonpublic personal information about our customers, including: --Information provided to us, such as on applications or other forms (ac- count balances, income, assets and marital status). --Information about transactions with us, our affiliates, or third parties. --Information from others, such as employers, and federal and state agen- cies. Protection of Nonpublic Personal Information . We restrict access to nonpublic personal information to those employees, agents, representatives or third parties who need to know the information to provide products and services to our customers. . We have policies and procedures that give direction to our employees, agents, and representatives on how to protect and use nonpublic personal information. . We maintain physical, electronic, and procedural safeguards to protect non- public personal information. Sharing of Nonpublic Personal Information . We do not share nonpublic personal information about our customers to anyone, including other affiliated American General companies or third parties, ex- cept as permitted by law. . We do not sell nonpublic personal information about our customers to third- parties who are not part of the American General family of companies. . We may disclose all of the types of nonpublic personal information we collect when needed, to: (i) affiliated companies, agents, employees, representa- tives, and third parties that market our services and products, and adminis- ter and service customer accounts on our behalf, (ii) financial service prov- iders, or (iii) other financial institutions with whom we have joint market- ing agreements. . Examples of the types of companies and individuals to whom we may disclose nonpublic personal information include, but are not limited to, banks, insur- ance companies, third-party administrators, registered broker/dealers, audi- tors, regulators, and transfer agents. Customers of Broker/Dealers . If you own shares of the Funds through a financial intermediary such as a broker/dealer, bank or trust company, you may receive the privacy policy of the financial intermediary that would address how it shares your nonpublic personal information with nonaffiliated third parties. Changes in Privacy Policy . We reserve the right to change any of our privacy policies and related proce- dures at any time, in accordance with applicable federal and state laws. You will receive appropriate notice if our Privacy Policy changes. Other Information Mailings to Shareholders To reduce expenses and to note our concern for the environment, we will deliver a single copy of most financial reports, proxy and information statements and prospectuses to investors who share an address, even if the accounts are registered under different names. If you would like to receive separate mailings, please call us and we will begin individual delivery within 30 days. In most cases, we also will deliver account statements for all the investors in a household in a single envelope. 15 FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period) The financial highlights table is intended to help you understand the Fund's financial performance for the period of the Fund's operations. Certain information reflects financial results for a single Fund share. The total returns in the table represent the return that an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, Independent Accountants for the Fund, whose report is included in the Annual Report, which is available upon request, and which is incorporated into this document by this reference.
Period from 9/18/00 * through 10/31/00 --------------------------- Class A Class B Class C - ----------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.00 $10.00 $10.00 - ----------------------------------------------------------------------------- Investment Operations: Net investment income** 0.03 0.03 0.03 Net realized and unrealized loss on investments (0.15) (0.16) (0.16) --------------------------- Total from investment operations (0.12) (0.13) (0.13) - ----------------------------------------------------------------------------- Net Asset Value, End of Period $9.88 $9.87 $9.87 - ----------------------------------------------------------------------------- Total Return (1.20%)+ (1.30%)+ (1.30%)+ - ----------------------------------------------------------------------------- Ratios/Supplemental Data Net assets, end of period (000's) $28,191 $8,389 $1,305 - ----------------------------------------------------------------------------- Ratio of net expenses to average net assets 1.77%# 2.42%# 2.42%# - ----------------------------------------------------------------------------- Ratio of net investment income to average net assets 2.94%# 2.32%# 2.34%# - ----------------------------------------------------------------------------- Portfolio turnover rate 98%+ 98%+ 98%+ - ----------------------------------------------------------------------------- Expense ratio before fee waiver by adviser 2.69%# 3.35%# 3.35%# - -----------------------------------------------------------------------------
* Commencement of Operations + Not annualized # Annualized ** Net investment income per share has been calculated using the average share method. 16 North American Funds 286 Congress Street Boston, Massachusetts 02210 (800) 872-8037 For Additional Information More Information about the Fund, including the SAI, is available to you free of charge. To request additional information: By Telephone Call 1-800-872-8037 By Mail from the Funds (There is no fee) Write to: North American Funds 286 Congress Street Boston, MA 02210 From the SEC Information about the Fund (including the SAI) also is available from the Securities and Exchange Commission (SEC). The SEC charges a duplicating fee to provide copies of this information. In person SEC Public Reference Room Washington, D.C. Call 202-942-8090 for location and hours On the Internet . EDGAR database at www.sec.gov . By email request at publicinfo@sec.gov By mail SEC Public Reference Section Washington, D.C. 20549-0102 Statement of Additional Information (SAI) The SAI provides additional information about the North American Funds. Investment Company Act File No. 811-05797 Privacy Notice Included - ----------------------- 0201:91330 PART B - STATEMENT OF ADDITIONAL INFORMATION NORTH AMERICAN FUNDS North American Funds (the "Trust") is an open-end investment company that currently has twenty-four investment portfolios, or series: the Aggressive Growth LifeStyle Fund, the Balanced Fund, the Conservative Growth LifeStyle Fund, the Core Bond Fund, the Global Equity Fund, the Growth & Income Fund, the High Yield Bond Fund, the International Equity Fund, the International Small Cap Fund, the Josephthal Strategic Growth Fund, the Large Cap Growth Fund, the Mid Cap Growth Fund, the Mid Cap Value Fund, the Moderate Growth LifeStyle Fund, the Money Market Fund, the Municipal Bond Fund, the Municipal Money Market Fund, the Science & Technology Fund, the Small Cap Growth Fund, the Small Cap Index Fund, the Socially Responsible Fund, the Stock Index Fund, the Strategic Income Fund and the U.S. Government Securities Fund (collectively, the "Funds," and each a "Fund"). The investment objective of each Fund is described in the Trust's Prospectus dated March 1, 2001. This Statement of Additional Information is not a prospectus and should be read in conjunction with the Prospectuses noted above as revised from time to time. Certain disclosure has been incorporated by reference from the Trust's Annual Report. A free copy of both the Prospectus and the Annual Report may be obtained by writing to North American Funds, 286 Congress Street, Boston, Massachusetts, 02210, or by telephone request at (800) 872-8037. The date of this Statement of Additional Information is March 1, 2001. TABLE OF CONTENTS HISTORY AND CLASSIFICATION 2 INVESTMENT POLICIES AND RISKS 2 INVESTMENT STRATEGIES AND RISKS 3 HEDGING AND OTHER STRATEGIC TRANSACTIONS 20 INVESTMENT RESTRICTIONS 26 OPERATING POLICIES 34 TEMPORARY DEFENSIVE POSITIONS 35 MANAGEMENT OF THE TRUST 37 INVESTMENT MANAGEMENT ARRANGEMENTS 57 DISTRIBUTIONS PLANS 65 OTHER SERVICES AGREEMENT 69 PORTFOLIO BROKERAGE 71 MULTIPLE PRICING SYSTEM 76 PURCHASE, REDEMPTION AND PRICING 78 CAPITAL STOCK 80 PERFORMANCE INFORMATION 81 PORTFOLIO TURNOVER 88 TAXES 90 INDEPENDENT ACCOUNTANTS 93 INDEX FUNDS 93 APPENDIX A - RATINGS A-1 APPENDIX B - DESCRIPTION OF INDICES B-1 1 HISTORY AND CLASSIFICATION The Trust is an open-end, management investment company organized as a business trust under the laws of the Commonwealth of Massachusetts on September 28, 1988. Each Fund is an open-end, management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). Each Fund's diversification policy limits the amount that the Fund may invest in certain securities. Each Fund's diversification policy is also designated to comply with the diversification requirements of the Internal Revenue Code (the "Code"), as well as the 1940 Act. The Small Cap Growth Fund, the Aggressive Growth LifeStyle Fund, the Conservative Growth LifeStyle Fund and the Moderate Growth LifeStyle Fund are "non-diversified" under the 1940 Act, which means that such Funds are not limited in the proportion of their assets that may be invested in the securities of a single issuer. None of the Funds is a "commodity pool" (i.e., a pooled investment vehicle which trades in commodity futures contracts and options thereon and the operator of which is registered with the Commodity Futures Trading Commission (the "CFTC")). Futures contracts and options on futures contracts will be purchased, sold or entered into to the extent permitted by a Fund's investment policies and consistent with CFTC regulations. The use of certain Hedging and Other Strategic Transactions may require that a Fund segregate cash or other liquid assets to the extent a Fund's obligations are not otherwise "covered" through ownership of the underlying security, financial instrument or currency. In connection with a reorganization of several of the Funds on approximately July 7, 2000, the Small Cap Growth Fund (formerly named the "Emerging Growth Fund"), the Mid Cap Growth Fund (formerly named the "Small/Mid Cap Fund"), the Large Cap Growth Fund (formerly named the "Growth Equity Fund"), the Core Bond Fund (formerly named the "Investment Quality Bond Fund"), and the Municipal Bond Fund (formerly named the "National Municipal Bond Fund") changed their names on February 27, 2000. INVESTMENT POLICIES AND RISKS The following discussion supplements the descriptions of certain of the Funds and their possible investments and associated risks, as set forth in the Prospectus. Although the Funds may have the flexibility to use some or all of the investments and strategies described in the Prospectus and in this SAI, the Subadvisors may choose not to use such investments or strategies for a variety of reasons. These choices may cause a Fund to miss opportunities, lose money or not achieve its objective. INTERNATIONAL SMALL CAP FUND The Fund may invest in securities issued by companies located in countries not considered to be major industrialized nations. Such countries are subject to more economic, political and business risk than major industrialized nations, and the securities issued by those companies may be more volatile, less liquid and more uncertain as to payment of dividends, interest and principal. 2 U.S. GOVERNMENT SECURITIES FUND While the Fund seeks a high level of current income, it cannot invest in instruments such as lower grade corporate obligations which offer higher yields but are subject to greater risks. The Fund will not knowingly invest in a high risk mortgage security. The term "high risk mortgage security" is defined generally as any mortgage security that exhibits greater price volatility than a benchmark security, the Federal National Mortgage Association ("FNMA") current coupon 30-year mortgage-backed pass through security. Shares of the Fund are neither insured nor guaranteed by the U.S. Government, its agencies or instrumentalities. In order to make the Fund an eligible investment for federal credit unions ("FCUs"), federal savings and loan institutions and national banks, the Fund will invest in U.S. Government securities that are eligible for investment by such institutions without limitation, and will also generally be managed so as to qualify as an eligible investment for such institutions. The Fund will comply with all investment limitations applicable to FCUs including (i) the requirement that a FCU may only purchase collateralized mortgage obligations which would meet the high risk securities test of Part 703 of the National Credit Union Administration Rules and Regulations or would be held solely to reduce interest rate risk and (ii) the requirement that a FCU may not purchase zero coupon securities having maturities greater than ten years. 3 INVESTMENT STRATEGIES AND RISKS ADJUSTABLE RATE SECURITIES Adjustable rate securities (i.e., variable rate and floating rate instruments) are securities that have interest rates that are adjusted periodically, according to a set formula. The maturity of some adjustable rate securities may be shortened under certain special conditions described more fully below. Variable rate instruments are obligations (usually certificates of deposit) that provide for the adjustment of their interest rates on predetermined dates or whenever a specific interest rate changes. A variable rate instrument whose principal amount is scheduled to be paid in 13 months or less is considered to have a maturity equal to the period remaining until the next readjustment of the interest rate. Many variable rate instruments are subject to demand features which entitle the purchaser to resell such securities to the issuer or another designated party, either (i) at any time upon notice of usually 30 days or less, or (ii) at specified intervals, not exceeding 13 months, and upon 30 days notice. A variable rate instrument subject to a demand feature is considered to have a maturity equal to the longer of the period remaining until the next readjustment of the interest rate or the period remaining until the principal amount can be recovered through demand. Floating rate instruments (generally corporate notes, bank notes, or Eurodollar certificates of deposit) have interest rate reset provisions similar to those for variable rate instruments and may be subject to demand features like those for variable rate instruments. The maturity of a floating rate instrument is considered to be the period remaining until the principal amount can be recovered through demand. ASSET-BACKED SECURITIES The securitization techniques used to develop mortgage securities are also being applied to a broad range of other assets. Through the use of trusts and special purpose corporations, automobile and credit card receivables are being securitized in pass-through structures similar to mortgage pass-through structures or in a pay-through structure similar to the Collateralized Mortgage Obligations ("CMOs") structure. Generally the issuers of asset-backed bonds, notes or pass-through certificates are special purpose entities and do not have any significant assets other than the receivables securing such obligations. In general, the collateral supporting asset-backed securities is of a shorter maturity than mortgage loans. As a result, investment in these securities should result in greater price stability for a Fund's shares. Instruments backed by pools of receivables are similar to mortgage-backed securities in that they are subject to unscheduled prepayments of principal prior to maturity. When the obligations are prepaid, a Fund must reinvest the prepaid amounts in securities the yields of which reflect interest rates prevailing at the time. Therefore, a Fund's ability to maintain a portfolio which includes high-yielding asset-backed securities will be adversely affected to the extent that prepayments of principal must be reinvested in securities which have lower yields than the prepaid obligations. Moreover, prepayments of securities purchased at a premium could result in a realized loss. A Fund will only invest in fixed-income asset-backed securities rated, at the time of purchase, "BBB" or better by Standard & Poor's Corporation ("S&P") or "Baa" or better by Moody's Investors Service ("Moody's") or which, in the opinion of the applicable Subadvisor, are of comparable quality. As with mortgage securities, asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties and use similar credit enhancement techniques. For a description of the types of credit enhancement that may accompany privately-issued mortgage securities, see "Types of Credit Support" below. A Fund will not limit its investments to asset-backed securities with credit enhancements. Although asset-backed securities are not generally traded on a national securities exchange, such securities are widely traded by brokers and dealers, and to such extent will not be considered illiquid securities. TYPES OF CREDIT SUPPORT. Mortgage securities and asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. To lessen the effect of failure by obligors on underlying assets to make payments, such securities may contain elements of credit support. Such credit support falls into two categories: (i) liquidity protection and (ii) protection against losses resulting from ultimate default by an obligor on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that the pass-through of payments due on the underlying pool occurs in a timely fashion. Protection against losses resulting from ultimate default enhances the likelihood of ultimate payment of the obligations on at least a portion of the assets in the pool. Such protection may be provided through guarantees, insurance policies or letters of credit obtained by the issuer or sponsor from third parties, through various means of structuring the transaction or through a combination of such approaches. The Funds will not pay any additional fees for such credit support, although the existence of credit support may increase the price of a security. The ratings of mortgage securities and asset-backed securities for which third- party credit enhancement provides liquidity protection or protection against losses from default are generally dependent upon the continued creditworthiness of the provider of the credit enhancement. The ratings of such securities could be subject to reduction in the event of deterioration in the creditworthiness of the 4 credit enhancement provider even in cases where the delinquency and loss experience on the underlying pool of assets is better than expected. Examples of credit support arising out of the structure of the transaction include "senior-subordinated securities" (multiple class securities with one or more classes subordinate to other classes as to the payment of principal thereof and interest thereon, with the result that defaults on the underlying assets are borne first by the holders of the subordinated class), creation of "reserve funds" (where cash or investments sometimes funded from a portion of the payments on the underlying assets are held in reserve against future losses) and "over-collateralization" (where the scheduled payments on, or the principal amount of, the underlying assets exceed those required to make payment of the securities and pay any servicing or other fees). The degree of credit support provided for each issue is generally based on historical information with respect to the level of credit risk associated with the underlying assets. Delinquency or loss in excess of that which is anticipated could adversely affect the return on an investment in such security. BORROWING Each Fund may borrow money as permitted under the 1940 Act and as interpreted or modified by regulatory authority from time to time and subject to the Fund's investment restrictions. This borrowing may be unsecured. Provisions of the 1940 Act require a Fund to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed. In other words, total borrowings are limited to 33 1/3% of a Fund's total assets. Any borrowings for temporary administrative purposes in excess of 5% of the Fund's total assets must maintain continuous asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio holdings within three days to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. As noted below, a Fund also may enter into certain transactions, including reverse repurchase agreements, mortgage dollar rolls, and sale-buybacks, that can be viewed as constituting a form of borrowing or financing transaction by the Fund. To the extent a Fund covers its commitment under a mortgage dollar roll or reverse repurchase agreement (or economically similar transaction) by the segregation of assets, such an agreement or mortgage dollar roll will not be considered a "senior security" by the Fund and therefore will not be prohibited under the Fund's borrowing restrictions. Borrowing will tend to exaggerate the affect on net asset value of any increase or decrease in the market value of a Fund's portfolio. Money borrowed will be subject to interest costs which may or may not be recovered by appreciation of the securities purchased. A Fund also may be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate. CATASTROPHE BONDS The U.S. Government Securities Fund, the Strategic Income Fund, the Municipal Bond Fund and the Core Bond Fund may invest in "catastrophe bonds." Catastrophe bonds are fixed income securities, for which the return of principal and payment of interest is contingent on the non-occurrence of a specific "trigger" catastrophic event, such as a hurricane or and earthquake. They may be issued by government agencies, insurance companies, reinsurers, special purpose corporations or other on-shore or off-shore entities. If a trigger event causes losses exceeding a specific amount in the geographic region and time period specified in a bond, a Fund investing in the bond may lose a portion or all of its principal invested in the bond. If no trigger event occurs, the Fund will recover its principal plus interest. For some catastrophe bonds, the trigger event or losses may be based on companywide losses, index-portfolio losses, industry indices, or readings of scientific instruments rather than specified actual losses. Often the catastrophe bonds provide for extensions of maturity that are mandatory, or optional at the discretion of the issuer, in order to process and audit loss claims in those cases where a trigger event has, or possibly has, occurred. In addition to the specified trigger events, catastrophe bonds may also expose the Fund to certain unanticipated risks including but not limited to issuer (credit) default, adverse regulatory or jurisdictional interpretations, and adverse tax consequences. Catastrophe bonds are a relatively new type of financial instrument. As such, there is no significant trading history of these securities, and there can be no assurance that a liquid market in these instruments will develop. See "Illiquid Securities" below. Lack of a liquid market may impose the risk of higher transaction costs and the possibility that a Fund may be forced to liquidate positions when it would not be advantageous to do so. Catastrophe bonds are typically rated, and a Fund will only invest in catastrophe bonds that meet the credit quality requirements for the Fund. EURODOLLAR OBLIGATIONS All of the Funds except for the LifeStyle Funds may invest in Eurodollar obligations, including Eurodollar bonds and Eurodollar certificates of deposit. A Eurodollar obligation is a security denominated in U.S. dollars and originated principally in Europe, giving rise to the term Eurodollar. 5 Such securities are not registered with the Securities and Exchange Commission ("SEC") and generally may only be sold to U.S. investors after the initial offering and cooling-off periods. The market for Eurodollar securities is dominated by foreign-based investors, and the primary trading market for these securities is London. Eurodollar obligations, including Eurodollar bonds and Eurodollar certificates of deposit, are principally obligations of foreign branches of U.S. banks. These instruments represent the loan of funds actually on deposit in the U.S. The Trust believes that the U.S. bank would be liable in the event that its foreign branch failed to pay on its U.S. dollar-denominated obligations. Nevertheless, the assets supporting the liability could be expropriated or otherwise restricted if located outside the U.S. Exchange controls, taxes, or political and economic developments also could affect liquidity or repayment. Due to possibly conflicting laws or regulations, the foreign branch of the U.S. bank could maintain that the liability is solely its own, thus exposing a Fund to a possible loss. Such U.S. dollar-denominated obligations of foreign branches of Federal Deposit Insurance Corporation ("FDIC") member U.S. banks are not covered by the usual $100,000 of FDIC insurance if they are payable only at an office of such a bank located outside the U.S., Puerto Rico, Guam, American Samoa, and the Virgin Islands. Moreover, there may be less publicly available information about foreign issuers whose securities are not registered with the SEC and such foreign issuers may not be subject to the accounting, auditing and financial reporting standards applicable to issuers registered domestically. In addition, foreign issuers, stock exchanges and brokers generally are subject to less government regulation. There are, however, no risks of currency fluctuation since the obligations are U.S. dollar-denominated. Eurodollar Futures Contracts The Core Bond Fund, High Yield Bond Fund, Small Cap Growth Fund, Small Cap Index Fund, Small Cap Value Fund, Socially Responsible Fund, Stock Index Fund and the Strategic Income Fund may purchase and sell Eurodollar futures contracts, which enable purchasers to obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate for borrowings. A Fund might use Eurodollar futures contracts and options thereon to hedge against changes in a foreign prime lending interest rate to which many interest swaps and fixed income securities are linked. FOREIGN SECURITIES Securities of foreign issuers include obligations of foreign branches of U.S. banks and of foreign banks, common and preferred stocks, debt securities issued by foreign governments, corporations and supranational organizations, and American Depositary Receipts, European Depositary Receipts and Global Depositary Receipts ("ADRs", "EDRs" and "GDRs", respectively). ADRs are U.S. dollar- denominated securities backed by foreign securities deposited in a U.S. securities depositary. ADRs are created for trading in the U.S. markets. The value of an ADR will fluctuate with the value of the underlying security, reflect any changes in exchange rates and otherwise involve risks associated with investing in foreign securities. ADRs in which the Funds may invest may be sponsored or unsponsored. There may be less information available about foreign issuers of unsponsored ADRs. EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank similar to that for ADRs and are designed for use in non-U.S. securities markets. EDRs and GDRs are not necessarily quoted in the same currency as the underlying security. Investments in emerging market countries may be subject to additional risks. Specifically, volatile social, political and economic conditions may expose investments in emerging or developing markets to economic structures that are generally less diverse and mature. Emerging market countries may have less stable political systems than those of more developed countries. As a result, it is possible that favorable economic developments in certain emerging market countries may be suddenly slowed or reversed by unanticipated political or social events in such countries. Moreover, the economics of individual emerging market countries may differ favorably or unfavorably from the U.S. economy in such respects as the rate of growth in gross domestic product, the rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. Additionally, investments in emerging countries may also be adversely impacted due to the implementation of certain capital control measures which could limit a Fund's ability to access U.S. dollars, repatriate earned interest and/or principal, and sell selected securities. Foreign markets, especially emerging markets, may have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delays in settlement could result in temporary periods when a portion of the assets of a Fund is uninvested and no return is earned thereon. The inability of a Fund to make intended security purchases due to settlement could cause the Fund to miss attractive investment opportunities. Inability to dispose of Fund securities due to settlement problems could result in losses to a Fund due to subsequent declines in values of the Fund securities or, if the Fund has entered into a contract to sell the security, possible liability to the purchaser. Certain foreign markets, especially emerging markets, may require governmental approval for the repatriation of investment income, capital or the proceeds of sales of securities by foreign investors. A Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation of capital, as well as by the application to the Fund of any restrictions on investments. 6 FOREIGN SOVEREIGN DEBT SECURITIES Investing in foreign sovereign debt securities may expose a Fund to the direct or indirect consequences of political, social or economic changes in the developing and emerging countries that issue the securities. The ability and willingness of sovereign obligors in developing and emerging countries or the governmental authorities that control repayment of their external debt to pay principal and interest on such debt when due may depend on general economic and political conditions within the relevant country. Countries such as those in which the Funds may invest have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate trade difficulties and extreme poverty and unemployment. Many of these countries are also characterized by political uncertainty or instability. Additional factors which may influence the ability or willingness to service debt include, but are not limited to, a country's cash flow situation, the availability of sufficient foreign exchange on the date a payment is due, the relative size of its debt service burden to the economy as a whole, and its government's policy towards the International Monetary Fund ("IMF"), the World Bank and other international agencies. The ability of a foreign sovereign obligor to make timely payments on its external debt obligations will also be strongly influenced by the obligor's balance of payments, including export performance, its access to international credits and investments, fluctuations in interest rates and the extent of its foreign reserves. A country whose exports are concentrated in a few commodities or whose economy depends on certain strategic imports could be vulnerable to fluctuations in international prices of these commodities or imports. To the extent that a country receives payment for its exports in currencies other than dollars, its ability to make debt payments denominated in dollars could be adversely affected. If a foreign sovereign obligor cannot generate sufficient earnings from foreign trade to service its external debt, it may need to depend on continuing loans and aid from foreign governments, commercial banks and multilateral organizations, and inflows of foreign investment. The commitment on the part of these foreign governments, multilateral organizations and others to make such disbursements may be conditioned on the government's implementation of economic reforms and/or economic performance and the timely service of its obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties' commitments to lend funds, which may further impair the obligor's ability or willingness to timely service its debts. The cost of servicing external debt will also generally be adversely affected by rising international interest rates, because many external debt obligations bear interest at rates which are adjusted based upon international interest rates. The ability to service external debt will also depend on the level of the relevant government's international currency reserves and its access to foreign exchange. Currency devaluations may affect the ability of a sovereign obligor to obtain sufficient foreign exchange to service its external debt. As a result of the foregoing, a governmental obligor may default on its obligations. If such an event occurs, a Fund may have limited legal recourse against the issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts of the defaulting party itself, and the ability of the holder of foreign sovereign debt securities to obtain recourse may be subject to the political climate in the relevant country. In addition, no assurance can be given that the holders of commercial bank debt will not contest payments to the holders of other foreign sovereign debt obligations in the event of default under their commercial bank loan agreements. Sovereign obligors in developing and emerging countries are among the world's largest debtors to commercial banks, other governments, international financial organizations and other financial institutions. These obligors have in the past experienced substantial difficulties in servicing their external debt obligations, which led to defaults on certain obligations and the restructuring of certain indebtedness. Restructuring arrangements have included, among other things, reducing and rescheduling interest and principal payments by negotiating new or amended credit agreements or converting outstanding principal and unpaid interest to Brady Bonds, and obtaining new credit to finance interest payments. Holders of certain foreign sovereign debt securities may be requested to participate in the restructuring of such obligations and to extend further loans to their issuers. There can be no assurance that the Brady Bonds and other foreign sovereign debt securities in which the Funds may invest will not be subject to similar restructuring arrangements or to requests for new credit which may adversely affect a Fund's holdings. Furthermore, certain participants in the secondary market for such debt may be directly involved in negotiating the terms of these arrangements and may therefore have access to information not available to other market participants. In addition to high yield foreign sovereign debt securities, the Funds may also invest in investment grade foreign securities. 7 HIGH YIELD/HIGH RISK DOMESTIC CORPORATE DEBT SECURITIES High yield U.S. corporate debt securities include bonds, debentures and notes and will generally be unsecured. Most of these debt securities will bear interest at fixed rates. However, a Fund may also invest in debt securities with variable rates of interest or which involve equity features, such as contingent interest or participations based on revenues, sales or profits (i.e., interest or other payments, often in addition to a fixed rate of return, that are based on the borrower's attainment of specified levels of revenues, sales or profits and thus enable the holder of the security to share in the potential success of the venture). Because the High Yield Bond, Strategic Income and Core Bond Funds will invest primarily in fixed-income securities, the net asset value of each Fund's shares can be expected to change as general levels of interest rates fluctuate, although the market values of securities rated below investment grade and comparable unrated securities tend to react less to fluctuations in interest rate levels than do those of higher-rated securities. Except to the extent that values are affected independently by other factors such as developments relating to a specific issuer, when interest rates decline, the value of a fixed-income Fund can generally be expected to rise. Conversely, when interest rates rise, the value of a fixed-income Fund can generally be expected to decline. The secondary markets for high yield corporate and sovereign debt securities are not as liquid as the secondary markets for higher rated securities. The secondary markets for high yield debt securities are concentrated in relatively few market makers and participants in the market are mostly institutional investors, including insurance companies, banks, other financial institutions and mutual funds. In addition, the trading volume for high yield debt securities is generally lower than that for higher-rated securities and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a particular issuer. These factors may have an adverse effect on a Fund's ability to dispose of particular Fund investments and may limit the ability of those Funds to obtain accurate market quotations for purposes of valuing securities and calculating net asset value. If a Fund is not able to obtain precise or accurate market quotations for a particular security, it will become more difficult for the Trustees to value such Fund's investment Fund and the Fund's Trustees may have to use a greater degree of judgment in making such valuations. Less liquid secondary markets may also affect a Fund's ability to sell securities at their fair value. In addition, each Fund may invest a limited percentage of its assets in illiquid securities, which may be more difficult to value and to sell at fair value. If the secondary markets for high yield debt securities are affected by adverse economic conditions, the proportion of a Fund's assets invested in illiquid securities may increase. While the market values of securities rated below investment grade and comparable unrated securities tend to react less to fluctuations in interest rate levels than do those of higher-rated securities, the market values of certain of these securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher-rated securities. In addition, such securities generally present a higher degree of credit risk. Issuers of these securities are often highly leveraged and may not have more traditional methods of financing available to them, so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. The risk of loss due to default by such issuers is significantly greater than with investment grade securities because such securities generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness. HIGH YIELD/HIGH RISK FOREIGN SOVEREIGN DEBT SECURITIES Brady Bonds The Strategic Income, High Yield Bond, Core Bond and International Small Cap Funds expect that a significant portion of their emerging market governmental debt obligations will consist of "Brady Bonds." In addition, the International Equity and Balanced Funds may also invest in Brady Bonds. Brady Bonds are debt securities, generally denominated in U.S. dollars, issued under the framework of the "Brady Plan," an initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external commercial bank indebtedness. The Brady Plan framework, as it has developed, contemplates the exchange of external commercial bank debt for newly issued bonds (Brady Bonds). Brady Bonds may also be issued in respect of new money being advanced by existing lenders in connection with the debt restructuring. Investors should recognize that Brady Bonds have been issued only recently, and accordingly do not have a long payment history. Brady Bonds issued to date generally have maturities of between 15 and 30 years from the date of issuance and have traded at a deep discount from their face value. The Funds may invest in Brady Bonds of emerging market countries that have been issued to date, as well as those which may be issued in the future. In addition to Brady Bonds, the Funds may invest in emerging market governmental obligations issued as a result of debt restructuring agreements outside of the scope of the Brady Plan. 8 Agreements implemented under the Brady Plan to date are designed to achieve debt and debt-service reduction through specific options negotiated by a debtor nation with its creditors. As a result, the financial packages offered by each country differ. The types of options have included the exchange of outstanding commercial bank debt for bonds issued at 100% of face value of such debt which carry a below-market stated rate of interest (generally known as par bonds), bonds issued at a discount from the face value of such debt (generally known as discount bonds), bonds bearing an interest rate which increases over time and bonds issued in exchange for the advancement of new money by existing lenders. Discount bonds issued to date under the framework of the Brady Plan have generally borne interest computed semiannually at a rate equal to 13/16 of one percent above the then current six month LIBOR rate. Regardless of the stated face amount and stated interest rate of the various types of Brady Bonds, the Funds will purchase Brady Bonds in secondary markets, as described below, in which the price and yield to the investor reflect market conditions at the time of purchase. Brady Bonds issued to date have traded at a deep discount from their face value. Certain sovereign bonds are entitled to "value recovery payments" in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized. Certain Brady Bonds have been collateralized as to principal due at maturity (typically 15 to 30 years from the date of issuance) by U.S. Treasury zero coupon bonds with a maturity equal to the final maturity of such Brady Bonds, although the collateral is not available to investors until the final maturity of the Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and the debtor nations' reserves. In addition, interest payments on certain types of Brady Bonds may be collateralized by cash or high-grade securities in amounts that typically represent between 12 and 18 months of interest accruals on these instruments with the balance of the interest accruals being uncollateralized. The Funds may purchase Brady Bonds with no or limited collateralization, and will be relying for payment of interest and (except in the case of principal collateralized Brady Bonds) principal primarily on the willingness and ability of the foreign government to make payment in accordance with the terms of the Brady Bonds. Brady Bonds issued to date are purchased and sold in secondary markets through U.S. securities dealers and other financial institutions and are generally maintained through European transnational securities depositories. HYBRID INSTRUMENTS Hybrid instruments (a type of potentially high-risk derivative) have been developed and combine the elements of futures contracts or options with those of debt, preferred equity or a depositary instrument (hereinafter "Hybrid Instruments"). Generally, a Hybrid Instrument will be a debt security, preferred stock, depositary share, trust certificate, certificate of deposit or other evidence of indebtedness on which a portion of or all interest payments, and/or the principal or stated amount payable at maturity, redemption or retirement, is determined by reference to prices, changes in prices, or differences between prices, of securities, currencies, intangibles, goods, articles or commodities (collectively "Underlying Assets") or by another objective index, economic factor or other measure, such as interest rates, currency exchange rates, commodity indices, and securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments may take a variety of forms, including, but not limited to, debt instruments with interest or principal payments or redemption terms determined by reference to the value of a currency or commodity or securities index at a future point in time, preferred stock with dividend rates determined by reference to the value of a currency, or convertible securities with the conversion terms related to a particular commodity. Hybrid Instruments can be an efficient means of creating exposure to a particular market, or segment of a market, with the objective of enhancing total return. For example, a Fund may wish to take advantage of expected declines in interest rates in several European countries, but avoid the transactions costs associated with buying and currency-hedging the foreign bond positions. One solution would be to purchase a U.S. dollar- denominated Hybrid Instrument whose redemption price is linked to the average three year interest rate in a designated group of countries. The redemption price formula would provide for payoffs of greater than par if the average interest rate was lower than a specified level, and payoffs of less than par if rates were above the specified level. Furthermore, the Fund could limit the downside risk of the security by establishing a minimum redemption price so that the principal paid at maturity could not be below a predetermined minimum level if interest rates were to rise significantly. The purpose of this arrangement, known as a structured security with an embedded put option, would be to give the Fund the desired European bond exposure while avoiding currency risk, limiting downside market risk, and lowering transactions costs. Of course, there is no guarantee that the strategy will be successful and the Fund could lose money if, for example, interest rates do not move as anticipated or credit problems develop with the issuer of the Hybrid. 9 The risks of investing in Hybrid Instruments reflect a combination of the risks of investing in securities, options, futures and currencies. Thus, an investment in a Hybrid Instrument may entail significant risks that are not associated with a similar investment in a traditional debt instrument that has a fixed principal amount, is denominated in U.S. dollars or bears interest either at a fixed rate or a floating rate determined by reference to a common, nationally published Benchmark. The risks of a particular Hybrid Instrument will, of course, depend upon the terms of the instrument, but may include, without limitation, the possibility of significant changes in the Benchmarks or the prices of Underlying Assets to which the instrument is linked. Such risks generally depend upon factors which are unrelated to the operations or credit quality of the issuer of the Hybrid Instrument and which may not be readily foreseen by the purchaser, such as economic and political events, the supply and demand for the Underlying Assets and interest rate movements. In recent years, various Benchmarks and prices for Underlying Assets have been highly volatile, and such volatility may be expected in the future. Reference is also made to the discussion below of futures, options, and forward contracts for a description of certain risks associated with such investments. Hybrid Instruments are potentially more volatile and carry greater market risks than traditional debt instruments. Depending on the structure of the particular Hybrid Instrument, changes in a Benchmark may be magnified by the terms of the Hybrid Instrument and have an even more dramatic and substantial effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid Instrument and the Benchmark or Underlying Asset may not move in the same direction or at the same time. Hybrid Instruments may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. Alternatively, Hybrid Instruments may bear interest at above market rates but bear an increased risk of principal loss (or gain). The latter scenario may result if "leverage" is used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid Instrument is structured so that a given change in a Benchmark or Underlying Asset is multiplied to produce a greater value change in the Hybrid Instrument, thereby magnifying the risk of loss as well as the potential for gain. Hybrid Instruments may also carry liquidity risk since the instruments are often "customized" to meet the portfolio needs of a particular investor, and therefore, the number of investors that are willing and able to buy such instruments in the secondary market may be smaller than that for more traditional debt securities. In addition, because the purchase and sale of Hybrid Instruments could take place in an over-the-counter market without the guarantee of a central clearing organization or in a transaction between the Fund and the issuer of the Hybrid Instrument, the creditworthiness of the counter party or issuer of the Hybrid Instrument would be an additional risk factor which the Fund would have to consider and monitor. Hybrid Instruments also may not be subject to regulation of the CFTC, which generally regulates the trading of commodity futures by U.S. persons, the SEC, which regulates the offer and sale of securities by and to U.S. persons, or any other governmental regulatory authority. The various risks discussed above, particularly the market risk of such instruments, may in turn cause significant fluctuations in the net asset value of the Fund. Accordingly, no Fund will invest more than 10% of its assets in Hybrid Investments. Certain issuers of Hybrid Investments may be deemed to be investment companies as defined in the 1940 Act. As a result, the Funds' investments in these products will be subject to limits applicable to investments in investment companies and may be subject to restrictions contained in the 1940 Act. ILLIQUID SECURITIES Each of the Funds may invest a percentage of their net assets in securities or other investments that are illiquid or not readily marketable (including repurchase agreements with maturities exceeding seven days, stripped mortgage securities, catastrophe bonds and inverse floaters). Investment in illiquid securities involves the risk that, because of the lack of consistent market demand for such securities, a Fund may be forced to sell them at a discount from the last offer price. Excluded from the limitation on investment in illiquid securities are securities that are restricted as to resale but for which a ready market is available pursuant to exemption provided by Rule 144A adopted under the Securities Act of 1933, as amended (the "1933 Act") or other exemptions from the registration requirements of the 1933 Act. Whether securities sold pursuant to Rule 144A are readily marketable for purposes of the Fund's investment restriction is a determination to be made by the Subadvisors, subject to the Trustees' oversight and for which the Trustees are ultimately responsible. The Subadvisors will also monitor the liquidity of Rule 144A securities held by the Funds for which they are responsible. To the extent Rule 144A securities held by a Fund should become illiquid because of a lack of interest on the part of qualified institutional investors, the overall liquidity of the Fund could be adversely affected. In addition, the Funds may invest in commercial paper issued in reliance on the exemption from registration afforded by Section 4(2) of the 1933 Act. Section 4(2) commercial paper is restricted as to the disposition under federal securities law, and is generally sold to institutional investors, such as the Fund, who agree that they are purchasing the paper for investment purposes and not with a view to public distribution. Any resale by the purchaser must be made in an exempt transaction. Section 4(2) commercial paper is normally resold to other institutional investors like the Funds through or with the assistance of the issuer or investment dealers who make a market in Section 4(2) commercial paper, thus providing liquidity. The Funds' Subadvisors believe that Section 4(2) commercial paper meet their criteria for liquidity and is quite liquid. The Funds intend, therefore, to treat Section 4(2) commercial paper as liquid and not subject to the investment limitation applicable to illiquid securities. 10 The Funds' Subadvisors will monitor the liquidity of Section 4(2) commercial paper held by the Funds, subject to the Trustees' oversight and for which the Trustees are ultimately responsible. INDEX FUNDS AND TRACKING AN INDEX The factors that cause a Fund to perform differently from the index it tries to track are called tracking differences. There is no assurance that an Index Fund can track its index. The coefficient of correlation is an index number which shows how closely two variables are related. If r = 0 there is no tendency for one variable to change with the other. A value of + 1 means that one variable will vary exactly with the other. Index funds try to keep their coefficient of correlation as close to 1 as possible. Tracking accuracy is reviewed periodically by the Subadvisor for each of the Index Funds. If an Index Fund does not accurately track an index, the Subadvisor may rebalance the Fund's portfolio by selecting securities which will provide a more representative sampling of the securities in the index as a whole or the sector diversification within the index, as appropriate. The index may remove one stock and substitute another, requiring the Fund to do the same. When a stock is sold and the new stock purchased, the Fund incurs transaction costs. The index incurs no transaction costs. Therefore, any index fund portfolio manager cannot match exactly the performance of an index. An index fund may not buy every single stock in its index or in the same proportions as the index. The Subadvisor may rely on a statistical selection technique to figure out, of the stocks tracked by their index, how many and which ones to buy. Stocks are bought and sold in response to cash flows into and out of the Fund and when they are added to or dropped from the index. This generally helps to keep brokerage fees and other transaction costs lower than other funds. INFLATION-INDEXED BONDS The Core Bond Fund, the Strategic Income Fund, the U.S. Government Securities Fund and the Municipal Bond Fund may invest in inflation-indexed bonds. Inflation-indexed bonds are fixed income securities whose principal value is periodically adjusted according to the rate of inflation. Interest payments are made to bondholders semi-annually and are made up of two components: a fixed "real coupon" or spread, and a variable coupon linked to an inflation index. Accordingly, payments will increase or decrease each period as a result of changes in the inflation index. In the period of deflation payments may decrease to zero, but in any event will not be less than zero. Inflation- indexed bonds generally are issued at an interest rate lower than typical bonds, but are expected to retain their principal value over time. The interest rate on these bonds is fixed at issuance, but over the life of the bond this interest may be paid on an increasing principal value, which has been adjusted for inflation. Inflation-indexed securities issued by the U.S. Treasury will initially have maturities of five, ten or thirty years, although it is anticipated that securities with other maturities will be issued in the future. The securities will pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted principal amount. For example, if a Fund purchased an inflation-indexed bond with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and inflation over the first six months were 1%, the mid-year par value of the bond would be $1,010 and the first semi- annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the year reached 3%, the end-of-year par value of the bond would be $1.030 and the second semi-annual interest payment would be $15.45 ($1,030 times 1.5%). If the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. The Funds may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal. The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than 11 nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed bonds. While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise die to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond's inflation measure. The U.S. Treasury has only recently begun issuing inflation-indexed bonds. As such, there is no trading history of these securities, and there can be no assurance that a liquid market in these instruments will develop, although one is expected. Lack of a liquid market may impose the risk of higher transaction costs and the possibility that a Fund may be forced to liquidate positions when it would not be advantageous to do so. There also can be no assurance that the U.S. Treasury will issue any particular amount of inflation-indexed bonds. Certain foreign governments, such as the United Kingdom, Canada and Australia, have a longer history of issuing inflation-indexed bonds, and there may be a more liquid market in certain of these countries for these securities. The periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. Inflation-indexed bonds issued by a foreign government are generally adjusted to reflect a comparable inflation index, calculated by that government. There can be no assurance that the CPI-U or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States. Any increase in the principal amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity. INTERNATIONAL BONDS The U.S. Government Securities Fund, the Municipal Bond Fund, the Core Bond Fund, the High Yield Bond Fund, the Small Cap Index Fund, the Socially Responsible Fund, the Stock Index Fund, the International Equity Fund and the Strategic Income Fund may invest in international bonds, which include U.S. dollar-denominated bonds issued by foreign corporations for which the primary trading market is abroad ("Euro Bonds"). International bonds may involve special risks and considerations not typically associated with investing in U.S. companies, including differences in accounting, auditing and financial reporting standards; generally higher commission rates on foreign portfolio transactions; the possibility of nationalization, expropriation or confiscatory taxation; adverse changes in investment or exchange control regulations (which may include suspension of the ability to transfer currency from a country); and political instability which could affect U.S. investments in foreign countries. Additionally, dispositions of foreign securities and dividends and interest payable on those securities may be subject to foreign taxes, including withholding taxes. Foreign securities often trade with less frequency and volume than domestic securities and, therefore, may exhibit greater price volatility. A Fund's investment in international bonds also may be affected either unfavorably or favorably by fluctuations in the relative rates of exchange between currencies of different nations, by exchange control regulations and by indigenous economic and political developments. LENDING PORTFOLIO SECURITIES For purposes of realizing additional income, each Fund, except the LifeStyle Funds, may make secured loans of its portfolio securities. Securities loans are made to broker-dealers and other financial institutions approved by State Street Bank and Trust Company (the "Custodian"), custodian to the Funds and pursuant to agreements requiring that the loans be continuously secured by collateral at least equal at all times to the loaned securities marked to market on a daily basis. The collateral received will consist of liquid assets or such other collateral as permitted by interpretations or rules of the SEC. While the securities are on loan, the Funds will continue to receive the equivalent of the interest or dividends paid by the issuer on the securities, as well as interest on the investment of the collateral or a fee from the borrower. Any loan of portfolio securities by any Fund will be callable at any time by the lending Fund upon notice of five business days. When voting or consent rights which accompany loaned securities pass to the borrower, the lending Fund will call the loan, in whole or in part as appropriate, to permit the exercise of such rights if the matters involved would have a material effect on that Fund's investment in the securities being loaned. If the borrower fails to maintain the requisite amount of collateral, the loan will automatically terminate, and the lending Fund will be permitted to use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over collateral. As with any extensions of credit, there are risks of delay in receiving additional collateral or in the recovery of the securities or, in some cases, even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will be made only when the Custodian 12 considers the borrowing broker-dealers or financial institutions to be creditworthy and of good standing and the interest earned from such loans to justify the attendant risks. On termination of the loan, the borrower will be required to return the securities to the lending Fund. Any gain or loss in the market price during the loan would inure to the lending Fund. The lending Fund may pay reasonable finders', administrative, and custodial fees in connection with a loan of its securities. INVESTMENT COMPANIES All of the Funds may invest in the securities of other open-end or closed-end investment companies subject to the limitations imposed by the 1940 Act. A Fund will indirectly bear its proportionate share of any management fees and other expenses paid by an investment company in which it invests. MONEY MARKET INSTRUMENTS All Funds may invest in Money Market Instruments. The Money Market Fund will be invested in the types of money market instruments described below. All other Funds may invest in certain of the instruments listed below unless a Fund's investment policy strictly prohibits such investment. Certain Funds may purchase such instruments to invest otherwise idle cash or for defensive purposes. 1. U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS. U.S. Government obligations are debt securities issued or guaranteed as to principal or interest by the U.S. Treasury. These securities include treasury bills, notes and bonds. U.S. Government agency obligations are debt securities issued or guaranteed as to principal or interest by an agency or instrumentality of the U.S. Government pursuant to authority granted by Congress. U.S. Government agency obligations include, but are not limited to, the Student Loan Marketing Association, Federal Home Loan Banks ("FHLMC"), Government National Mortgage Association ("GNMA"), Federal Intermediate Credit Banks and the Federal National Mortgage Association ("FNMA"). U.S. instrumentality obligations include, but are not limited to, the Export-Import Bank and Farmers Home Administration. Some obligations issued or guaranteed by U.S. Government agencies or instrumentalities are supported by the right of the issuer to borrow from the U.S. Treasury or the Federal Reserve Banks, such as those issued by Federal Intermediate Credit Banks; others, such as those issued by the FNMA, are supported by discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, such as those issued by the Student Loan Marketing Association, are supported only by the credit of the agency or instrumentality. There are also separately traded interest components of securities issued or guaranteed by the U.S. Treasury. No assurance can be given that the U.S. Government will provide financial support to such U.S. Government sponsored agencies or instrumentalities in the future, since it is not obligated to do so by law. The foregoing types of instruments are hereafter collectively referred to as "U.S. Government securities." 2. CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND OTHER OBLIGATIONS. Certificates of deposit are certificates issued against funds deposited in a bank or a savings and loan association. They are for a definite period of time and earn a specified rate of return. Bankers' acceptances are short-term credit instruments evidencing the obligation of a bank to pay a draft which has been drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. They are primarily used to finance the import, export, transfer or storage of goods. They are termed "accepted" when a bank guarantees their payment at maturity. Certain Funds may acquire obligations of foreign banks and foreign branches of U.S. banks. These obligations are not insured by the Federal Deposit Insurance Corporation. The Funds limit investments in United States certificates of deposit and bankers acceptances to obligations of United States banks (including foreign branches) which have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or where deposits are insured by the Federal Deposit Insurance Corporation. A Fund may also invest in certificates of deposit of savings and loan associations (federally or state chartered and federally insured) having total assets in excess of $1 billion. 3. COMMERCIAL PAPER. Commercial paper consists of unsecured promissory notes issued by corporations to finance short-term credit needs. Commercial paper is issued in registered form with maturities generally not exceeding nine months. Commercial paper obligations may include variable amount master demand notes. Variable amount master demand notes are obligations that permit the investment of fluctuating amounts at varying rates of interest pursuant to direct arrangements between a Fund, as lender, and the borrower. These notes permit daily changes in the amounts borrowed. A Fund has the right to increase the amount under the note at any time up to the full amount provided by the note agreement, or to decrease the amount, and the borrower may prepay up to the full 13 amount of the note without penalty. Because variable amount master demand notes are direct lending arrangements between the lender and borrower, it is not generally contemplated that such instruments will be traded, and there is no secondary market for these notes, although they are redeemable (and thus immediately repayable by the borrower) at face value, plus accrued interest, at any time. A Fund will only invest in variable amount master demand notes issued by companies which at the date of investment have an outstanding debt issue rated "Aaa" or "Aa" by Moody's or "AAA" or "AA" by S&P and which the applicable Subadvisor has determined present minimal risk of loss to the Fund. A Subadvisor will look generally at the financial strength of the issuing company as "backing" for the note and not to any security interest or supplemental source such as a bank letter of credit. A variable amount master demand note will be valued each day as a Fund's net asset value is determined, which value will generally be equal to the face value of the note plus accrued interest unless the financial position of the issuer is such that its ability to repay the note when due is in question. 4. CORPORATE OBLIGATIONS. Corporate obligations include bonds and notes issued by corporations to finance longer-term credit needs than those supported by commercial paper. While such obligations generally have maturities of ten years or more, the Money Market Fund and the Municipal Money Market Fund will only purchase obligations which have remaining maturities of thirteen months or less from the date of purchase. 5. REPURCHASE AGREEMENTS. Repurchase agreements are arrangements involving the purchase of obligations by a Fund and the simultaneous agreement to resell the same obligations on demand or at a specified future date and at an agreed upon price. The majority of repurchase transactions run from day to day and delivery pursuant to the resale provision typically will occur within one to five business days of the purchase. A repurchase agreement can be viewed as a loan made by a Fund to the seller of the obligation with such obligation serving as collateral for the seller's agreement to repay the amount borrowed with interest. Such transactions afford an opportunity for a Fund to earn a return on cash which is only temporarily available. Repurchase agreements entered into by the Fund will be with banks, brokers or dealers. However, a Fund will enter into a repurchase agreement with a broker or dealer only if the broker or dealer agrees to deposit additional collateral should the value of the obligation purchased by the Fund decrease below the resale price. The Trustees have adopted procedures that establish certain creditworthiness, asset and collateralization requirements for the counterparties to a Fund's repurchase agreements. These procedures limit the counterparties to repurchase transactions to those financial institutions which are members of the Federal Reserve System and/or a primary government securities dealer reporting to the Federal Reserve Bank of New York's Market Reports Division or a broker/dealer which meet certain creditworthiness criteria or which report U.S. Government securities positions to the Federal Reserve Board. However, the Trustees reserve the right to change the criteria used to select such financial institutions and broker/dealers. The Trustees will regularly monitor the use of repurchase agreements and the Subadvisors will, pursuant to procedures adopted by the Trustees, continuously monitor the amount of collateral held with respect to a repurchase transaction so that it equals or exceeds the amount of the obligations. Should an issuer of a repurchase agreement fail to repurchase the underlying obligation, the losses to the Fund, if any, would be the difference between the repurchase price and the underlying obligation's market value. A Fund might also incur certain costs in liquidating the underlying obligation. Moreover, if bankruptcy or other insolvency proceedings should be commenced with respect to the seller, realization upon the underlying obligation by the Fund might be delayed or limited. Generally, repurchase agreements are of a short duration, often less than one week but on occasion for longer periods. 6. CANADIAN AND PROVINCIAL GOVERNMENT AND CROWN AGENCY OBLIGATIONS. Canadian Government obligations are debt securities issued or guaranteed as to principal or interest by the Government of Canada pursuant to authority granted by the Parliament of Canada and approved by the Governor in Council, where necessary. These securities include treasury bills, notes, bonds, debentures and marketable Government of Canada loans. Canadian Crown agency obligations are debt securities issued or guaranteed by a Crown corporation, company or agency ("Crown agencies") pursuant to authority granted by the Parliament of Canada and approved by the Governor in Council, where necessary. Certain Crown agencies are by statute agents of Her Majesty in right of Canada, and their obligations, when properly authorized, constitute direct obligations of the Government of Canada. Such obligations include, but are not limited to, those issued or guaranteed by the Export Development Corporation, Farm Credit Corporation, Federal Business Development Bank and Canada Post Corporation. In addition, certain Crown agencies which are not by law agents of Her Majesty may issue obligations which by statute the Governor in Council may authorize the Minister of Finance to guarantee on behalf of the Government of Canada. Other Crown agencies which are not by law agents of Her Majesty may issue or guarantee obligations not entitled to be guaranteed by the Government of Canada. No assurance can be given that the Government of Canada will support the obligations of Crown agencies which are not agents of Her Majesty, which it has not guaranteed, since it is not obligated to do so by law. Provincial Government obligations are debt securities issued or guaranteed as to principal or interest by the government of any province of Canada pursuant to authority granted by the Legislature of any such province and approved by the Lieutenant Governor in Council of any such province, where necessary. These securities include treasury bills, notes, bonds and debentures. Provincial Crown agency obligations are debt securities issued or guaranteed by a provincial Crown corporation, company or agency ("provincial Crown agencies") pursuant to authority granted by a provincial Legislature and approved by the Lieutenant Governor in Council of such province, where necessary. Certain provincial Crown agencies are by statute agents of Her Majesty in right of a 14 particular province of Canada, and their obligations, when properly authorized, constitute direct obligations of such province. Other provincial Crown agencies which are not by law agents of Her Majesty in right of a particular province of Canada may issue obligations which by statute the Lieutenant Governor in Council of such province may guarantee, or may authorize the Treasurer thereof to guarantee, on behalf of the government of such province. Finally, other provincial Crown agencies which are not by law agencies of Her Majesty may issue or guarantee obligations not entitled to be guaranteed by a provincial government. No assurance can be given that the government of any province of Canada will support the obligations of provincial Crown agencies which are not agents of Her Majesty, which it has not guaranteed, as it is not obligated to do so by law. Provincial Crown agency obligations described above include, but are not limited to, those issued or guaranteed by a provincial railway corporation, a provincial hydroelectric or power commission or authority, a provincial municipal financing corporation or agency and a provincial telephone commission or authority. Any Canadian obligation acquired by the Money Market Fund will be denominated in U.S. dollars. MONEY MARKET SECURITIES OF FOREIGN ISSUERS Foreign money market instruments utilized by the Funds will be limited to: (i) obligations of, or guaranteed by, a foreign government, its agencies or instrumentalities; (ii) certificates of deposit, bankers' acceptances, short- term notes, negotiable time deposits and other obligations of the ten largest banks in each foreign country, measured in terms of net assets; and (iii) other short-term unsecured corporate obligations (usually 1 to 270 day commercial paper) of foreign companies. For temporary purposes or in light of adverse foreign political or economic conditions, the Funds may invest in short-term high quality foreign money market securities as described in the Prospectus. MORTGAGE DOLLAR ROLLS Each of the Funds (except the High Yield Bond Fund, the Money Market Fund, the Municipal Money Market Fund and the LifeStyle Funds) may enter into mortgage dollar rolls. Under a mortgage dollar roll, a Fund sells mortgage-backed securities for delivery in the future (generally within 30 days) and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. During the roll period, the Fund forgoes principal and interest paid on the mortgage-backed securities. A Fund is compensated by the difference between the current sale price and the lower forward price for the future purchase (often referred to as the "drop") as well as by the interest earned on the cash proceeds of the initial sale. A Fund may also be compensated by receipt of a commitment fee. A Fund may only enter into covered rolls. A "covered roll" is a specific type of dollar roll for which there is an offsetting liquid asset. Dollar roll transactions involve the risk that the market value of the securities sold by the Fund may decline below the repurchase price of those securities. While a mortgage dollar roll may be considered a form of leveraging and may, therefore, increase fluctuations in a Fund's net asset value per share, each Fund may cover the transaction as described above. Dollar roll transactions for terms exceeding three months may be deemed "illiquid" and subject to a Fund's overall limitations on investments in illiquid securities. MORTGAGE SECURITIES Mortgage securities differ from conventional bonds in that principal is paid over the life of the securities rather than at maturity. As a result, a Fund receives monthly scheduled payments of principal and interest, and may receive unscheduled principal payments representing prepayments on the underlying mortgages. When a Fund reinvests the payments and any unscheduled prepayments of principal it receives, it may receive a rate of interest which is higher or lower than the rate on the existing mortgage securities. For this reason, mortgage securities may be less effective than other types of debt securities as a means of locking in long-term interest rates. In addition, because the underlying mortgage loans and assets may be prepaid at any time, if a Fund purchases mortgage securities at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have the opposite effect of increasing yield to maturity. Conversely, if a Fund purchases these securities at a discount, faster than expected prepayments will increase, while slower than expected payments will reduce, yield to maturity. Adjustable rate mortgage securities are similar to the mortgage securities discussed above, except that unlike fixed rate mortgage securities, adjustable rate mortgage securities are collateralized by or represent interests in mortgage loans with variable rates of interest. These variable rates of interest reset periodically to align themselves with market rates. Most adjustable rate mortgage securities provide for an initial mortgage rate that is in effect for a fixed period, typically ranging from three to twelve months. Thereafter, the mortgage interest rate will reset periodically in accordance with movements in a specified published interest rate index. The amount of interest due to an adjustable rate mortgage holder is determined in accordance with movements in a specified published interest rate index by adding a pre- determined increment or "margin" to the specified interest rate index. Many adjustable rate mortgage securities reset their interest rates based on changes in the one-year, three-year and five-year constant maturity Treasury rates, the three-month or six-month Treasury Bill rate, the 11th District Federal Home Loan Bank Cost of Funds, the National Median 15 Cost of Funds, the one-month, three-month, six-month or one-year London Interbank Offered Rate ("LIBOR") and other market rates. A Fund will not benefit from increases in interest rates to the extent that interest rates rise to the point where they cause the current coupon of adjustable rate mortgages held as investments to exceed any maximum allowable annual or lifetime reset limits (or "cap rates") for a particular mortgage. In this event, the value of the mortgage securities in a Fund would likely decrease. Also, the Fund's net asset value could vary to the extent that current yields on adjustable rate mortgage securities are different than market yields during interim periods between coupon reset dates. During periods of declining interest rates, income to a Fund derived from adjustable rate mortgages which remain in a mortgage pool will decrease in contrast to the income on fixed rate mortgages, which will remain constant. Adjustable rate mortgages also have less potential for appreciation in value as interest rates decline than do fixed rate investments. MORTGAGE BACKED SECURITIES. Mortgage-backed securities are issued by lenders such as mortgage bankers, commercial banks, and savings and loan associations. Such securities differ from conventional debt securities which provide for periodic payment of interest in fixed amounts (usually semi-annually) with principal payments at maturity or specified call dates. Mortgage-backed securities provide monthly payments which are, in effect, a "pass-through" of the monthly interest and principal payments (including any prepayments) made by the individual borrowers on the pooled mortgage loans. Principal prepayments result from the sale of the underlying property or the refinancing or foreclosure of underlying mortgages. The yield of mortgage-backed securities is based on the average life of the underlying pool of mortgage loans, which is computed on the basis of the maturities of the underlying instruments. The actual life of any particular pool may be shortened by unscheduled or early payments of principal and interest. The occurrence of prepayments is affected by a wide range of economic, demographic and social factors and, accordingly, it is not possible to accurately predict the average life of a particular pool. For pools of fixed rate 30-year mortgages, it has been common practice to assume that prepayments will result in a 12-year average life. The actual prepayment experience of a pool of mortgage loans may cause the yield realized by the Fund to differ from the yield calculated on the basis of the average life of the pool. In addition, if any of these mortgage-backed securities are purchased at a premium, the premium may be lost in the event of early prepayment which may result in a loss to the Fund. Prepayments tend to increase during periods of falling interest rates, while during periods of rising interest rates prepayments will most likely decline. Reinvestment by the Fund of scheduled principal payments and unscheduled prepayments may occur at higher or lower rates than the original investment, thus affecting the yield of the Fund. Monthly interest payments received by the Fund have a compounding effect which will increase the yield to shareholders as compared to debt obligations that pay interest semiannually. Because of the reinvestment of prepayments of principal at current rates, mortgage-backed securities may be less effective than Treasury bonds of similar maturity at maintaining yields during periods of declining interest rates. Also, although the value of debt securities may increase as interest rates decline, the value of these pass-through type of securities may not increase as much due to the prepayment feature. Mortgage-backed securities that are issued or guaranteed by the U.S. Government, its agencies or instrumentalities, are not subject to the Funds' industry concentration restrictions, set forth below under "Investment Restrictions," by virtue of the exclusion from the test available to all U.S. Government securities. In the case of privately issued mortgage-related securities, the Funds take the position that mortgage-related securities do not represent interests in any particular "industry" or group of industries. PRIVATELY-ISSUED MORTGAGE SECURITIES. Privately-issued pass through securities provide for the monthly principal and interest payments made by individual borrowers to pass through to investors on a corporate basis, and in privately- issued collateralized mortgage obligations, as further described below. Privately-issued mortgage securities are issued by private originators of, or investors in, mortgage loans, including mortgage bankers, commercial banks, investment banks, savings and loan associations and special purpose subsidiaries of the foregoing. Since privately-issued mortgage certificates are not guaranteed by an entity having the credit status of GNMA or FHLMC, such securities generally are structured with one or more types of credit enhancement. For a description of the types of credit enhancements that may accompany privately-issued mortgage securities, see "Asset-Backed Securities-- Types of Credit Support" below. A Fund will not limit its investments to asset- backed securities with credit enhancements. COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs"). CMOs generally are bonds or certificates issued in multiple classes that are collateralized by or represent an interest in mortgages. CMOs may be issued by single-purpose, stand-alone finance subsidiaries or trusts of financial institutions, government agencies, investment banks or other similar institutions. Each class of CMOs, often referred to as a "tranche", may be issued with a specific fixed coupon rate (which may be zero) or a floating coupon rate, and has a stated maturity or final distribution date. Principal prepayments on the underlying mortgages may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Interest is paid or accrued on CMOs on a monthly, quarterly or semiannual basis. The principal of and interest on the underlying mortgages may be allocated among the several classes of a series of a CMO in many ways. The general goal sought to be achieved in allocating cash flows on the underlying mortgages to the various classes of a series of CMOs is to create tranches on which the expected cash flows have a higher degree of predictability than the underlying mortgages. As a general matter, the more predictable the cash flow is on a CMO tranche, the lower the anticipated yield 16 will be on that tranche at the time of issuance. As part of the process of creating more predictable cash flows on most of the tranches in a series of CMOs, one or more tranches generally must be created that absorb most of the volatility in the cash flows on the underlying mortgages. The yields on these tranches are relatively higher than on tranches with more predictable cash flows. Because of the uncertainty of the cash flows on these tranches, and the sensitivity thereof to changes in prepayment rates on the underlying mortgages, the market prices of and yield on these tranches tend to be highly volatile. CMOs purchased may be: (1) collateralized by pools of mortgages in which each mortgage is guaranteed as to payment of principal and interest by an agency or instrumentality of the U.S. Government; (2) collateralized by pools of mortgages in which payment of principal and interest is guaranteed by the issuer and the guarantee is collateralized by U.S. Government securities; or (3) securities for which the proceeds of the issuance are invested in mortgage securities and payment of the principal and interest is supported by the credit of an agency or instrumentality of the U.S. Government. STRIPS. In addition to the U.S. Government securities discussed above, certain Funds may invest in separately traded interest components of securities issued or guaranteed by the U.S. Treasury. The interest components of selected securities are traded independently under the Separate Trading of Registered Interest and Principal of Securities program ("STRIPS"). Under the STRIPS program, the interest components are individually numbered and separately issued by the U.S. Treasury at the request of depositary financial institutions, which then trade the component parts independently. STRIPPED MORTGAGE SECURITIES. Stripped mortgage securities are derivative multiclass mortgage securities. Stripped mortgage securities may be issued by agencies or instrumentalities of the U.S. Government, or by private issuers, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing. Stripped mortgage securities have greater volatility than other types of mortgage securities in which a Fund invests. Although stripped mortgage securities are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers, the market for such securities has not yet been fully developed. Accordingly, stripped mortgage securities are generally illiquid and to such extent, together with any other illiquid investments, will not exceed the illiquidity restriction on a Fund's assets. Stripped mortgage securities are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of stripped mortgage security 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 (the interest-only or "IO" class), while the other class will receive all of the principal (the principal-only or "PO" class). The yield to maturity on an IO class is extremely sensitive not only to changes in prevailing interest rates but also the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on a Fund's yield to maturity. 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 even if the securities have received the highest rating by a nationally recognized statistical rating organization. As interest rates rise and fall, the value of IOs tends to move in the same direction as interest rates. The value of the other mortgage securities described in this Statement of Additional Information, like other debt instruments, will tend to move in the opposite direction of interest rates. Accordingly, the Fund believes that investing in IOs, in conjunction with the other mortgage securities described herein, will contribute to a Fund's relatively stable net asset value. In addition to the stripped mortgage securities described above, the Strategic Income Fund may invest in similar securities such as Super POs and Leveraged IOs which are more volatile than POs or IOs. Risks associated with instruments such as Super POs are similar in nature to those risks related to investments in POs. Risks connected with Leveraged IOs and IOettes are similar in nature to those associated with IOs. The Strategic Income Fund may also invest in other similar instruments developed in the future that are deemed consistent with the investment objective, policies and restrictions of the Fund. 17 Under the Code, POs may generate taxable income from the current accrual of original issue discount, without a corresponding distribution of cash to a Fund. INVERSE FLOATERS. The Strategic Income and Municipal Bond Funds may invest in inverse floaters, which are also derivative mortgage securities. Inverse floaters may be issued by agencies or instrumentalities of the U.S. Government, or by private issuers, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing. Inverse floaters have greater volatility than other types of mortgage securities in which a Fund invests (with the exception of stripped mortgage securities). Although inverse floaters are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers, the market for such securities has not yet been fully developed. Accordingly, inverse floaters are generally illiquid and to such extent, together with any other illiquid investments, will not exceed the illiquidity restriction on the Fund's assets. Inverse floaters are structured as a class of security that receives distributions on a pool of mortgage assets and whose yields move in the opposite direction of short-term interest rates and at an accelerated rate. Such securities have the effect of providing a degree of investment leverage since they will generally increase or decrease in value in response to changes in market interest rates at a rate which is a multiple (typically two) of the rate at which fixed-rate long-term debt obligations increase or decrease in response to such changes. As a result, the market values of such securities will generally be more volatile than the market value of fixed-rate obligations. MUNICIPAL BONDS Municipal Bonds are debt obligations that are typically issued by a municipality to obtain funding for public purposes, such as the construction of public facilities (e.g., airports, highways, bridges and schools). Private activity bonds issued by or on behalf of public authorities to finance various privately operated facilities also are considered municipal bonds. Municipal bonds at the time of issuance may have varying maturities. The Municipal Money Market Fund will not purchase a security which, after giving effect to any demand features, has a remaining maturity of greater than 13 months, or maintains a dollar- weighed average portfolio maturity in excess of 90 days. The Municipal Bond Fund and the Municipal Money Market Fund may invest in investment grade municipal bonds. Investment grade municipal bonds are instruments that are rated at the time of purchase within the four highest ratings assigned by Moody's, S&P, Fitch, or determined by a Subadvisor to be of comparable quality. The four highest ratings currently assigned by Moody's to municipal bonds are "Aaa", "Aa", "A" and "Baa"; the four highest ratings assigned by S&P and Fitch to municipal bonds are "AAA", "AA", "A" and "BBB". Although municipal obligations rated in the fourth highest rating category by Moody's (i.e., "Baa3") or S&P or Fitch (i.e., "BBB-") are considered investment grade, they may be subject to greater risks than other higher rated investment grade securities. A more complete description of the ratings assigned by Moody's, S&P and Fitch is included in the Appendix herein. MUNICIPAL COMMERCIAL PAPER The Municipal Bond Fund and the Municipal Money Market Fund may purchase municipal commercial paper. Municipal commercial paper that may be purchased by the Funds consists of short term obligations of a municipality. Such paper is likely to be issued to meet seasonal working capital needs of a municipality or as interim construction financing. Municipal commercial paper, in many cases, is backed by a letter of credit lending agreement, repurchase agreement or other credit facility agreement offered by banks or other institutions. The Funds may invest in commercial paper that is rated at the time of purchase "P-2" or better by Moody's, "A-2" or better by S&P, or "F-2" or better by Fitch, or, if not rated, determined by a Subadvisor to be of comparable quality. MUNICIPAL NOTES Municipal notes are notes issued by local, regional and state governments to meet their short-term funding requirements. Municipal notes generally have maturities at the time of issuance of three years or less. Funds may invest in municipal notes rated at the time of purchase ""MIG1", "MIG2" (or "VMIG-1" or "VMIG-2", in the case of variable rate demand notes), "P-2" or better by Moody's, "SP-2", "A-2" or better by S&P or "F-2" or better by Fitch, or if not rated, determined by a Subadvisor to be of comparable quality. Municipal notes that may be purchased by the Funds include, but are not limited to the following: 18 TAX ANTICIPATION NOTES. Tax anticipation notes ("TANs") are sold as interim financing in anticipation of collection of taxes. An uncertainty in a municipal issuer's capacity to raise taxes as a result of such factors as a decline in its tax base or a rise in delinquencies could adversely affect the issuer's ability to meet its obligations on outstanding TANs. BOND ANTICIPATION NOTES. Bond anticipation notes ("BANs") are sold as interim financing in anticipation of a bond sale. The ability of a municipal issuer to meet its obligations on its BANs is primarily dependent on the issuer's adequate access to the longer term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal of, and interest on, BANs. REVENUE ANTICIPATION NOTES. Revenue anticipation notes ("RANs") are sold as interim financing in anticipation of receipt of other revenues. A decline in the receipt of certain revenues, such as anticipated revenues from another level of government, could adversely affect an issuer's ability to meet its obligations on outstanding RANs. TANs, BANs and RANs are usually general obligations of the issuer. MUNICIPAL OBLIGATIONS Municipal obligations are debt obligations issued by or on behalf of states, cities, municipalities and other public authorities. The two principal classifications of municipal obligations that may be held by the Municipal Bond Fund and the Municipal Money Market Fund are "general obligation" securities and "revenue" securities. General obligation securities are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue securities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source such as the user of a facility being financed. Revenue securities may include private activity bonds. Such bonds may be issued by or on behalf of public authorities to finance various privately operated facilities and are not payable from the unrestricted revenues of the issuer. As a result, the credit quality of private activity bonds is frequently related directly to the credit standing of private corporations or other entities. In addition, the interest on private activity bonds issued after August 7, 1986, is subject to the federal alternative minimum tax. The Funds will not be restricted with respect to the proportion of its assets that may be invested in such obligations. Accordingly, the Funds may not be a suitable investment vehicle for individuals or corporations that are subject to the federal alternative minimum tax. The Funds' portfolio may also include "moral obligation" securities, which are normally issued by special purpose public authorities. If the issuer of moral obligation securities is unable to meet its debt service obligations from current revenues, it may draw on a reserve fund, the restoration of which is a moral commitment but not a legal obligation of the state or municipality that created the issuer. In addition, the Funds may invest in municipal lease obligations ("MLOs"). MLOs are not fully backed by the municipality's credit and their interest may become taxable if the lease is assigned. If the governmental user does not appropriate sufficient funds for the following year's lease payments, the lease will terminate, with the possibility of default on the MLO and loss to the Fund. The Subadvisor may invest each Fund's net assets in MLOs and will monitor certain factors in evaluating the liquidity of such obligations. These factors include (i) the frequency of trades and quotes for the MLO; (ii) the number of dealers willing to purchase or sell such MLO and the number of other potential purchasers; (iii) the willingness of dealers to undertake to make a market in the MLO; (iv) the nature of the MLO and the nature of the marketplace trades (e.g., the time needed to dispose of the security and the method of soliciting offers); (v) the nature of the offering of such MLO (e.g., the size of the issue and the number of anticipated holders); (vi) the ability of the MLO to maintain its marketability throughout the time the instrument is held in the Fund; and (vii) other factors, if any, which the Subadvisor deems relevant to determining the existence of a trading market for such MLO. The Funds also may invest in resource recovery bonds, which may be general obligations of the issuing municipality or supported by corporate or bank guarantees. The viability of the resource recovery project, environmental protection regulations and project operator tax incentives may affect the value and credit quality of resource recovery bonds. The Funds currently intend to invest substantially all of their assets in obligations the interest on which is exempt from regular federal income taxes. However, in order to maintain liquidity, the Municipal Bond Fund may invest up to 20% of its assets in taxable obligations, including taxable high-quality short-term money market instruments; obligations of the U.S. Government or its agencies or instrumentalities, commercial paper of issuers rated, at the time of purchase, "A-2" or better by S&P, "P-2" or better by Moody's, or "F-2" or better by Fitch or which if unrated, in the opinion of the Subadvisor, are of comparable quality; certificates of deposit, bankers' acceptances or time deposits of U.S. banks with total assets of at least $1 billion (including obligations of foreign 19 branches of such banks) and of the 75 largest foreign commercial banks in terms of total assets (including domestic branches of such banks), and repurchase agreements with respect to such obligations. If at some future date, in the opinion of the Subadvisor, adverse conditions prevail in the market for obligations the interest on which is exempt from regular federal income taxes, the Funds may invest its assets without limit in taxable high-quality short-term money market instruments. Dividends paid by the Funds that are attributable to interest derived from taxable money market instruments will be taxable to investors. From time to time, the Municipal Bond Fund may invest more than 25% of its assets in obligations whose interest payments are from revenues of similar projects (such as utilities or hospitals) or whose issuers share the same geographic location. As a result, the Fund may be more susceptible to a single economic, political or regulatory development than would a portfolio of securities with a greater variety of issuers. These developments include proposed legislation or pending court decisions affecting the financing of such projects and market factors affecting the demand for their services or products. Opinions relating to the validity of municipal obligations and to the exempting of interest thereon from regular federal income tax are rendered by bond counsel to the respective issuers at the time of issuance. Neither the Trust nor the Subadvisor will review the proceedings relating to the issuance of municipal obligations or the basis for such opinions. PERFORMANCE INDEXED PAPER The Core Bond Fund, Strategic Income Fund, U.S. Government Securities Fund and Municipal Bond Fund may invest in performance indexed paper ("PIPs"). PIPs is U.S. dollar-denominated commercial paper the yield of which is linked to certain foreign exchange rate movements. The yield to the investor on performance indexed paper is established at maturity as a function of spot exchange rates between the U.S. dollar and a designated currency as of or about that time (generally, the index maturity two days prior to maturity). The yield to the investor will be within a range stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above, market yields on U.S. dollar-denominated commercial paper with both the minimum and maximum rates of return on the investment corresponding to the minimum and maximum values of the spot exchange rate two business days prior to maturity. PREFERRED STOCK AND CONVERTIBLE SECURITIES Preferred stock is a class of capital stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting rights. Convertible securities are securities (usually preferred shares or bonds) that are exchangeable for a set number of another form of securities (usually common stock) at a prestated price. The convertible feature is usually designed as a sweetener to enhance the marketability of the security. PRE-REFUNDED BONDS From time to time, a municipality may refund a bond that it has already issued prior to the original bond's call date by issuing a second bond, the proceeds of which are used to purchase securities. The securities are placed in an escrow account pursuant to an agreement between the municipality and an independent escrow agent. The principal and interest payments on the securities are then used to pay off the original bondholders. For the purposes of diversification, pre-refunded bonds will be treated as governmental issues. REAL ESTATE SECURITIES AND REAL ESTATE INVESTMENT TRUSTS ("REITS") The Core Bond Fund, the Strategic Income Fund, the U.S. Government Securities Fund, the International Equity Fund, the High Yield Bond Fund and the Municipal Bond Fund may invest in real estate securities and REITs. Real estate securities are equity securities consisting of (i) common stocks, (ii) rights or warrants to purchase common stocks, (iii) securities convertible into common stocks and (iv) preferred stocks issued by real estate companies. A real estate company is one that derives at least 50% of its revenues from the ownership, construction, financing, management or sale of commercial, industrial, or residential real estate or that has at least 50% of its assets invested in real estate. REITs are pooled investment vehicles which invest primarily in income producing real estate or real estate related loans or interests. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. Like regulated investment companies such as the 20 Funds, REITs are not taxed on income distributed to shareholders provided they comply with certain requirements under the Code. A Fund will indirectly bear its proportionate share of any expenses paid by REITs in which it invests in addition to the expenses paid by a Fund. Investing in REITs involves certain unique risks. Equity REITs may be affected by changes in the value of the underlying property owned by such REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs are dependent upon management skills, are not diversified (except to the extent the Code requires), and are subject to the risks of financing projects. REITs are subject to heavy cash flow dependency, default by borrowers, self-liquidation, and the possibilities of failing to qualify for the exemption from tax for distributed income under the Code and failing to maintain their exemptions from the 1940 Act. REITs (especially mortgage REITs) are also subject to interest rate risks. REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS Each of the Funds may enter into repurchase agreements and reverse repurchase agreements. Repurchase agreements involve the acquisition by a Fund of debt securities subject to an agreement to resell them at an agreed-upon price. Under a repurchase agreement, at the time the Fund acquires a security, it agrees to resell it to the original seller (a financial institution or broker/dealer which meets the guidelines established by the Trustees) and must deliver the security (and/or securities that may be added to or substituted for it under the repurchase agreement) to the original seller on an agreed-upon date in the future. The repurchase price is in excess of the purchase price. The arrangement is in economic effect a loan collateralized by securities. A Fund's risk in a repurchase transaction is limited to the ability of the seller to pay the agreed-upon sum on the delivery date. In the event of bankruptcy or other default by the seller, there may be possible delays and expenses in liquidating the instrument purchased, decline in its value and loss of interest. Securities subject to repurchase agreements will be monitored by the Subadvisor and additional collateral will be requested if necessary so that the value of the collateral is at least equal to the value of the repurchase obligation, including the interest accrued thereon. Under a reverse repurchase agreement, a Fund may sell a debt security and agree to repurchase it at an agreed upon time and at an agreed upon price. The Fund retains record ownership of the security and the right to receive interest and principal payments thereon. At an agreed upon future date, the Fund repurchases the security by remitting the proceeds previously received, plus interest. The difference between the amount the Fund receives for the security and the amount it pays on repurchase is deemed to be payment of interest. The Fund may maintain in a segregated custodial account cash, Treasury bills or other U.S. Government securities having an aggregate value equal to the amount of such commitment to repurchase including accrued interest, until payment is made. In certain types of agreements, there is no agreed-upon repurchase date and interest payments are calculated daily, often based on the prevailing overnight repurchase rate. While a reverse repurchase agreement may be considered a form of leveraging and may, therefore, increase fluctuations in a Fund's net asset value per share, each Fund will cover the transaction as described above. STRUCTURED NOTES The Core Bond Fund, the International Equity Fund, the Strategic Income Fund, the U.S. Government Securities Fund, the High Yield Bond Fund and the Municipal Bond Fund may invest in structured notes. Structured notes are derivative fixed income securities, the interest rate or principal of which is determined by an unrelated indicator. Indexed securities include structured notes as well as securities other than debt securities, the interest rate or principal of which is determined by an unrelated indicator. Indexed securities may include a multiplier that multiplies the indexed element by a specified factor and, therefore, the value of such securities may be very volatile. To the extent a Fund invests in these securities, however, a Subadvisor will analyze these securities in its overall assessment of the effective duration of the Fund's portfolio in an effort to monitor the Fund's interest rate risk. VARIABLE RATE DEMAND NOTES Each Fund may invest in variable rate demand notes ("VRDNs"). VRDNs are either taxable or tax-exempt obligations which contain a floating or variable interest rate adjustment formula and which are subject to an unconditional right of demand to receive payment of the principal balance plus accrued interest either at any time or at specified intervals not exceeding one year and in either case upon no more than seven days notice. The interest rates are adjustable at intervals ranging from daily ("floating rate") to up to one year to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDN at approximately the par value of the VRDN upon the adjustment date. The adjustments are typically based upon the prime rate of a bank or some other appropriate interest rate adjustment index. 21 The Municipal Bond Fund, the Municipal Money Market Fund and the Money Market Fund may also invest in VRDNs in the form of participation interests ("Participating VRDNs") in variable rate tax-exempt obligations held by a financial institution, typically a commercial bank ("institution"). Participating VRDNs provide the Fund with a specified undivided interest (up to 100%) in the underlying obligation and the right to institution upon a specified number of days' notice, not to exceed seven days. A Fund has an undivided interest in the underlying obligation and thus participates on the same basis as the institution in such obligation except that the institution typically retains fees out of the interest paid on the obligation for servicing the obligation and issuing the repurchase commitment. WARRANT TRANSACTIONS AND RISKS Each of the Funds (other than the Money Market Fund and the Municipal Money Market Fund) may purchase warrants, including warrants traded independently of the underlying securities. Such transactions entail certain risks. A warrant is a security, usually issued together with a bond or preferred stock, that entitles the holder to buy a proportionate amount of common stock at a specified price, usually higher than the market price at the time of issuance, for a period of years or to perpetuity. In contrast, rights, which also represent the right to buy common shares, normally have a subscription price lower than the current market value of the common stock and a life of two to four weeks. A warrant is usually issued as a sweetener, to enhance the marketability of the accompanying fixed income securities. Warrants may be considered more speculative than certain other types of investments in that prior to their exercise they do not entitle a holder to dividends and voting rights with respect to the securities which may be purchased by the exercise thereof, nor do they represent any rights in the assets of the issuing company. Also, the value of the warrant does not necessarily change with the value of the underlying security. If a warrant expires unexercised, the Fund will lose the amount paid for the warrant and any transaction costs. WHEN-ISSUED SECURITIES ("FORWARD COMMITMENTS") In order to help ensure the availability of suitable securities, each of the Funds may purchase debt securities on a "when-issued" or on a "forward delivery" basis, which means that the obligations will be delivered to the Fund at a future date, which may be a month or more after the date of commitment (referred to as "forward commitments"). It is expected that, under normal circumstances, a Fund purchasing securities on a when-issued or forward delivery basis will take delivery of the securities, but the Fund may sell the securities before the settlement date, if such action is deemed advisable. In general, a Fund does not pay for the securities or start earning interest on them until the purchase of the obligation is scheduled to be settled, but it does, in the meantime, record the transaction and reflect the value each day of the securities in determining its net asset value. At the time delivery is made, the value of when-issued or forward delivery securities may be more or less than the transaction price, and the yields then available in the market may be higher than those obtained in the transaction. While awaiting delivery of the obligations purchased on such bases, a Fund may establish a segregated account consisting of cash or liquid high quality debt securities equal to the amount of the commitments to purchase when- issued or forward delivery securities. The availability of liquid assets for this purpose and the effect of asset segregation on a Fund's ability to meet its current obligations, to honor requests for redemption and to have its investment Fund managed properly may limit the extent to which the Fund may purchase when- issued or forward delivery securities. Except as may be imposed by these factors, there is no limit on the percentage of a Fund's total assets that may be committed to such transactions. ZERO COUPON SECURITIES AND PAY-IN-KIND BONDS Each Fund may invest in zero coupon securities and pay-in-kind bonds which involve special risk considerations. Zero coupon securities are debt securities that do not provide for the payment of cash income but are sold at substantial discounts from their value at maturity. When a zero coupon security is held to maturity, its entire return, which consists of the amortization of discount, comes from the difference between its purchase price and its maturity value. This difference is known at the time of purchase, so that investors holding zero coupon securities until maturity know at the time of their investment what the return on their investment will be. Certain zero coupon securities also are sold at substantial discounts from their maturity value and provide for the commencement of regular interest payments at a deferred date. The Funds also may purchase pay-in-kind bonds. Pay-in-kind bonds are bonds that pay all or a portion of their interest in the form of additional debt or equity securities. Zero coupon securities and pay-in-kind bonds tend to be subject to greater price fluctuations in response to changes in interest rates than are ordinary interest-paying debt securities with similar maturities. The value of zero coupon securities appreciates more during periods of declining interest rates and depreciates more during periods of rising interest rates. Zero coupon securities and pay-in-kind bonds may be issued by a wide variety of corporate and governmental issuers. Although zero coupon securities and pay-in- kind bonds are generally not traded on a national securities exchange, such securities are widely traded by brokers and dealers and, to such extent, will not be considered illiquid for the purposes of the investment restriction under "Investment Restrictions" below. Current federal income tax law requires the holder of a zero coupon security or certain pay-in-kind bonds to accrue income with respect to these securities prior to the receipt of cash payments. To maintain its qualification as a regulated investment company and 22 avoid liability for federal income and excise taxes, a Fund may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements. HEDGING AND OTHER STRATEGIC TRANSACTIONS A discussion of Hedging and Other Strategic Transactions follows. With the exception of the International Equity Fund,which may use certain Strategic Transactions for both hedging and non-hedging purposes, these strategies will be used for hedging purposes only, including hedging various market risks (such as interest rates, currency exchange rates and broad or specific market movements), and managing the effective maturity or duration of debt instruments held by the Fund. No Fund which is authorized to use any of these investment strategies will be obligated, however, to pursue any of such strategies and no Fund makes any representation as to the availability of these techniques at this time or at any time in the future. In addition, a Fund's ability to pursue certain of these strategies may be limited by the Commodity Exchange Act, as amended, applicable rules and regulations of the CFTC thereunder and the federal income tax requirements applicable to regulated investment companies which are not operated as commodity pools. GENERAL CHARACTERISTICS OF OPTIONS Put options and call options typically have similar structural characteristics and operational mechanics regardless of the underlying instrument on which they are purchased or sold. Thus, the following general discussion relates to each of the particular types of options discussed in greater detail below. In addition, many Hedging and Other Strategic Transactions involving options may require segregation of Fund assets in special accounts. A put option gives the purchaser of the option, upon payment of a premium, the right to sell, and the writer the obligation to buy, the underlying security, commodity, index, currency or other instrument at the exercise price. A Fund's purchase of a put option on a security, for example, might be designed to protect its holdings in the underlying instrument (or, in some cases, a similar instrument) against a substantial decline in the market value of such instrument by giving the Fund the right to sell the instrument at the option exercise price. A call option, upon payment of a premium, gives the purchaser of the option the right to buy, and the seller the obligation to sell, the underlying instrument at the exercise price. A Fund's purchase of a call option on a security, financial futures contract, index, currency or other instrument might be intended to protect the Fund against an increase in the price of the underlying instrument that it intends to purchase in the future by fixing the price at which it may purchase the instrument. An "American" style put or call option may be exercised at any time during the option period, whereas a "European" style put or call option may be exercised only upon expiration or during a fixed period prior to expiration. Exchange-listed options are issued by a regulated intermediary such as the Options Clearing Corporation ("OCC"), which guarantees the performance of the obligations of the parties to the options. The discussion below uses the OCC as an example, but is also applicable to other similar financial intermediaries. OCC-issued and exchange-listed options, with certain exceptions, generally settle by physical delivery of the underlying security or currency, although in the future, cash settlement may become available. Index options and Eurodollar instruments (which are described below under "Eurodollar Instruments") are cash settled for the net amount, if any, by which the option is "in-the-money" (that is, the amount by which the value of the underlying instrument exceeds, in the case of a call option, or is less than, in the case of a put option, the exercise price of the option) at the time the option is exercised. Frequently, rather than taking or making delivery of the underlying instrument through the process of exercising the option, listed options are closed by entering into offsetting purchase or sale transactions that do not result in ownership of the new option. A Fund's ability to close out its position as a purchaser or seller of an OCC- issued or exchange-listed put or call option is dependent, in part, upon the liquidity of the particular option market. Among the possible reasons for the absence of a liquid option market on an exchange are: (1) insufficient trading interest in certain options, (2) restrictions on transactions imposed by an exchange, (3) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or underlying securities, including reaching daily price limits, (4) interruption of the normal operations of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or the OCC to handle current trading volume or (6) a decision by one or more exchanges to discontinue the trading of options (or a particular class or series of options), in which event the relevant market for that option on that exchange would cease to exist, although any such outstanding options on that exchange would continue to be exercisable in accordance with their terms. The hours of trading for listed options may not coincide with the hours during which the underlying financial instruments are traded. To the extent that the option markets close before the markets for the underlying financial instruments, significant price and rate movements can take place in the underlying markets that would not be reflected in the corresponding option markets. Over-the-counter ("OTC") options are purchased from or sold to securities dealers, financial institutions or other parties (collectively referred to as "Counterparties" and individually referred to as a "Counterparty") through a direct bilateral agreement with the Counterparty. In contrast to exchange- listed options, which generally have standardized terms and performance mechanics, 23 all of the terms of an OTC option, including such terms as method of settlement, term, exercise price, premium, guaranties and security, are determined by negotiation of the parties. It is anticipated that any Fund authorized to use OTC options will generally only enter into OTC options that have cash settlement provisions, although it will not be required to do so. Unless the parties provide for it, no central clearing or guaranty function is involved in an OTC option. As a result, if a Counterparty fails to make or take delivery of the security, currency or other instrument underlying an OTC option it has entered into with a Fund or fails to make a cash settlement payment due in accordance with the terms of that option, the Fund will lose any premium it paid for the option as well as any anticipated benefit of the transaction. Thus, the Subadvisor must assess the creditworthiness of each such Counterparty or any guarantor or credit enhancement of the Counterparty's credit to determine the likelihood that the terms of the OTC option will be met. A Fund will enter into OTC option transactions only with U.S. Government securities dealers recognized by the Federal Reserve Bank of New York as "primary dealers," or broker-dealers, domestic or foreign banks, or other financial institutions that are deemed creditworthy by the Subadvisor. In the absence of a change in the current position of the staff of the SEC, OTC options purchased by a Fund and the amount of the Fund's obligation pursuant to an OTC option sold by the Fund (the cost of the sell-back plus the in-the-money amount, if any) or the value of the assets held to cover such options will be deemed illiquid. If a Fund sells a call option, the premium that it receives may serve as a partial hedge, to the extent of the option premium, against a decrease in the value of the underlying securities or instruments held by the Fund or will increase the Fund's income. Similarly, the sale of put options can also provide Fund gains. If and to the extent authorized to do so, a Fund may purchase and sell call options on securities and on Eurodollar instruments that are traded on U.S. and foreign securities exchanges and in the OTC markets, and on securities indices, currencies and futures contracts. All calls sold by a Fund must be "covered," that is, the Fund must own the securities subject to the call, must own an offsetting option on a futures position, or must otherwise meet the asset segregation requirements described below for so long as the call is outstanding. Even though a Fund will receive the option premium to help protect it against loss, a call sold by the Fund will expose the Fund during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security or instrument and may require the Fund to hold a security or instrument that it might otherwise have sold. Each Fund reserves the right to purchase or sell options on instruments and indices which may be developed in the future to the extent consistent with applicable law, the Fund's investment objective and the restrictions set forth herein. If and to the extent authorized to do so, a Fund may purchase and sell put options on securities (whether or not it holds the securities in its portfolio) and on securities indices, currencies and futures contracts. A Fund will not sell put options if, as a result, the Fund would be required to segregate more than 50% of its assets to cover its potential obligations under put options other than those with respect to futures contracts. In selling put options, a Fund faces the risk that it may be required to buy the underlying security at a disadvantageous price above the market price. GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS If and to the extent authorized to do so, a Fund may trade financial futures contracts or purchase or sell put and call options on those contracts as a hedge against anticipated interest rate, currency or market changes, for duration management and for permissible non-hedging purposes. Futures contracts are generally bought and sold on the commodities exchanges on which they are listed with payment of initial and variation margin as described below. The sale of a futures contract creates a firm obligation by a Fund, as seller, to deliver to the buyer the specific type of financial instrument called for in the contract at a specific future time for a specified price (or, with respect to certain instruments, the net cash amount). Options on futures contracts are similar to options on securities except that an option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract and obligates the seller to deliver that position. A Fund's use of financial futures contracts and options thereon will in all cases be consistent with applicable regulatory requirements and in particular the rules and regulations of the CFTC and generally will be entered into only for bona fide hedging, risk management (including duration management). Maintaining a futures contract or selling an option on a futures contract will typically require a Fund to deposit with a financial intermediary, as security for its obligations, an amount of cash or other specified assets ("initial margin") that initially is from 1% to 10% of the face amount of the contract (but may be higher in some circumstances). Additional cash or assets ("variation margin") may be required to be deposited thereafter daily as the mark-to-market value of the futures contract fluctuates. The purchase of an option on a financial futures contract involves payment of a premium for the option without any further obligation on the part of a Fund. If a Fund exercises an option on a futures contract it will be obligated to post initial margin (and potentially variation margin) for the resulting futures position just as it would for any futures position. Futures contracts and options thereon are generally settled by entering into an offsetting transaction, but no assurance can be given that a position can be offset prior to settlement or that delivery will occur. 24 All of the Funds intend to comply with guidelines of eligibility for exclusion from the definition of the term "commodity pool operator" adopted by the CFTC and the National Futures Association, which regulate trading in the futures markets. A Fund will use futures contracts and related options, to the extent otherwise permitted, primarily for bona fide hedging purposes within the meaning of CFTC regulations. To the extent that a Fund holds positions in futures contracts and related options that do not fall within the definition of bona fide hedging transactions, the aggregate initial margins and premiums required to establish such positions will not exceed 5% of the fair market value of the Fund's net assets, after taking into account unrealized profits and unrealized losses on any such contracts it has entered into. The value of all futures contracts sold by a Fund (adjusted for the historical volatility relationship between such Fund and the contracts) will not exceed the total market value of the Fund's securities. OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES If and to the extent authorized to do so, a Fund may purchase and sell call and put options on securities indices and other financial indices. In so doing, the Fund can achieve many of the same objectives it would achieve through the sale or purchase of options on individual securities or other instruments. Options on securities indices and other financial indices are similar to options on a security or other instrument except that, rather than settling by physical delivery of the underlying instrument, options on indices settle by cash settlement; that is, an option on an index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the index upon which the option is based exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option (except if, in the case of an OTC option, physical delivery is specified). This amount of cash is equal to the excess of the closing price of the index over the exercise price of the option, which also may be multiplied by a formula value. The seller of the option is obligated, in return for the premium received, to make delivery of this amount. The gain or loss on an option on an index depends on price movements in the instruments comprising the market, market segment, industry or other composite on which the underlying index is based, rather than price movements in individual securities, as is the case with respect to options on securities. CURRENCY TRANSACTIONS If and to the extent authorized to do so, a Fund may engage in currency transactions with Counterparties to hedge, and with respect to the International Equity Fund for non-hedging purposes as well, the value of portfolio securities denominated in particular currencies against fluctuations in relative value. Currency transactions include currency forward contracts, exchange-listed currency futures contracts and options thereon, exchange-listed and OTC options on currencies, and currency swaps. A forward currency contract involves a privately negotiated obligation to purchase or sell (with delivery generally required) a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. A currency swap is an agreement to exchange cash flows based on the notional difference among two or more currencies and operates similarly to an interest rate swap, which is described below under "Swaps, Caps, Floors and Collars". A Fund may enter into currency transactions only with Counterparties that are deemed creditworthy by the Subadvisor. A Fund's (except for the International Equity Fund) dealings in forward currency contracts and other currency transactions such as futures contracts, options, options on futures contracts and swaps will be limited to hedging and other non- speculative purposes, including transaction hedging and position hedging. See discussion herein for the International Equity Fund. Transaction hedging is entering into a currency transaction with respect to specific assets or liabilities of a Fund, which will generally arise in connection with the purchase or sale of the Fund's portfolio securities or the receipt of income from them. Position hedging is entering into a currency transaction with respect to portfolio securities positions denominated or generally quoted in that currency. A Fund will not enter into a transaction to hedge currency exposure to an extent greater, after netting all transactions intended wholly or partially to offset other transactions, than the aggregate market value (at the time of entering into the transaction) of the securities held by the Fund that are denominated or generally quoted in or currently convertible into the currency, other than with respect to proxy hedging as described below. A Fund may cross-hedge currencies by entering into transactions to purchase or sell one or more currencies that are expected to increase or decline in value relative to other currencies to which the Fund has or in which the Fund expects to have exposure. To reduce the effect of currency fluctuations on the value of existing or anticipated holdings of its securities, a Fund may also engage in proxy hedging. Proxy hedging is often used when the currency to which a Fund's holdings is exposed is difficult to hedge generally or difficult to hedge against the dollar. Proxy hedging entails entering into a forward contract to sell a currency, the changes in the value of which are generally considered to be linked to a currency or currencies in which some or all of a Fund's securities are or are expected to be denominated, and to buy dollars. The amount of the contract would not exceed the market value of the Fund's securities denominated in linked currencies. 25 Currency transactions are subject to risks different from other portfolio transactions, as discussed below under "Risk Factors." COMBINED TRANSACTIONS If and to the extent authorized to do so, a Fund may enter into multiple transactions, including multiple options transactions, multiple futures transactions, multiple currency transactions (including forward currency contracts), multiple interest rate transactions and any combination of futures, options, currency and interest rate transactions, instead of a single Hedging and Other Strategic Transaction, as part of a single or combined strategy when, in the judgment of the Subadvisor, it is in the best interests of the Fund to do so. A combined transaction will usually contain elements of risk that are present in each of its component transactions. Although combined transactions will normally be entered into by a Fund based on the Subadvisor's judgment that the combined strategies will reduce risk or otherwise more effectively achieve the desired portfolio management goal, it is possible that the combination will instead increase the risks or hinder achievement of the portfolio management objective. INTERNATIONAL EQUITY FUND'S STRATEGIC TRANSACTIONS The International Equity Fund may use certain Strategic Transactions and instruments for both hedging and non-hedging purposes. Circumstances under which such techniques might be used to further the Fund's investment objective include, but are not limited to the following: gaining exposure to a market in response to changes in the Fund's investment strategy, upon the inflow of investable cash; when the instrument provides greater liquidity than the underlying market; when the Fund is restricted from directly owning a security or currency; or when these strategies and instruments provide a pricing advantage or lower transaction costs. The Fund also may purchase combinations of instruments in order to gain exposure to an investment instead of actually purchasing such investment. For example, the Fund may purchase and sell forward foreign currency exchange contracts in combination with other transactions (such as the purchase and sale of stock and stock index futures contracts). The Fund will not use derivatives in a manner that creates leverage. SWAPS, CAPS, FLOORS AND COLLARS A Fund may be authorized to enter into interest rate, currency and index swaps, the purchase or sale of related caps, floors and collars and other derivatives. A Fund will enter into these transactions primarily to seek to preserve a return or spread on a particular investment or portion of its portfolio, to protect against currency fluctuations, as a duration management technique or to protect against any increase in the price of securities a Fund anticipates purchasing at a later date. A Fund will use these transactions for non-speculative purposes and will not sell interest rate caps or floors if it does not own securities or other instruments providing the income the Fund may be obligated to pay. Interest rate swaps involve the exchange by a Fund with another party of their respective commitments to pay or receive interest (for example, an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal). A currency swap is an agreement to exchange cash flows on a notional amount based on changes in the values of the reference indices. The purchase of a cap entitles the purchaser to receive payments on a notional principal amount from the party selling the cap to the extent that a specified index exceeds a predetermined interest rate. The purchase of an interest rate floor entitles the purchaser to receive payments of interest on a notional principal amount from the party selling the interest rate floor to the extent that a specified index falls below a predetermined interest rate or amount. The purchase of a floor entitles the purchaser to receive payments on a notional principal amount from the party selling the floor to the extent that a specific index falls below a predetermined interest rate or amount. A collar is a combination of a cap and a floor that preserves a certain return with a predetermined range of interest rates or values. A Fund will usually enter into interest rate swaps on a net basis, that is, the two payment streams are netted out in a cash settlement on the payment date or dates specified in the instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Inasmuch as these swaps, caps, floors, collars and other similar derivatives are entered into for good faith hedging or other non-speculative purposes, they do not constitute senior securities under the 1940 Act, and, thus, will not be treated as being subject to the Fund's borrowing restrictions. A Fund will not enter into any swap, cap, floor, collar or other derivative transaction unless the Counterparty is deemed creditworthy by the Subadvisor. If a Counterparty defaults, a Fund may have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid. Caps, floors and collars are more recent innovations for which standardized documentation has not yet been fully developed and, for that reason, they are less liquid than swaps. The liquidity of swap agreements will be determined by a Subadvisor based on various factors, including (1) the frequency of trades and quotations, (2) the number of dealers and prospective purchasers in the marketplace, (3) dealer undertakings to make a market, (4) the nature of the security (including any demand or tender features), and (5) the nature of the marketplace for trades (including the ability to assign or offset a Fund's rights and obligations relating to the investment). Such determination will govern whether a swap will be deemed to be within each Fund's restriction on investments in securities that are not readily marketable. 26 Each Fund may maintain cash and appropriate liquid assets in a segregated custodial account to cover its current obligations under swap agreements. If a Fund enters into a swap agreement on a net basis, it may segregate assets with a daily value at least equal to the excess, if any, of the Fund's accrued obligations under the swap agreement over the accrued amount the Fund is entitled to receive under the agreement. If a Fund enters into a swap agreement on other than a net basis, it may segregate assets with a value equal to the full amount of the Fund's accrued obligations under the agreement. See "Use of Segregated and Other Special Accounts." EURODOLLAR INSTRUMENTS If and to the extent authorized to do so, a Fund may make investments in Eurodollar instruments, which are typically dollar-denominated futures contracts or options on those contracts that are linked to the LIBOR, although foreign currency denominated instruments are available from time to time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate for borrowings. A Fund might use Eurodollar futures contracts and options thereon to hedge against changes in LIBOR, to which many interest rate swaps and fixed income instruments are linked. 27 RISK FACTORS Hedging and Other Strategic Transactions have special risks associated with them, including possible default by the Counterparty to the transaction, illiquidity and, to the extent the Subadvisor's view as to certain market movements is incorrect, the risk that the use of the Hedging and Other Strategic Transactions could result in losses greater than if they had not been used. Use of put and call options could result in losses to a Fund, force the sale or purchase of portfolio securities at inopportune times or for prices higher than (in the case of put options) or lower than (in the case of call options) current market values, or cause a Fund to hold a security it might otherwise sell. The use of futures and options transactions entails certain special risks. In particular, the variable degree of correlation between price movements of futures contracts and price movements in the related securities position of a Fund could create the possibility that losses on the derivative instrument are greater than gains in the value of the Fund's position. In addition, futures and options markets could be illiquid in some circumstances and certain over- the-counter options could have no markets. As a result, in certain markets, a Fund might not be able to close out a transaction without incurring substantial losses. Although a Fund's use of futures and options transactions for hedging should tend to minimize the risk of loss due to a decline in the value of the hedged position, at the same time it will tend to limit any potential gain to a Fund that might result from an increase in value of the position. Finally, the daily variation margin requirements for futures contracts create a greater ongoing potential financial risk than would purchases of options, in which case the exposure is limited to the cost of the initial premium. Currency transactions involve some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to a Fund if the underlying currency fluctuates in value to a degree or in a direction that is not anticipated. Further, the risk exists that the perceived linkage between various currencies may not be present or may not be present during the particular time that a Fund is engaging in proxy hedging. Currency transactions are also subject to risks different from those of other portfolio transactions. Because currency control is of great importance to the issuing governments and influences economic planning and policy, purchases and sales of currency and related instruments can be adversely affected by government exchange controls, limitations or restrictions on repatriation of currency, and manipulations or exchange restrictions imposed by governments. These forms of governmental actions can result in losses to a Fund if it is unable to deliver or receive currency or monies in settlement of obligations and could also cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as incurring transaction costs. Buyers and sellers of currency futures contracts are subject to the same risks that apply to the use of futures contracts generally. Further, settlement of a currency futures contract for the purchase of most currencies must occur at a bank based in the issuing nation. Trading options on currency futures contracts is relatively new, and the ability to establish and close out positions on these options is subject to the maintenance of a liquid market that may not always be available. Currency exchange rates may fluctuate based on factors extrinsic to that country's economy. Losses resulting from the use of Hedging and Other Strategic Transactions will reduce a Fund's net asset value, and possibly income, and the losses can be greater than if Hedging and Other Strategic Transactions had not been used. RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES When conducted outside the United States, Hedging and Other Strategic Transactions may not be regulated as rigorously as in the United States, may not involve a clearing mechanism and related guarantees, and will be subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities, currencies and other instruments. The value of positions taken as part of non-U.S. Hedging and Other Strategic Transactions also could be adversely affected by: (1) other complex foreign political, legal and economic factors, (2) lesser availability of data on which to make trading decisions than in the United States, (3) delays in a Fund's ability to act upon economic events occurring in foreign markets during non-business hours in the United States, (4) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States and (5) lower trading volume and liquidity. 28 USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS Use of many Hedging and Other Strategic Transactions by a Fund may require, among other things, that the Fund segregate cash or other liquid assets with its custodian, or a designated sub-custodian, to the extent the Fund's obligations are not otherwise "covered" through ownership of the underlying security, financial instrument or currency. In general, either the full amount of any obligation by a Fund to pay or deliver securities or assets will be covered at all times by the securities, instruments or currency required to be delivered, or, subject to any regulatory restrictions and fund internal policy, an amount of cash or other liquid assets equal to the current amount of the obligation may be segregated with the custodian or sub-custodian. Segregated assets cannot be sold or transferred unless equivalent assets are substituted in their place or it is no longer necessary to segregate them. A call option on securities written by a Fund, for example, may require the Fund to hold the securities subject to the call (or securities convertible into the needed securities without additional consideration) or to segregate liquid assets sufficient to purchase and deliver the securities if the call is exercised. A call option sold by a Fund on an index may require the Fund to own portfolio securities that correlate with the index or to segregate liquid assets equal to the excess of the index value over the exercise price on a current basis. A put option on securities written by a Fund may require the Fund to segregate liquid assets equal to the exercise price. Except when a Fund enters into a forward contract in connection with the purchase or sale of a security denominated in a foreign currency or for other non-speculative purposes, which requires no segregation, a currency contract that obligates the Fund to buy or sell a foreign currency may generally require the Fund to hold an amount of that currency, liquid securities denominated in that currency equal to a Fund's obligations or to segregate liquid assets equal to the amount of the Fund's obligations. OTC options entered into by a Fund, including those on securities, currency, financial instruments or indices, and OCC-issued and exchange-listed index options will generally provide for cash settlement, although a Fund will not be required to do so. As a result, when a Fund sells these instruments it may segregate an amount of assets equal to its obligations under the options. OCC- issued and exchange-listed options sold by a Fund other than those described above generally settle with physical delivery, and the Fund may segregate an amount of assets equal to the full value of the option. OTC options settling with physical delivery or with an election of either physical delivery or cash settlement will be treated the same as other options settling with physical delivery. In the case of a futures contract or an option on a futures contract, a Fund must deposit initial margin and, in some instances, daily variation margin, and may segregate assets sufficient to meet its obligations to purchase or provide securities or currencies, or to pay the amount owed at the expiration of an index-based futures contract. These assets may consist of cash, cash equivalents, liquid high grade debt or equity securities or other assets acceptable to the Subadvisor. A Fund will accrue the net amount of the excess, if any, of its obligations relating to swaps over its entitlements with respect to each swap on a daily basis and may segregate with its custodian, or designated sub-custodian, an amount of cash or liquid assets having an aggregate value equal to at least the accrued excess. Caps, floors and collars may require segregation of assets with a value equal to a Fund's net obligation, if any. Hedging and Other Strategic Transactions may be covered by means other than those described above when consistent with applicable regulatory policies. A Fund may also enter into offsetting transactions so that its combined position, coupled with any segregated assets, equals its net outstanding obligation in related options and Hedging and Other Strategic Transactions. A Fund could purchase a put option, for example, if the strike price of that option is the same or higher than the strike price of a put option sold by the Fund. Moreover, instead of segregating assets if it holds a futures contracts or forward contract, a Fund could purchase a put option on the same futures contract or forward contract with a strike price as high or higher than the price of the contract held. Other Hedging and Other Strategic Transactions may also be offset in combinations. If the offsetting transaction terminates at the time of or after the primary transaction, no segregation is required, but if it terminates prior to that time, assets equal to any remaining obligation would need to be segregated. SHORT POSITIONS IN OPTIONS AND FUTURES CONTRACTS No Fund will maintain open short positions in futures contracts, call options written on futures contracts, and call options written on securities indices if, in the aggregate, the current market value of the open positions exceeds the current market value of that portion of its securities portfolio being hedged by those futures and options plus or minus the unrealized gain or loss on those open positions, adjusted for the historical volatility relationship between that portion of the Fund and the contracts (e.g., the Beta volatility factor). For purposes of the limitation stated in the immediately preceding sentence, to the extent the Fund has written call options on specific securities in that portion of its portfolio, the value of those securities will be deducted from the current market value of that portion of the securities portfolio. If this limitation should be exceeded at any time, the Fund will take prompt action to close out the appropriate number of open short positions to bring its open futures and options positions within this limitation. 29 INVESTMENT RESTRICTIONS Fundamental restrictions may only be changed by the affirmative vote of a majority of the outstanding voting securities of a Fund, which means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of a Fund, or (2) 67% or more of the shares of a Fund present at a meeting if more than 50% of the outstanding shares of the Fund are represented at the meeting in person or by proxy. Non-fundamental restrictions are subject to change by the Trustees of a Fund without shareholder approval. The Trust may not issue senior securities, except to the extent that the borrowing of money in accordance with the restrictions noted below may constitute the issuance of a senior security. (For purposes of this restriction, purchasing securities on a when-issued or delayed delivery basis and engaging in Hedging and Other Strategic Transactions will not be deemed to constitute the issuance of a senior security). The percentage limitations referenced in some of the restrictions are to be determined at the time of purchase; however, percentage limitations for illiquid securities and borrowings apply at all times. Calculation of each Fund's total assets for compliance with any of the investment restrictions will not include cash collateral held in connection with securities lending activities except for purposes of calculating total assets for compliance with each Fund's limitation on securities lending. INVESTMENT RESTRICTIONS FOR THE SMALL CAP GROWTH FUND, THE INTERNATIONAL SMALL CAP FUND, THE MID CAP GROWTH FUND, THE GLOBAL EQUITY FUND, THE LARGE CAP GROWTH FUND, THE INTERNATIONAL EQUITY FUND, THE GROWTH & INCOME FUND, THE BALANCED FUND, THE STRATEGIC INCOME FUND, THE CORE BOND FUND, THE MUNICIPAL BOND FUND, THE U.S. GOVERNMENT SECURITIES FUND, AND THE MONEY MARKET FUND ARE LISTED BELOW. FUNDAMENTAL RESTRICTIONS As a matter of FUNDAMENTAL POLICY, EACH FUND MAY NOT: (1) Invest more than 25% of the value of its total assets in securities of issuers having their principal activities in any particular industry, excluding U.S. Government securities and, with respect to the Money Market Fund, obligations of domestic branches of U.S. banks and with respect to the Municipal Bond Fund, obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities or by any state, territory or any possession of the United States, the District of Columbia, or any of their authorities, agencies, instrumentalities or political subdivisions, or with respect to repurchase agreements collateralized by any of such obligations. For purposes of this restriction (except with regard to the Small Cap Growth Fund), supranational issuers will be considered to comprise an industry as will each foreign government that issues securities purchased by a Fund. (2) With respect to 75% of the Fund's total assets, purchase the securities of any issuer if the purchase would cause more than 5% of the value of the Fund's total assets to be invested in the securities of any one issuer (excluding U.S. Government securities) or cause more than 10% of the voting securities of the issuer to be held by the Fund. This restriction does not apply to the Small Cap Growth Fund as a non-diversified portfolio. (3) Borrow money except that each Fund may borrow (i) for temporary or emergency purposes (not for leveraging) up to 33 1/3% of the value of the Fund's total assets (including amounts borrowed) less liabilities (other than borrowings) and (ii) in connection with reverse repurchase agreements, mortgage dollar rolls and other similar transactions. (4) Underwrite securities of other issuers except insofar as the Fund may be considered an underwriter under the Securities Act of 1933 in selling portfolio securities. (5) Purchase or sell real estate, except that each Fund may invest in securities issued by companies which invest in real estate or interests therein and each of the Funds other than the Money Market Fund may invest in mortgages and mortgage-backed securities. 30 (6) Purchase or sell commodities or commodity contracts except that each Fund other than the Core Bond and Money Market Funds may purchase and sell futures contracts on financial instruments and indices and options on such futures contracts. The Small Cap Growth, Balanced, Mid Cap Growth, International Small Cap, Large Cap Growth, Global Equity, Strategic Income and International Equity Funds may purchase and sell futures contracts on foreign currencies and options on such futures contracts. The U.S. Government Securities Fund has elected for the present to not engage in the purchase or sale of commodities or commodity contracts to the extent permitted by this restriction, but it reserves the right to engage in such transactions at a future time. (7) Lend money to other persons except by the purchase of obligations in which the Fund is authorized to invest and by entering into repurchase agreements. For purposes of this restriction, collateral arrangements with respect to options, forward currency and futures transactions will not be deemed to involve the lending of money. (8) Lend securities in excess of 33% of the value of its total non-cash assets. For purposes of this restriction, collateral arrangements with respect to options, forward currency and futures transactions will not be deemed to involve loans of securities. In addition to the above policies, the Money Market Fund is subject to certain restrictions required by Rule 2a-7 under the 1940 Act. For the purposes of the investment limitations applicable to the Municipal Bond Fund, the identification of the issuer of a municipal obligation depends on the terms and conditions of the obligation. If the assets and revenues of an agency, authority, instrumentality, or other political subdivision are separate from those of the government creating the subdivision and the obligation is backed only by the assets and revenues of the subdivision, such subdivision would be regarded as the sole issuer. Similarly, in the case of a private activity bond, if the bond is backed only by the assets and revenues of the non- governmental user, such non-governmental user would be regarded as the sole issuer. If in either case the creating government or another entity guarantees an obligation, the guarantee would be considered a separate security and treated as an issue of such government or entity. INVESTMENT RESTRICTIONS FOR THE MID CAP VALUE FUND, THE STOCK INDEX FUND, THE SMALL CAP INDEX FUND, THE SOCIALLY RESPONSIBLE FUND, THE HIGH YIELD BOND FUND, THE AGGRESSIVE GROWTH LIFESTYLE FUND, THE MODERATE GROWTH LIFESTYLE FUND, THE CONSERVATIVE GROWTH LIFESTYLE FUND, THE MUNICIPAL MONEY MARKET FUND, THE SCIENCE & TECHNOLOGY FUND AND THE JOSEPHTHAL STRATEGIC GROWTH FUND ARE LISTED BELOW. AS A MATTER OF FUNDAMENTAL POLICY, THE MID CAP VALUE FUND MAY NOT: (1) Borrow money, except that the Fund may (i) borrow money from banks for temporary or emergency purposes and not for leveraging or investment and (ii) enter into reverse repurchase agreements and employ similar investment techniques, and pledge its assets in connection therewith, for any purpose; provided that (i) and (ii) in combination do not exceed 33 1/3% of the value of its total assets (including the amount borrowed) less liabilities (other than borrowings). If borrowings exceed 33 1/3% of the value of the Fund's total assets, the Fund will reduce its borrowings within three days (excluding Sundays and holidays) to the extent necessary to comply with the 33 1/3% limitation. (2) Purchase physical commodities or contracts thereon, unless acquired as a result of the ownership of securities or instruments, but this restriction shall not prohibit the Fund from purchasing futures contracts or options (including options on futures contracts, but excluding options or futures contracts on physical commodities) or from investing in securities of any kind. For purposes of the limitations on commodities, the Fund does not consider foreign currencies or forward contracts to be physical commodities. 31 (3) With respect to 75% of the value of its total assets, purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities) if, as a result, (i) more than 5% of the value of the Fund's total assets would be invested in the securities of that issuer or (ii) the Fund would hold more than 10% of the outstanding voting securities of that issuer; except that the Fund may purchase securities of other investment companies without regard to such limitation to the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or other relief from the provisions of the 1940 Act. (4) Purchase any security if, as a result, 25% or more of its total assets (taken at current value) would be invested in the securities of issuers having their principal business activities in the same industry, provided, however, that this limitation excludes shares of other open-end investment companies owned by the Fund but includes the Fund's pro rata portion of the securities and other assets owned by any such company. This limitation does not apply to securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. (5) Lend any security or make any other loan if, as a result, more than 33 1/3% of its total assets (taken at current value) would be lent to other parties, except, in accordance with its investment objective, policies, and limitations, (i) through the purchase of a portion of an issue of debt securities or (ii) by engaging in repurchase agreements. (6) Purchase real estate unless acquired as a result of the ownership of securities or instruments, but this restriction shall not prohibit the Fund from purchasing securities issued by entities or investment vehicles that own or deal in real estate or interests therein or instruments secured by real estate or interests therein. (7) Issue senior securities, except as permitted under the 1940 Act. (8) Underwrite securities of other issuers, except to the extent that the Fund, in disposing of portfolio securities, may be deemed to be an underwriter within the meaning of the 1933 Act. 32 AS A MATTER OF FUNDAMENTAL POLICY, THE STOCK INDEX FUND MAY NOT: (1) Borrow money or mortgage or hypothecate assets of the Fund, except that in an amount not to exceed 33 1/3% of the value of the Fund's total assets, it may borrow money as a temporary measure for extraordinary or emergency purposes and enter into reverse repurchase agreements or dollar roll transactions, and except that it may pledge, mortgage or hypothecate not more than 1/3 of such assets to secure such borrowings (it is intended that money would be borrowed only from banks and only either to accommodate requests for the withdrawal of beneficial interests (redemption of shares) while effecting an orderly liquidation of portfolio securities or to maintain liquidity in the event of an unanticipated failure to complete a portfolio security transaction or other similar situations) or reverse repurchase agreements, provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and variation margin, are not considered a pledge of assets for purposes of this restriction and except that assets may be pledged to secure letters of credit solely for the purpose of participating in a captive insurance company sponsored by the Investment Company Institute. If borrowings exceed 5% of the Fund's total assets the Fund will not purchase additional securities. (2) Underwrite securities issued by other persons except insofar as the Trust (or the Fund) may technically be deemed an underwriter under the Securities Act of 1933 ("1933 Act") in selling a portfolio security. (3) Make loans to other persons except: (a) through the lending of the Fund's portfolio securities and provided that any such loans not exceed 30% of the Fund's total assets (taken at market value); (b) through the use of repurchase agreements or the purchase of short-term obligations; or (c) by purchasing a portion of an issue of debt securities of types distributed publicly or privately. (4) Purchase or sell in the ordinary course of business (a) real estate (including limited partnership interests but excluding securities secured by real estate or interests therein); (b) interests in oil, gas or mineral leases; or (c) commodities or commodity contracts except futures and option contracts except that the Fund may hold and sell, for the Fund's portfolio, real estate acquired as a result of the Fund's ownership of securities. (5) Concentrate its investments in any particular industry (excluding U.S. Government securities), but if it is deemed appropriate for the achievement of the Fund's investment objective, up to 25% of its total assets may be invested in any one industry. This limitation excludes shares of other open-end investment companies owned by the Fund but includes the Fund's pro rata portion of the securities and other assets owned by any such company. (6) Issue any senior security (as that term is defined in the 1940 Act) if such issuance is specifically prohibited by the 1940 Act or the rules and regulations promulgated thereunder, provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and variation margin, are not considered to be the issuance of a senior security for purposes of this restriction. 33 AS A MATTER OF FUNDAMENTAL POLICY, THE SMALL CAP INDEX FUND MAY NOT: (1) Borrow money or mortgage or hypothecate assets of the Fund, except that in an amount not to exceed 33 1/3% of the value of the Fund's total assets, it may borrow money as a temporary measure for extraordinary or emergency purposes and enter into reverse repurchase agreements or dollar roll transactions, and except that it may pledge, mortgage or hypothecate not more than 33 1/3% of total assets to secure such borrowings (it is intended that money would be borrowed only from banks and only either to accommodate requests for the withdrawal of beneficial interests (redemption of shares) while effecting an orderly liquidation of portfolio securities or to maintain liquidity in the event of an unanticipated failure to complete a portfolio security transaction or other similar situations) or reverse repurchase agreements, provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and variation margin, are not considered a pledge of assets for purposes of this restriction and except that assets may be pledged to secure letters of credit solely for the purpose of participating in a captive insurance company sponsored by the Investment Company Institute. If borrowings exceed 5% of the Fund's total assets, the Fund will not purchase additional securities. (2) Underwrite securities issued by other persons except insofar as the Trust (or the Fund) may technically be deemed an underwriter under the 1933 Act in selling a portfolio security. (3) Make loans to other persons except: (a) through the lending of the Fund's portfolio securities and provided that any such loans not exceed 30% of the Fund's total assets (taken at market value); (b) through the use of repurchase agreements or the purchase of short-term obligations; or (c) by purchasing a portion of an issue of debt securities of types distributed publicly or privately. (4) Purchase or sell in the ordinary course of business (a) real estate (including limited partnership interests but excluding securities secured by real estate or interests therein); (b) interests in oil, gas or mineral leases; or (c) commodities or commodity contracts except futures and option contracts except that the Trust may hold and sell, for the Fund's portfolio, real estate acquired as a result of the Fund's ownership of securities. This limitation excludes shares of other open-end investment companies owned by the Fund but includes the Fund's pro rata portion of the securities and other assets owned by any such company. (5) Concentrate its investments in any particular industry (excluding U.S. Government securities), but if it is deemed appropriate for the achievement of a Fund's investment objective(s), up to 25% of its total assets may be invested in any one industry, provided, however, that this limitation excludes shares of other open-end investment companies owned by the Fund but includes the Fund's pro rata portion of the securities and other assets owned by any such company. (6) Issue any senior security (as that term is defined in the 1940 Act) if such issuance is specifically prohibited by the 1940 Act or the rules and regulations promulgated thereunder, provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and variation margin, are not considered to be the issuance of a senior security for purposes of this restriction. 34 AS A MATTER OF FUNDAMENTAL POLICY, THE SOCIALLY RESPONSIBLE FUND MAY NOT: (1) Invest more than 5% of the value of its total assets in the securities of any one issuer or purchase more than 10% of the outstanding voting securities, or any other class of securities, of any one issuer; except that the Fund may purchase securities of other investment companies without regard to such limitation to the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or other relief from the provisions of the 1940 Act. For purposes of this restriction, all outstanding debt securities of an issuer are considered as one class, and all preferred stock of an issuer is considered as one class. This restriction does not apply to obligations issued or guaranteed by the U.S. Government, its agencies, or instrumentalities. As a matter of operating policy, the Trust will not consider repurchase agreements subject to the 5% limitation if the collateral underlying the repurchase agreements are U.S. Government securities. (2) (a) Issue senior securities except in connection with investments in options and futures contracts; or (b) borrow money, enter into reverse repurchase agreements, or employ similar investment techniques, and pledge its assets in connection therewith, except to the extent permitted by applicable law, and provided that the Fund will not purchase additional securities if borrowings exceed 5% of total assets. (3) Acquire real estate or real estate contracts, although the Fund may acquire obligations that are secured by real estate or securities issued by companies investing in real estate, such as real estate investment trusts. (4) Underwrite securities of other issuers except where the sale of restricted portfolio securities constitutes an underwriting under the federal securities laws. (5) Lend money, except by purchasing debt obligations in which a Fund may invest consistent with its investment objective(s) and policies or by purchasing securities subject to repurchase agreements. (6) Purchase or sell commodities or commodities contracts. This restriction shall not prohibit the Fund, subject to restrictions described in the Prospectus and elsewhere in this Statement of Additional Information, from purchasing, selling or entering into futures contracts, options on futures contracts, foreign currency forward contracts, foreign currency options, or any interest rate, securities-related or foreign currency-related hedging instruments, including swap agreements and other derivative instruments, subject to compliance with any applicable provisions of the federal securities or commodities laws. (7) Lend its portfolio securities to broker-dealers and other financial institutions in an amount in excess of 33 1/3% of the value of the Fund's total assets. (8) Enter into financial futures contracts (by exercise of any option or otherwise) or acquire any options thereon, if, immediately thereafter, the total of the initial margin deposits required with respect to all open futures positions at the time such positions were established plus the sum of the premiums paid for all unexpired options on futures contracts would exceed 5% of the value of its total assets. (9) Invest more than 25% of the value of its total assets in the securities of issuers primarily engaged in any one industry (excluding the U.S. Government or any of its agencies or instrumentalities), provided, however, that this limitation excludes shares of other open-end investment companies owned by the Fund but includes the Fund's pro rata portion of the securities and other assets owned by any such company. 35 A MATTER OF FUNDAMENTAL POLICY, THE HIGH YIELD BOND FUND MAY NOT: (1) Invest more than 5% of the value of its total assets in the securities of any one issuer or purchase more than 10% of the outstanding voting securities, or any other class of securities, of any one issuer; except that a Fund may purchase securities of other investment companies without regard to such limitation to the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or other relief from the provisions of the 1940 Act. For purposes of this restriction, all outstanding debt securities of an issuer are considered as one class, and all preferred stock of an issuer is considered as one class. This restriction does not apply to obligations issued or guaranteed by the U.S. Government, its agencies, or instrumentalities or securities issued by state or municipal governments and their political subdivisions. As a matter of operating policy, the Trust will not consider repurchase agreements subject to the 5% limitation if the collateral underlying the repurchase agreements are U.S. Government securities. (2) (a) Issue senior securities except in connection with investments in options and futures contracts; or (b) borrow from banks or enter into reverse repurchase agreements, or employ similar investment techniques, and pledge its assets in connection therewith, unless immediately after each borrowing there is asset coverage of 300%. (3) Acquire real estate or real estate contracts, although a Fund may acquire obligations that are secured by real estate or securities issued by companies investing in real estate, such as real estate investment trusts. (4) Underwrite securities of other issuers except where the sale of restricted portfolio securities constitutes an underwriting under the federal securities laws. (5) Lend money, except by purchasing debt obligations in which a Fund may invest consistent with its investment objective(s) and policies or by purchasing securities subject to repurchase agreements. (6) Purchase or sell commodities or commodities contracts. This restriction shall not prohibit the Fund, subject to restrictions described in the Prospectus and elsewhere in this Statement of Additional Information, from purchasing, selling or entering into futures contracts, options on futures contracts, foreign currency forward contracts, foreign currency options, or any interest rate, securities-related or foreign currency-related hedging instruments, including swap agreements and other derivative instruments, subject to compliance with any applicable provisions of the federal securities or commodities laws. (7) Lend its portfolio securities to broker-dealers and other financial institutions in an amount in excess of 33 1/3% of the value of a Fund's total assets. (8) Invest more than 25% of its total assets in issuers primarily engaged in a single industry (excluding the U.S. Government or any of its agencies or instrumentalities), provided, however, that this limitation excludes shares of other open-end investment companies owned by a Fund but includes a Fund's pro rata portion of the securities and other assets owned by any such company. 36 AS A MATTER OF FUNDAMENTAL POLICY, THE AGGRESSIVE GROWTH LIFESTYLE FUND, THE CONSERVATIVE GROWTH LIFESTYLE FUND AND THE MODERATE GROWTH LIFESTYLE FUND MAY NOT: (1) Issue senior securities. (2) Borrow money, except to the extent permitted by applicable law, and provided that the Fund may not purchase additional securities if borrowings exceed 5% of total assets. (3) Underwrite the securities of other issuers. (4) Purchase real estate or real estate mortgage loans, although the underlying mutual funds in which a Fund will invest may purchase marketable securities of companies which deal in real estate, real estate mortgage loans or interests therein. (5) Purchase or sell commodities or commodity contracts. (6) Make loans except by purchasing bonds, debentures or similar obligations which are either publicly distributed or customarily purchased by institutional investors. (7) Invest more than 25% of its assets in any one industry, other than Funds that are part of the Trust. AS A MATTER OF FUNDAMENTAL POLICY, THE MUNICIPAL MONEY MARKET FUND MAY NOT: (1) Purchase the securities of any issuer (except the U.S. Government, its agencies or instrumentalities, or securities which are backed by the full faith and credit of the U.S. or securities issued by state or municipal governments and their political subdivisions) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer or more than 10% of the outstanding voting securities of any class of any issuer would be held by the Fund. The Fund may purchase securities of other investment companies without regard to such limitation to the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or other relief from the provisions of the 1940 Act. (2) Borrow money, except from a bank for temporary or emergency purposes and not for investment purposes, and then in an amount not exceeding 10% of the value of the Fund's total assets at the time of borrowing. (No new investments will be made by the Fund while any outstanding borrowings exceed 5% of its total assets.) Secured temporary borrowings may take the form of reverse repurchase agreements, pursuant to which the Fund would sell portfolio securities for cash and simultaneously agree to repurchase them at a specified date for the same amount of cash plus an interest component. 37 (3) Underwrite any issue of securities, except to the extent that the purchase of municipal obligations in accordance with the Fund's investment objectives, policies, and restrictions, either directly from the issuer, or from an underwriter for an issuer, may be deemed to be underwriting. (4) Purchase or sell real estate, but this shall not prevent the Fund from investing in municipal fixed income securities secured by real estate or interests therein. (5) Purchase or sell commodities or commodity contracts or invest in oil, gas or other mineral exploration or development programs. (6) Make loans, except (i) by the purchase of a portion of an issue of debt securities in accordance with its investment objectives, policies, and restrictions, (ii) by engaging in repurchase transactions, and (iii) by making loans of portfolio securities not in excess of 10% of the value of the Fund's total assets. (7) Write, purchase or sell puts, calls, or combinations thereof, except that it may obtain rights to resell municipal bonds and notes. (8) Purchase securities (other than municipal bonds, notes and other fixed income securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities) if, as a result, more than 25% of total Fund assets would be invested in any one industry. For the purposes of the investment limitations applicable to the Municipal Money Market Fund, the identification of the issuer of a municipal obligation depends on the terms and conditions of the obligation. If the assets and revenues of an agency, authority, instrumentality, or other political subdivision are separate from those of the government creating the subdivision and the obligation is backed only by the assets and revenues of the subdivision, such subdivision would be regarded as the sole issuer. Similarly, in the case of a private activity bond, if the bond is backed only by the assets and revenues of the non- governmental user, such non-governmental user would be regarded as the sole issuer. If in either case the creating government or another entity guarantees an obligation, the guarantee would be considered a separate security and treated as an issue of such government or entity. AS A MATTER OF FUNDAMENTAL POLICY, THE SCIENCE & TECHNOLOGY FUND MAY NOT: (1) Make any investment inconsistent with its classification as a diversified investment company under the 1940 Act. 38 (2) Invest 25% or more of its total assets in the securities of one or more issuers conducting their principal business activities in the same industry (excluding the U.S. Government or any of its agencies or instrumentalities), provided, however, that this limitation excludes shares of other open-end investment companies owned by the Fund but includes the Fund's pro rata portion of the securities and other assets owned by any such company. (3) Issue senior securities or borrow money, except from banks or other persons for non-leveraging, temporary or emergency purposes, and then only in an amount up to 33 1/3% of the value of its total assets or as permitted by law and except by engaging in reverse repurchase agreements, where allowed. In order to secure any permitted borrowings and reverse repurchase agreements under this section, the Fund may pledge, mortgage or hypothecate its assets. (4) Make loans, although the Fund may lend portfolio securities, purchase of money market instruments and repurchase agreements or bonds, debentures or other debt securities, or as permitted by law. The purchase of all or a portion of an issue of publicly distributed or privately placed debt obligations and purchase debt in accordance with the Fund's investment objective, policies and restrictions, shall not constitute the making of a loan. (5) Underwrite the securities of other issuers, except as allowed by law or to the extent that the purchase of obligations in accordance with its investment objective and policies, either directly from the issuer, or from an underwriter for an issuer, may be deemed an underwriting. (6) Invest directly in commodities or real estate, unless acquired as a result of ownership of securities or other instruments, or as permitted by law. However, the Fund may invest in securities which are secured by real estate or real estate mortgages and securities of issuers which invest or deal in commodities, commodity futures, real estate or real estate mortgages. T. Rowe Price Associates, Inc. ("T. Rowe") manages the assets of the Science & Technology Fund. T. Rowe offers a diversified and cost-effective investment vehicle for the cash reserves of client accounts. Therefore, T. Rowe may choose to invest any available cash reserves in a money market fund established for the exclusive use of the T. Rowe family of mutual funds and other T. Rowe clients. Currently, two such money market funds are in operation - Reserve Investment Fund ("RIF") and Government Reserve Investment Fund ("GRF"), each a series of the Reserve Investment Funds, Inc. Additional series may be created in the future. These funds were created and operate under an Exemptive Order issued by the SEC (Investment Company Act Release No. IC-22770, July 29, 1997). As a non-fundamental operating policy, the Science & Technology Fund may invest up to 25% of its total assets in either the RIF or GRF. RIF and GRF must comply with the requirements of Rule 2a-7 under the 1940 Act governing money market funds. The RIF invests at least 95% of its total assets in prime money market instruments receiving the highest credit rating. The GRF invests primarily in a portfolio of U.S. government backed securities, primarily U.S. Treasuries, and repurchase agreements thereon. The RIF and GRF do not pay an advisory fee to the investment manager at T. Rowe, but will incur other expenses. However, RIF and GRF are expected by T. Rowe to operate at very low expense ratios. The Fund will only invest in RIF or GRF to the extent it is 39 consistent with its objective and program. RIF and GRF are neither insured nor guaranteed by the U.S. government, and there is no assurance they will maintain a stable net asset value of $1.00 per share. AS A MATTER OF FUNDAMENTAL POLICY, THE JOSEPHTHAL STRATEGIC GROWTH FUND MAY NOT: (1) With respect to 75% of its total assets, invest more than 5% of its total assets at the time of purchase in the securities of any single issuer (other than obligations issued or guaranteed as to principal and interest by the U.S. Government or any of its agencies or instrumentalities); except that the Fund may purchase securities of other investment companies without regard to such limitation to the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or other relief from the provisions of the 1940 Act. (2) With respect to 75% of its total assets, purchase more than 10% of any class of the outstanding voting securities of any issuer; except that the Fund may purchase securities of other investment companies without regard to such limitation to the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or other relief from the provisions of the 1940 Act. (3) Invest more than 25% of its total assets in companies within a single industry, provided, however, that this limitation excludes shares of other open- end investment companies owned by the Fund but includes the Fund's pro rata portion of the securities and other assets owned by any such company. There are no limitations on investments made in instruments issued or guaranteed by the U.S. Government and its agencies. (4) Make loans except by purchasing debt securities in accordance with its investment objective and policies or entering into repurchase agreements, or by lending its portfolio securities to banks, brokers, dealers and other financial institutions so long as the loans are made in compliance with the 1940 Act, as amended, or the rules and regulations or interpretations of the SEC. (5) Borrow, except (i) from banks; (ii) to enter into reverse repurchase agreements or to employ similar investment techniques, and pledge its assets in connection therewith; and (iii) as a temporary measure for extraordinary or emergency purposes and then, in no event, in excess of 33 1/3% of the Fund's total assets valued at the lower of market or cost. If borrowings exceed 5% of the Fund's total assets, the Fund will not purchase additional securities. (6) Invest in physical commodities or contracts on physical commodities. (7) Purchase or sell real estate, although it may purchase and sell securities of companies which deal in real estate and may purchase and sell securities which are secured by interests in real estate. (8) Underwrite the securities of other issuers. (9) Issue senior securities, as defined in the 1940 Act, except that this restriction shall not be deemed to prohibit the Fund from (i) making any permitted borrowings, mortgages or pledges, or (ii) entering into repurchase transactions. NON-FUNDAMENTAL RESTRICTIONS The following restrictions apply to each Fund unless noted otherwise: 1. Control of Companies. The Fund may not invest in companies for the purpose of exercising management control or influence, except that the Fund may purchase securities of other investment companies to the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and regulations promulgated thereunder, as amended from time to time, or 40 (iii) an exemption or similar relief from the provisions of the 1940 Act. (See Operating Policies 3,4 and 5 below for additional information on investment company security investment restrictions.) 2. Illiquid Securities. The Fund (other than the LifeStyle Funds) may not invest more than 15% (10% for the Money Market Fund and the Municipal Money Market Fund) of its net assets in illiquid securities, including repurchase agreements with maturities in excess of seven days, stripped mortgage securities and inverse floaters, but excluding variable amount master demand notes and liquid Rule 144A securities. The LifeStyle Funds may not invest in illiquid securities. This restriction on illiquid securities is applicable at all times. 3. Foreign Securities. To the extent consistent with their respective investment objectives, each of the Funds as noted in the Limitation List below may invest in foreign securities. ADRs and U.S. dollar-denominated securities of foreign issuers are excluded from such percentage limitation for each Fund other than the Balanced Fund and the Mid Cap Growth Fund. With respect to the Balanced Fund and the Mid Cap Growth Fund, ADRs, U.S. dollar-denominated securities of foreign issuers and Canadian securities are excluded from such percentage limitations. 100% 20% Global Equity Fund Growth & Income Fund International Small Cap Fund Money Market Fund (payable in U.S. $) International Equity Fund Socially Responsible Fund Stock Index Fund 50% Strategic Income Fund 10% Mid Cap Value Fund 35% Small Cap Growth Fund Core Bond Fund High Yield Bond Fund 0% LifeStyle Funds* 30% Municipal Bond Fund Large Cap Growth Fund Municipal Money Market Fund Science & Technology Fund U.S. Government Securities 25% Balanced Fund *Each Fund invests indirectly in Josephthal Strategic Growth Fund equity Securities of international Mid Cap Growth Fund companies. Small Cap Index Fund 4. Margin. The Fund may not purchase securities on margin, except that the Fund may obtain such short-term credits as may be necessary for the clearance of purchases and sales of portfolio securities. The payment by the Fund of initial or variation margin in connection with futures or related options transactions will not be considered the purchase of a security on margin. 5. Short Sales. Each of the Funds other than the Josephthal Fund, the LifeStyle Funds, the Money Market Fund and the Municipal Money Market Fund may not sell securities short, unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold short or has the right to acquire through the conversion of exchange of other securities it owns, and provided that transactions in futures contracts and options are not deemed to constitute selling securities short. With respect to the Josephthal Fund, the Fund may short securities such that the dollar amount of such sale at any one time does not exceed 25% of the net equity of the Fund, and the value of securities of any one issuer in which the Fund is short exceeds the lesser of 2% of `the securities of any class of any U.S. issuer and, provided that short sales may be made only in those securities which are listed on a national securities exchange or a foreign exchange. 6. Diversification. The Stock Index Fund and the Small Cap Index Fund may not, with respect to 75% of its total assets of either Fund, purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities), if, as a result, (i) more than 5% of the Fund's total assets would be invested in the securities of that issuer, or (ii) the Fund would hold more than 10% of the outstanding voting securities of that issuer, except that the Fund may purchase securities of other investment companies without regard to such limitation to the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the 1940 41 Act, as amended from time to time, or (iii) an exemption or other relief from the provisions of the 1940 Act. The Small Cap Growth Fund and the LifeStyle Funds are "non-diversified" funds. (See Operating Policies 3, 4 and 5 below for additional information on investment company security investment restrictions.) 7. Investment Companies. The Fund may invest in securities issued by other investment companies to the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or other relief from the provisions of the 1940 Act. (See Operating Policies 3, 4 and 5 below for additional information on investment company security investment restrictions.) OPERATING POLICIES 1. Asset-Backed Securities. A Fund will only invest in fixed-income asset- backed securities rated, at the time of purchase, in the same quality range as its other permissible investments. 2. Hybrid Instruments. Unless otherwise permitted by the 1940 Act, no Fund will invest more than 10% of its assets in Hybrid Instruments. 3. Single Investment Companies. Unless otherwise permitted by the 1940 Act, no Fund other than the Science & Technology Fund may invest more than 5% of total assets in a single investment company. 4. Total Investment Company Investment. Unless otherwise permitted by the 1940 Act, no Fund other than the Science & Technology Fund may invest more than 10% of total assets in investment company securities. 5. Single Investment Company Voting Securities. Unless otherwise permitted by the 1940 Act, no Fund other than the Science & Technology Fund may invest more than 3% of total assets in the voting securities of a single investment company. 6. Certificates of Deposit and Bankers Acceptances. The Funds limit investments in U.S. certificates of deposit and bankers acceptances to obligations of United States banks (including foreign branches) which have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or where deposits are insured by the Federal Deposit Insurance Corporation. A Fund may also invest in certificates of deposit of savings and loan associations (federally or state chartered and federally insured) having total assets in excess of $1 billion. 7. Municipal Commercial Paper. The Municipal Bond Fund and the Municipal Money Market Fund may invest in commercial paper that is rated at the time of purchase "P-2" or better by Moody's Investors Service ("Moody's"), "A-2" or better by Standard & Poor's Corporation ("S&P"), or "F-2" or better by Fitch, or, if not rated, determined by a Subadvisor to be of comparable quality. 8. Municipal Notes. The Municipal Bond Fund and the Municipal Money Market Fund may invest in commercial paper that is rated at the time of purchase "P-2" or better by Moody's, "A-2" or better by S&P, or "F-2" or better by Fitch, or, if not rated, determined by a Subadvisor to be of comparable quality. 9. Taxable Municipal Obligations. In order to maintain liquidity, the Municipal Bond Fund may invest up to 20% of its assets in taxable obligations. 10. Revenue Project Bonds. From time to time, the Municipal Bond Fund may invest more than 25% of its assets in obligations whose interest payments are from revenues of similar projects (such as utilities or hospitals) or whose issuers share the same geographic location. 11. Put Options. A Fund will not sell put options if, as a result, the Fund would be required to segregate more than 50% of its assets to cover its potential obligations under put options other than those with respect to futures contracts. In selling put options, a Fund faces the risk that it may be required to buy the underlying security at a disadvantageous price above the market price. 42 12. Futures Contracts - Initial Margin Deposits. To the extent that a Fund holds positions in futures contracts and related options that do not fall within the definition of bona fide hedging transactions, the aggregate initial margins and premiums required to establish such positions will not exceed 5% of the fair market value of the Fund's net assets, after taking into account unrealized profits and unrealized losses on any such contracts it has entered into. TEMPORARY DEFENSIVE POSITIONS The Funds may invest in the types of investments indicated below during periods when the Funds are assuming a temporary defensive position.
Fund Investments - ---- ----------- Small Cap Growth Fund Investment grade debt obligations, domestic and foreign money market obligations, including repurchase agreements, and short-term money market obligations. International Small Cap Fund Cash, cash equivalents, U.S. government obligations, commercial paper, bank obligations, repurchase agreements, and negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depositary institutions, U.S. branches of foreign depositary institutions, and foreign depositary institutions. Mid Cap Growth Fund Equity securities of companies that, at the time of purchase, have total market capitalization of $5 billion or greater and in excess of that amount, money market instruments, bank and thrift obligations, obligations issued or guaranteed by the U.S. Government or by its agencies or instrumentalities, foreign bank obligations and obligations of foreign branches of domestic banks, variable rate master demand notes and repurchase agreements. Global Equity Fund Cash or short-term and medium-term debt obligations consisting of (i) obligations of U.S. or foreign governments, their respective agencies or instrumentalities, (ii) money market instruments, and (iii) instruments denominated in any currency issued by international development agencies. Large Cap Growth Fund Cash, cash equivalents, U.S. government obligations, commercial paper, bank obligations, repurchase agreements, and negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depositary institutions, U.S. branches of foreign depositary institutions, and foreign depositary institutions. International Equity Fund Money market instruments, obligations of the U.S. Government and its agencies and instrumentalities, other debt securities, commercial paper, bank obligations and repurchase agreements. Growth and Income Fund All securities authorized for purchase by the Core Bond Fund and Money Market Fund. Balanced Fund U.S. Government obligations, commercial paper, bank obligations, repurchase agreements, and negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depositary institutions, U.S. branches of foreign depositary institutions, and foreign depositary institutions, in cash, or in other cash equivalents. Strategic Income Fund High Quality Bonds. Core Bond Fund Securities authorized for purchase by the Money Market Fund. Municipal Bond Fund Taxable high-quality short-term money market instruments. U.S. Government Securities Fund Money Market Securities. Money Market Fund N/A Mid Cap Value Fund Cash, cash equivalents, U.S. government obligations, commercial paper, bank obligations, repurchase agreements, and negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depositary institutions, U.S. branches of foreign depositary institutions, and foreign depositary institutions.
43 Stock Index Fund Cash, cash equivalents, U.S. government obligations, commercial paper, bank obligations, repurchase agreements, and negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depositary institutions, U.S. branches of foreign depositary institutions, and foreign depositary institutions. Small Cap Index Fund Cash, cash equivalents, U.S. government obligations, commercial paper, bank obligations, repurchase agreements, and negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depositary institutions, U.S. branches of foreign depositary institutions, and foreign depositary institutions. Socially Responsible Fund Cash, cash equivalents, U.S. government obligations, commercial paper, bank obligations, repurchase agreements, and negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depositary institutions, U.S. branches of foreign depositary institutions, and foreign depositary institutions. High Yield Bond Fund Cash, cash equivalents, U.S. government obligations, commercial paper, bank obligations, repurchase agreements, and negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depositary institutions, U.S. branches of foreign depositary institutions, and foreign depositary institutions. Aggressive Growth LifeStyle Fund Cash, cash equivalents, U.S. government obligations, commercial paper, bank obligations, repurchase agreements, and negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depositary institutions, U.S. branches of foreign depositary institutions, and foreign depositary institutions. Moderate Growth LifeStyle Fund Cash, cash equivalents, U.S. government obligations, commercial paper, bank obligations, repurchase agreements, and negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depositary institutions, U.S. branches of foreign depositary institutions, and foreign depositary institutions. Conservative Growth LifeStyle Fund Cash, cash equivalents, U.S. government obligations, commercial paper, bank obligations, repurchase agreements, and negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depositary institutions, U.S. branches of foreign depositary institutions, and foreign depositary institutions. Municipal Money Market Fund Cash, cash equivalents, U.S. government obligations, commercial paper, bank obligations, repurchase agreements, and negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depositary institutions, U.S. branches of foreign depositary institutions, and foreign depositary institutions. Science & Technology Fund Cash, cash equivalents, U.S. government obligations, commercial paper, bank obligations, repurchase agreements, and negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depositary institutions, U.S. branches of foreign depositary institutions, and foreign depositary institutions. Josephthal Strategic Growth Fund Cash, cash equivalents, investment grade debt securities, repurchase agreements, U.S. government obligations, commercial paper and bank obligations.
Consistent with each Fund's investment objective and policies, the Subadvisor of the Fund may make changes in the portfolio consistent with the Fund's policies whenever it believes doing so is in the best interest of the Fund. 44 MANAGEMENT OF THE TRUST The Trustees are responsible for generally overseeing the conduct of the Trust's business. The Trustees and officers of the Fund, together with information as to their principal occupations during the past five years, are listed below:
Name, Principal Occupation Address and Age Position with the Fund During Past Five Years - ---------------- ----------------------- ---------------------- Alice T. Kane* Chairman of the Board, Trustee Chairman and Chief Executive Officer, 286 Congress Street & President American General Asset Management Boston, MA 02210 Corp. ("AGAM"), Executive Vice Date of Birth: 01/16/48 President, American General Fund Group (October, 2000-Present). Executive Vice President, American General Annuity Insurance Company and The Variable Annuity Life Insurance Company ("VALIC") (October 2000-Present). Formerly, Executive Vice President, American General Investment Management, L.P. (1998-1999); Executive Vice President (1994-1998) and General Counsel (1986-1995) New York Life Insurance Company; Chair, MainStay Mutual Funds (1994-1998). President and Director or Trustee of other investment companies advised by "AGAM and VALIC". (1)(2) Dr. Judith L. Craven Trustee Retired Administrator. Formerly, 286 Congress Street President, United Way of the Texas Boston, MA 02210 Gulf Coast (1992-1998), Director, Date of Birth: 10/06/45 Houston Branch, Federal Reserve Bank of Dallas (1992-1999), Compaq Computer Corporation (1998-Present), Luby's Inc. (1998-Present), A.H. Belo Corporation (journalism, TV and radio) (1993-Present), SYSCO Corporation (marketing and distribution of food) (1996-Present), Board Member, Sisters of Charity of the Incarnate Word (1996-1999). (1)(2) William F. Devin Trustee Member of the Board of Governors of 286 Congress Street the Boston Stock Exchange. Retired Boston, MA 02210 Executive Vice President of Fidelity Date of Birth: 12/30/38 Capital Markets, a division of National Financial Services Corporation in Boston. (2) Dr. Timothy J. Ebner Trustee Professor and Department Head, 286 Congress Street Department of Neuroscience and Boston, MA 02210 Visscher Chair of Physiology Date of Birth: 07/15/49 (1998-Present), Director, Graduate Program in Neuroscience, University of Minnesota (1991-1999). Formerly, Consultant to EMPI, Inc. (1994-1995) and Medtronic Inc. (manufacturers of medical products) (1997-1998). (1)(2)
45 Judge Gustavo E. Gonzales, Jr. Trustee Municipal Court Judge, Dallas, Texas 286 Congress Street (1995-Present); Director, Downtown Boston, MA 02210 Dallas YMCA Board (1996-Present); Date of Birth: 07/27/40 Director, Dallas Easter Seals Society (1997-Present). Formerly, private attorney (litigation) (1981-1995). (1)(2) Kenneth J. Lavery Trustee Vice President of Massachusetts 286 Congress Street Capital Resource Company. (2) Boston, MA 02210 Date of Birth: 12/30/49 Ben H. Love Trustee Retired. Formerly, Director, 286 Congress Street Mid-American (waste products) Boston, MA 02210 (1993-1997), and Chief Executive, Boy Date of Birth: 09/26/30 Scouts of America (1985-1993). (1)(2) Dr. John E. Maupin, Jr. Trustee President and Chief Executive Officer, 286 Congress Street Meharry Medical College, Nashville, Boston, MA 02210 Tennessee (1994-Present); Nashville Date of Birth: 10/28/46 Advisory Board Member, First American National Bank (1996-Present); Director, Monarch Dental Corporation (1997-Present), LifePoint Hospitals, Inc. (1998-Present). (1)(2) Joseph T. Grause, Jr.* Trustee and President, American General Asset 286 Congress Street Vice President Management Corp. ("AGAM") (March, Boston, MA 02210 2000-Present). Formerly, Executive Date of Birth: 05/28/52 Vice President of Cypress Holding Company, Inc. (November, 1995 to March, 2000); and Senior Vice President of Sales and Marketing, The Shareholder Services Group, a subsidiary of First Data Corporation (May, 1993 to November, 1995). (2) John I. Fitzgerald Secretary and Counsel, AGAM (April, 1997-Present); 286 Congress Street Vice President Counsel, American General Funds Boston, MA 02210 Distributors, Inc. ("AGFD") (April, Date of Birth: 03/23/48 1997-Present); Prior to April, 1997, Executive Vice President--Legal Affairs and Government Relations at the Boston Stock Exchange (June 1993 to March, 1997). Thomas J. Brown Treasurer and Chief Financial Officer and Chief 286 Congress Street Vice President Administrative Officer, AGAM (March, Boston, MA 02210 2000-Present). Formerly, Principal of Date of Birth: 12/24/45 Cypress Holding Company, Inc. (July, 1997 to March, 2000); consultant to financial services industry (October, 1995 to June 1997); and Executive Vice President, Boston Company Advisors (August, 1994 to October, 1995).
46 John N. Packs Vice President Director of Research, AGAM (March 286 Congress Street 2000-Present). Formerly, Vice Boston, MA 02210 President, Cypress Holding Company Date of Birth: 12/09/55 (November 1995-March 2000).
*Trustee who is an "interested person", as defined in the 1940 Act. (1) A Director or Trustee of North American Funds Variable Product Series I, North American Funds Variable Product Series II and USLIFE Income Fund, Inc., each a registered investment company for which an American General Corporation affiliate serves as investment adviser. (2) A Director or Trustee of North American Senior Floating Rate Fund, Inc. and CypressTree Senior Floating Rate Fund, Inc., each a registered closed-end investment company for which AGAM serves as investment adviser. COMPENSATION OF TRUSTEES The Trust does not pay any remuneration to its Trustees who are officers or employees of AGAM, the investment adviser (the "Adviser") or its affiliates. Trustees not so affiliated receive a quarterly retainer of $900, a fee of $900 for each meeting of the Trustees that they attend in person and a fee of $500 for each such meeting conducted by telephone. Trustees are reimbursed for travel and other out-of-pocket expenses. For the fiscal year ended October 31, 2000, no pension or retirement benefits were paid to Trustees. Effective January 23, 2001, the Trust adopted a Deferred Compensation Agreement and Retirement Plan. The officers listed above are furnished to the Trust pursuant to the Advisory Agreement described below and receive no compensation from the Fund. TRUSTEE COMPENSATION TABLE The following table sets forth information regarding compensation received by those Trustees who are not "interested persons" (as defined by the 1940 Act) of the Trust for the fiscal year ended October 31, 2000: 47 COMPENSATION TABLE (1) (2) (3) Name of Person, Position Aggregate Compensation Total Compensation From From the Trust the Trust and Fund Complex Paid to the Trustees/1/ - -------------------------------------------------------------------------------- William F. Devin $7,800 $20,850 Trustee Kenneth J. Lavery $7,800 $20,850 Trustee Alice T. Kane/2/ N/A N/A Trustee Dr. Judith L. Craven/2/ $4,050 $59,100 Trustee Dr. Timothy J. Ebner/2/ $4,050 $59,100 Trustee Judge Gustavo E. Gonzalez/2/ $4,050 $55,600 Trustee Ben H. Love/2/ $4,050 $60,350 Trustee Dr. John E. Maupin/2/ $4,050 $56,600 Trustee Joseph T. Grause, Jr./2/ N/A N/A Trustee William Achtmeyer/3/ $3,750 $11,250 Trustee Don B Allen/3/ $9,375 $ 9,375 /1/ The amounts listed in column (3) include total compensation paid to the Trustees for their services as Trustees of the Trust and as Directors/Trustees of certain of the investment companies managed by AGAM or an affiliate of AGAM. /2/ Elected Trustee on June 1, 2000. /3/ Resigned as Trustee effective June 1, 2000. No front-end sales charge or CDSC is applicable to any sale of Class A shares to a Trustee or officer of the Trust, or to the immediate families (i.e., the spouse, children, mother or father) of such persons. The Agreement and Declaration of Trust of the Trust provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust, except if it is determined in the manner specified in the Agreement and Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust or that such indemnification would relieve any officer or Trustee of any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of his or her duties. The Trust, at its expense, provides liability insurance for the benefit of its Trustees and officers. CODES OF ETHICS The Trust, AGAM and "AGFD", the Funds' distributor and principal underwriter, have adopted Codes of Ethics pursuant to Rule 17j-1 under the 1940 Act. These Codes of Ethics permit personnel subject to the Codes to invest in securities, including securities that may be purchased or held by the Funds, subject to some restrictions. PRINCIPAL HOLDERS OF SECURITIES As of January 31, 2001, the following persons owned, of record or beneficially, five percent or more of the outstanding securities of the indicated Fund classes: 48
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- Municipal Bond Fund VALIC 28.45% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 J. Stuart Wilson TR 6.03% Shirley Jo Dickens-Wilson TR U/A DTD 04/21/99 FBO Fleta W. Coe Trust 5111 Mimosa Lane Richmond, TX 77469-7612 Municipal Bond Fund VALIC 31.32% Class B Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Bear Stearns Securities Corporation 21.56% FBO 044-51064-13 1 Metrotech Center North Brooklyn, NY 11201-3870 Municipal Bond Fund Claire Koh 17.19% Class C Shares 963C Heritage Hills Drive Somers, NY 10589-1913 Donaldson Lufkin Jenrette Securities Corporation, Inc. 23.73% PO Box 2052 Jersey City, NJ 07303-2052 Donaldson Lufkin Jenrette Securities Corporation, Inc. 23.73% PO Box 2052 Jersey City, NJ 07303-2052
49
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- NFSC FBO #AFS-045284 6.11% Scott B. Huchinson Christine A. Huchinson 12843 Westledge Lane St. Louis, MO 63131-2237 U.S. Government Securities Fund PaineWebber For the Benefit of 6.10% Class A Shares First Federal Savings Bank Attn: Walter Manijak 633 LaSalle Street Ottawa, IL 61350-2931 U.S. Government Securities Fund State Street Bank & Trust Company 6.51% Class C Shares Cust for the Rollover IRA of Carole A. Eisenstein 122 Totowa Road Totowa, NJ 07512-2709 Paget Partners, L.P. 6.26% PO Box 5430 Incline VLG, NV 89450-5430 Core Bond Fund VALIC 6.03% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Core Bond Fund State Street Bank & Trust Company 5.94% Class B Shares Cust for the IRA R/O Beverly Huckabay 1910 Sherwood Drive CPE Girardeau, MO 63701-2540 Core Bond Fund State Street Bank & Trust Co. 13.94% Class C Shares FBO Shirley Einhorn R/O IRA 10662 SW 79 Terr Miami, FL 33173-2912 Core Bond Fund Aggressive Growth LifeStyle Fund 10.89% Institutional I Shares C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Moderate Growth LifeStyle Fund 32.61% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Conservative Growth LifeStyle Fund 45.05% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142
50
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- Core Bond Fund American General 100.00% Institutional II Shares Attn: Beth Dobbs Plan Admin 2929 Allen Parkway A38-04 Houston, TX 77019-7100 Global Equity Fund North American Life Assurance Co. 24.05% Class A Shares C/O Elliott & Page, Brett Hyrb 393 University Ave., Suite 2100 Toronto, Ontario Canada MSG 1E6 International Small Cap Fund Wexford Clearing Services Corp. FBO 6.17% Class B Shares Robert M. Freeman 14 Kanawha Road Richmond, VA 23226-3308 Large Cap Growth Fund VALIC 8.13% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Large Cap Growth Fund VALIC 8.59% Institutional I Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Aggressive Growth LifeStyle Fund 26.20% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Moderate Growth LifeStyle Fund 14.38% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Conservative Growth LifeStyle Fund 10.84% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142
51
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- VALIC Trust Company as Custodian 18.93% FBO The North Carolina Baptist Hospitals, Inc. 403B Retirement Savings Plan 2929 Allen Parkway L14-30 Houston, TX 77019-7100 Balanced Fund VALIC 17.04% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Salomon Smith Barney, Inc. 5.46% 00168A80340 333 W. 34th Street 3rd Floor New York, NY 10001 Balanced Fund VALIC 7.65% Class B Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Balanced Fund VALIC 51.53% Institutional I Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 VALIC Trust Company as Custodian 7.09% FBO Hamot Health Foundation 403B 2929 Allen Parkway L14-30 Houston, TX 77019-7100 VALIC Trust Company as Custodian 30.11% FBO The North Carolina Baptist Hospitals, Inc. 403B Retirement Savings Plan 2929 Allen Parkway L14-30 Houston, TX 77019-7100 Small Cap Growth Fund VALIC 22.89% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142
52
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- Small Cap Growth Fund VALIC 6.62% Class B Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Small Cap Growth Fund First Union National Bank TTEE 6.01% Class C Shares FBO Christian Barton PSP FBO JE Betts P/S/P U/A/D 2/1/79 A/C #5041140787 Trust Operations 1525 West WT Harris Blvd. NC 1151 Charlotte, NC 28262-8522 Small Cap Growth Fund VALIC 22.92% Institutional I Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Aggressive Growth LifeStyle Fund 23.58% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Moderate Growth LifeStyle Fund 14.10% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Conservative Growth LifeStyle Fund 7.06% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 VALIC Trust Company as Custodian 14.96% FBO Hamot Health Foundation 403B 2929 Allen Parkway L14-30 Houston, TX 77019-7100 VALIC Trust Company as Custodian 9.30% FBO High Point Regional Hospital 2929 Allen Parkway L14-30 Houston, TX 77019-7100 Science & Technology Fund VALIC 7.82% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142
53
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- State Street Bank & Trust Company 5.43% Cust for the IRA R/O FBO David T. McNaught 1624 Stable Circle Indianapolis, IN 46239-8841 Science & Technology Fund NFSC FBO #0AG-002917 6.40% Class C Shares Wesley McClain Sheri McClain 1090 Maple Ridge Court Evans, GA 30809-5248 State Street Bank & Trust Company 8.93% Cust for the IRA R/O Isreal Grinberg 5315 Rutherglenn Dr. Houston, TX 77096-4139 Science & Technology Fund VALIC 99.99% Institutional I Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Municipal Money Market Fund VALIC 57.64% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Linda J. Vincent 10.65% Christopher Vincent Jacob Vincent TOD 39 Rivermeadow Dr. Steep Falls, ME 04085-6842 Municipal Money Market Fund VALIC 90.91% Class B Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Municipal Money Market Fund Victoria P. Villarreal 33.26% Class C Shares 112 San Martin St. San Antonio, TX 78207-2251 Caroline A. Liserio Under MA TOD 24.86% John A. Cantu PO Box 1161 Poteet, TX 78065-1161 Brad Coleman & Candace Coleman JT TEN 39.24% 603 Westway Dr. Rockwall, TX 75087-3013
54
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- High Yield Bond Fund State Street Bank & Trust Company 25.95% Class A Shares IRA A/C Shirley C. Karfunkle 106 Doe Ln. Kennet Square, PA 19348-2722 Kenneth Royce Barrett 17.19% Ariel Cecil Barrett TOD 2160 Swift Blvd. Houston, TX 77030-1216 Louise Kristic Under MA TOD 30.96% Robert Joseph Kristic Myra Lynn Bortoli PO Box 772 Ferndale, CA 95536-0772 High Yield Bond Fund Bear Stearns Securities Corporation 8.37% Class B Shares FBO 046-07518-11 1 Metrotech Center North Brooklyn, NY 11201-3870 Bear Stearns Securities Corporation 20.42% FBO 046-55300-12 1 Metrotech Center North Brooklyn, NY 11201-3870 NFSC FBO #GFS-000094 6.16% Andrea Berkowitz 60 Hudson Ave. Lake Grove, NY 11755-2956 High Yield Bond Fund Donaldson Lufkin Jenrette Securities Corporation, Inc. 44.10% Class C Shares PO Box 2052 Jersey City, NJ 07303-2052 Henry Huppe & Carole Huppe JT TEN 7.15% 1402 Wessler Road Arenzville, IL 62611-3095 State Street Bank & Trust Company 10.42% Cust for the IRA R/O of James B. Ritter 12 Oak Grove Drive Beardstown, IL 62618-7601 Charlotte A. Cloninger 10.50% Box 225 Chandlerville, IL 62627-0225 High Yield Bond Fund Moderate Growth LifeStyle Fund 99.35% Institutional I Shares C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142
55
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- High Yield Bond Fund American General 100.00% Institutional II Shares Attn: Beth Dobbs 2929 Allen Parkway Houston, TX 77019-7100 Conservative Growth LifeStyle Fund VALIC 39.58% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Katherine A. Kirby 8.68% TOD as per Will 302 E. 8th Street El Paso, IL 61738-1281 State Street Bank & Trust Company 8.20% Cust for the IRA R/O of Ruth A. Ward 4018 Schroeder Ave. Perry Hall, MD 21128-9704 Conservative Growth LifeStyle Fund VALIC 12.03% Class B Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Conservative Growth LifeStyle Fund State Street Bank & Trust Company 13.24% Class C Shares Cust for the IRA R/O Barbara H. Laska 410 Lexington Riddle Village Media, PA 19063-6022 State Street Bank & Trust Company 12.30% Cust for the IRA R/O Yuly A Vega 1803 Edmondson Ave. Catonsville, MD 21228-4350 Evan Dawn Beattie TTEE 5.44% Evan Dawn Beattie Trust U/A DTD 01/14/1995 9730 Cherokee Ln. Newcastle, CA 95658-9750 Betty L. Roach 8.17% 1674 Belleville Way Sunnyvale, CA 94087-3958 Carol R. Fosco 8.98% 1562 Fitchville Ave. San Jose, CA 95126-4218 Cathy H. Cutchins 18.00% 202 Harkness Road Amherst, MA 01002-9775
56
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- Conservative Growth LifeStyle Fund VALIC 62.40% Institutional I Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 VALIC Trust Company as Custodian 9.14% FBO City of Shreveport 401A 2929 Allen Parkway L14-30 Houston, TX 77019-7100 VALIC Trust Company as Custodian 11.45% FBO City of Shreveport 457 2929 Allen Parkway L14-30 Houston, TX 77019-7100 Moderate Growth LifeStyle Fund VALIC 37.09% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 State Street Bank & Trust Company 7.92% IRA R/O Michael Flynn 6006 Wayne Ave. Pentwater, MI 49449-9514 Moderate Growth LifeStyle Fund VALIC 10.40% Class B Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Moderate Growth LifeStyle Fund State Street Bank & Trust Company 7.86% Class C Shares Cust for the IRA R/O of Robert H. Ellis 10511 Ranier Houston, TX 77031-1820 Antonia L. Peracchio Under MA TOD 6.14% John P. Peracchio & John Peracchio David F. Peracchio & Chrisann Shust 1 Forest Ave. Bridgewater, NJ 08807-3722 Lorraine Johnson Under MA TOD 8.25% Andrew G. Johnson PO Box 535 Union, ME 04862-0535 State Street Bank & Trust Company 5.75% Cust for the Rollover IRA of Constance V. Giles Cincusnaveur PSC 802 BOC 4 FPO AS 09499-0151
57
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- Cathy H. Cutchins 18.04% 202 Harkness Road Amherst, MA 01002-9775 State Street Bank & Trust Company 12.33% Cust for the IRA R/O of Joseph A. Clumpner 1006 Northside Drive Chattanooga, TN 37421-3636 Moderate Growth LifeStyle Fund VALIC 46.47% Institutional I Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 VALIC Trust Company as Custodian 5.59% FBO City of Lakeland 457 DCP 2929 Allen Parkway L14-30 Houston, TX 77019-7100 VALIC Trust Company as Trustee 6.81% FBO City of Shreveport 457 2929 Allen Parkway L14-30 Houston, TX 77019-7100 Aggressive Growth LifeStyle Fund VALIC 37.29% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 State Street Bank & Trust Company 5.62% IRA A/C Alyson C. Hardin 511 Banyan Rd. Starkville MS 39759-4348 Aggressive Growth LifeStyle Fund VALIC 9.61% Class B Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 State Street Bank & Trust Company 10.24% Cust for the IRA R/O of Richard B. Brown 160 Ogunquit Rd. South Berwick, ME 03908-2140 State Street Bank & Trust Company 12.53% Cust fo the IRA of Judith B. Trimble 205 Wayside Dr. Turlock, CA 95380-3219
58
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- State Street Bank & Trust Company 9.66% Cust for the IRA R/O Hugh E. Wilson 455 Piney Point Dr. Sour Lake, TX 77659-9246 Evan Dawn Beattie TTEE 20.12% Evan Dawn Beattie Trust U/A DTD 01/14/1995 9730 Cherokee Ln. Newcastle, CA 95658-9750 Aggressive Growth LifeStyle Fund VALIC 60.58% Institutional I Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 VALIC Trust Company as Custodian 5.66% FBO City of Shreveport 457 2929 Allen Parkway L14-30 Houston, TX 77019-7100 Socially Responsible Fund VALIC 77.71% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Socially Responsible Fund VALIC 38.73% Class B Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Socially Responsible Fund Linda Margaretic 18.95% Class C Shares PO Box 3092 Quincy, CA 95971-3092 NFSC FEBO #APW-471100 50.85% J. Glenn Blackburn TTEE Jere Noel Blackburn REV TR U/A 12/31/90 PO Box 4179 Wise, VA 24293-4179 LPL Financial Services 15.22% A/C 3912-9792 9785 Towne Centre Drive San Diego, CA 92121-1968
59
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- Socially Responsible Fund VALIC 48.18% Institutional I Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 VALIC Trust Company as Custodian 5.84% FBO Centra Health Matching TDSP 2929 Allen Parkway L14-30 Houston, TX 77019-7100 VALIC Trust Company as Custodian 32.25% FBO State of Florida 457 2929 Allen Parkway L14-30 Houston, TX 77019-7100 VALIC Trust Company as Custodian 6.30% FBO Memorial Health SYS TAX DEF 2929 Allen Parkway L14-30 Houston, TX 77019-7100 Mid Cap Value Fund VALIC 46.52% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 State Street Bank & Trust Company 5.11% Cust for the IRA of Eugene Celiano 2623 River Road Manasquan, NJ 08736-2436 State Street Bank & Trust Company 5.64% Cust Roth Contribution IRA Eugene Celiano 2623 River Road Manasquan, NJ 08736-2436 Mid Cap Value Fund VALIC 16.26% Class B Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Mid Cap Value Fund Victoria P. Villarreal 9.54% Class C Shares 112 San Martin Street San Antonio, TX 78207-2251 Caroline A. Liserio Under MA TOD 9.56% John A. Cantu PO Box 1161 Poteet, TX 78065-1161
60
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- Mid Cap Value Fund VALIC 26.21% Institutional I Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Aggressive Growth LifeStyle Fund 25.95% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Moderate Growth LifeStyle Fund 23.82% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Conservative Growth LifeStyle Fund 11.16% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 VALIC Trust Company as Custodian 9.47% FBO Catholic Healthcare W SUPP RET PL 2929 Allen Parkway Houston, TX 77019-7100 Stock Index Fund VALIC 33.20% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 State Street Bank & Trust Company 13.74% FBO IRA R/O Mary Ann Boettger 505 Harold Street Bay City, MI 48708-7560 Stock Index Fund VALIC 7.76% Class B Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Stock Index Fund State Street Bank & Trust Company 10.00% Class C Shares Cust for the IRA R/O Isreal Grinberg 5315 Rutherglenn Drive Houston, TX 77096-4139
61
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- State Street Bank & Trust Company 11.58% Cust for the IRA R/O Joan B. Terry 1602 Northwind Court Winter Springs, FL 32708-3879 NFSC FEBO #0SE-640999 5.95% Account 2 Martha Shaw Jerome Shaw 25 Lori Street Poughkeepsie, NY 12603-5815 NFSC FEBO #AFS-396923 8.96% NFSC/FMTC IRA Rollover FBO Luis Cantu 3632 Whispering Ridge Lane St. Louis, MO 63129-2248 Small Cap Index Fund VALIC 89.84% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Small Cap Index Fund VALIC 61.02% Class B Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Small Cap Index Fund State Street Bank & Trust Company 31.36% Class C Shares C/F Roth Contribution 01/01/2000 FBO Richard B. Brown 160 Ogunquit Road South Berwick, ME 03908-2140 Mary A. Schlenk 8.06% 3118 Griesmer Ave. Hamilton, OH 45015-1729 Paula Knudson Under MA TOD 6.79% Dorene Knudson Nancy Knudson Linda Gaul 1327 Castle Court Houston, TX 77006-5701 NFSC FEBO #0AG-001015 5.26% John S. Yarbrough Eva H. Yarbrough 2742 Wrenwood Fresno, CA 93711-2559
62
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- First Clearing Corporation 6.35% A/C 3296-3833 FCC as Custodian 118 Fulbright Lane Schaumburg, IL 60194-5171 NFSC FEBO #AFS-400491 35.08% NFSC/FMTC IRA Rollover FBO Dennis F. Fuglsang 1164 Chavaniao Drive Manchester, MO 63011-3602 Jospehthal Stretegic Growth Fund Bear Stearns Securities Corporation 5.63% Class C Shares FBO 670-01706-13 1 Metrotech Center North Brooklyn, NY 11201-3870 Bear Stearns Securities Corporation 13.97% FBO 690-20111-10 1 Metrotech Center North Brooklyn, NY 11201-3870 Bear Stearns Securities Corporation 14.10% FBO 690-20150-13 1 Metrotech Center North Brooklyn, NY 11201-3870 Bear Stearns Securities Corporation 7.05% FBO 690-20138-19 1 Metrotech Center North Brooklyn, NY 11201-3870 Bear Stearns Securities Corporation 7.12% FBO 670-03406-20 1 Metrotech Center North Brooklyn, NY 11201-3870 Mid Cap Growth Fund VALIC 8.72% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Mid Cap Growth Fund VALIC 19.87% Institutional I Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Aggressive Growth LifeStyle Fund 11.20% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142
63
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- Moderate Growth LifeStyle Fund 6.71% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 VALIC Trust Company as Custodian 34.33% FBO Centra Health Matching TDSP 2929 Allen Parkway L14-30 Houston, TX 77019-7100 VALIC Trust Company as Custodian 17.26% FBO RC Deferred Compensation Plan 2929 Allen Parkway L14-30 Houston, TX 77019-7100 Strategic Income Fund VALIC 17.13% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Strategic Income Fund VALIC 6.54% Class B Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Strategic Income Fund VALIC 100.00% Institutional I Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 International Equity Fund VALIC 38.29% Class A Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 International Equity Fund VALIC 12.67% Class B Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 International Equity Fund VALIC 25.52% Institutional I Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Aggressive Growth LifeStyle Fund 30.33% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142
64
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- Moderate Growth LifeStyle Fund 21.79% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Conservative Growth LifeStyle Fund 10.04% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Growth & Income Fund VALIC 11.14% Institutional I Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Aggressive Growth LifeStyle Fund 30.46% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Moderate Growth LifeStyle Fund 28.37% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Conservative Growth LifeStyle Fund 20.11% C/O VALIC Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Money Market Fund Wendel & Company A/C 005077 14.53% Class A Shares C/O The Bank of New York Mutual Fund/Reorg Dept. PO Box 1066 Wall Street Station New York, NY 10268-1066 Money Market Fund VALIC 13.83% Class B Shares Seed Account Attn: Greg Kingston 2919 Allen Parkway L7-01 Houston, TX 77019-2142 Money Market Fund Northern Trust Bank of Texas 10.76% Class C Shares Cust for Alice McPherson, MD A/C #03-22585 PO Box 92956 Chicago, IL 60675-2956
65
FUND SHAREHOLDER % OF FUND HELD - ---- ----------- -------------- Money Market Fund Boston Financial Data Services, Inc. 33.33% Institutional I Shares Corporate Actions Audit A/C #1 North American Funds 2 Heritage Drive 2nd Floor Quincy, MA 02171-2144 Boston Financial Data Services, Inc. 33.33% Corporate Actions Audit A/C #2 North American Funds 2 Heritage Drive 2nd Floor Quincy, MA 02171-2144 Boston Financial Data Services, Inc. 33.33% Corporate Actions Audit A/C #4 North American Funds 2 Heritage Drive 2nd Floor Quincy, MA 02171-2144
As of January 31, 2001, the officers and Trustees of the Trust as a group owned less than 1% of the outstanding shares of each class of each Fund. INVESTMENT MANAGEMENT ARRANGEMENTS The following information supplements the material appearing in the Prospectus. ADVISORY ARRANGEMENTS "AGAM" and "AGFD" are both wholly-owned subsidiaries of American General Corporation, which is a part of American General Financial Group, a financial services company with approximately $115 billion in assets and over $6 billion in total stockholders' equity. AGAM acts as the Trust's investment adviser (the "Adviser"), while AGFD acts as the Trust's distributor (the "Distributor") and principal underwriter. The American General Corporation group of companies operate in each of the 50 states, and collectively engage in substantially all forms of financial services. Prior to March 10, 2000, CypressTree Asset Management Corporation, Inc., was the investment adviser to the Trust, and CypressTree Funds Distributors, Inc. was the distributor to the Trust. Prior to October 1, 1997, NASL Financial Services, Inc. was both the investment adviser and the distributor for the Trust (in such capacity, the "Former Distributor"). Prior to March 10, 2000, VALIC served as investment adviser and American General Distributors, Inc. ("AGD") served as the distributor for Mid Cap Value, Science & Technology, Small Cap Index, Socially Responsible, Stock Index, High Yield Bond, Municipal Money Market, Aggressive Growth LifeStyle, Moderate Growth LifeStyle and Conservative Growth LifeStyle Funds ("VALIC Funds"). Advisory fee rates payable to VALIC prior to March 10, 2000, were the same as those payable under the current investment advisory agreement. Subject to the supervision of the Trustees, the Adviser oversees all aspects of the Trust's business and affairs. In that connection, the Adviser permits its directors, officers and employees to serve as Trustees or President, Vice President, Treasurer or Secretary of the Trust, without cost to the Trust. The Adviser also provides certain services, and the personnel to perform such services, to the Trust for which the Trust reimburses the Adviser's costs of providing such services and personnel. Such services include maintaining certain records of the Trust and performing all administrative, financial, accounting, bookkeeping and recordkeeping functions of the Trust, except for any of those functions performed by the Trust's custodian or transfer and shareholder servicing agents. The reimbursement paid by the Trust to the Adviser for personnel costs include employee compensation and allocated portions of the Adviser's related personnel expenses of office space, utilities, office equipment and miscellaneous office expenses. As compensation for its services, the Adviser receives a fee from the Trust computed separately for each Fund. The fee for each Fund is stated as an annual percentage of the current value of the net assets of the Fund. The fee, which is accrued daily and payable monthly, is calculated for each day by multiplying the fraction of one over the number of calendar days in the year by the annual 66 percentage prescribed for a Fund, and multiplying this product by the value of the net assets of the Fund at the close of business on the previous business day of the Fund. The following is a schedule of the management fees each Fund currently is obligated to pay AGAM under the Advisory Agreement: Between Between $ 50,000,000 $200,000,000 FIRST AND AND EXCESS OVER FUNDS $50,000,000 $200,000,000 $500,000,000 $500,000,000 Small Cap Growth Fund .950% .950% .950% .950% International Small Cap Fund 1.050% 1.000% .900% .800% Mid Cap Growth Fund .925% .900% .875% .850% Global Equity Fund .900% .900% .700% .700% Large Cap Growth Fund .900% .850% .825% .800% International Equity Fund .900% .850% .800% .750% Growth & Income Fund .725% .675% .625% .550% Balanced Fund .775% .725% .675% .625% Strategic Income Fund .750% .700% .650% .600% Core Bond Fund .600% .600% .525% .475% Municipal Bond Fund .600% .600% .600% .600% U.S. Government Securities Fund .600% .600% .525% .475% Money Market Fund .200% .200% .200% .145% Mid Cap Value Fund See Below Stock Index Fund .270% .270% .270% .260% Small Cap Index Fund .280% .280% .280% .270% Socially Responsible Fund .650% .650% .650% .650% High Yield Bond Fund .825% .825% .725% .675% Aggressive Growth LifeStyle Fund .100% .100% .100% .100% Moderate Growth LifeStyle Fund .100% .100% .100% .100% Conservative Growth LifeStyle Fund .100% .100% .100% .100% Municipal Money Market Fund .350% .350% .350% .350% Science & Technology Fund .900% .900% .900% .900% Josephthal Strategic Growth Fund .900% .850% .825% .800%
The management fee schedule for the Mid Cap Value Fund follows: .900% on the first $100,000,000; .875% between $100,000,000 and $250,000,000; .850% between $250,000,000 and $500,000,000; .825% between $500,000,000 and $750,000,000, and .800% on the excess over $750,000,000 of the average net assets of the Fund. SUBADVISORY ARRANGEMENTS Under the terms of each of the Subadvisory agreements between the Adviser and a Subadvisor (the "Subadvisory Agreements"), the Subadvisor assigned to a Fund manages the investment and reinvestment of the assets of such Fund, subject to the supervision of the Trustees. The Subadvisor formulates a continuous investment program for such Fund consistent with its investment objectives and policies outlined in this Prospectus. The Subadvisor implements such programs by purchases and sales of securities and regularly reports to the Adviser and the Trustees with respect to their implementation. 67 As compensation for their services, the Subadvisors receive fees from the Adviser computed separately for each Fund. The fee for each Fund is stated as an annual percentage of the current value of the net assets of the Fund. The fee, which is accrued daily and payable monthly, is calculated for each day by multiplying the fraction of one over the number of calendar days in the year by the annual percentage prescribed for a Fund, and multiplying this product by the value of the net assets of the Fund at the close of business on the previous business day of the Fund. Once the average net assets of a Fund exceed specified amounts, the fee is reduced with respect to the excess. Absent any applicable fee waivers, the following is a schedule of the management fees the Adviser is obligated to pay the Subadvisors for each Fund under the Subadvisory Agreements. THESE FEES ARE PAID BY THE ADVISER AND ARE NOT ADDITIONAL CHARGES TO THE FUNDS OR THEIR SHAREHOLDERS. The following is a schedule of fee rates paid by the Adviser to the Subadvisors. BETWEEN BETWEEN $ 50,000,000 $200,000,000 FIRST AND AND EXCESS OVER FUNDS $50,000,000 $200,000,000 $500,000,000 $500,000,000 Small Cap Growth Fund .550% .550% .550% .550% International Small Cap Fund See below Mid Cap Growth Fund See below Global Equity Fund .500% .450% .400% .350% Large Cap Growth Fund See below International Equity Fund .500% .450% .400% .350% Growth and Income Fund .325% .275% .225% .150% Balanced Fund See below Strategic Income Fund* .350% .350% .250% .200% Core Bond Fund* .250% .250% .200% .150% Municipal Bond Fund* .250% .250% .220% .150% U.S. Government Securities Fund* .225% .225% .150% .100% Money Market Fund* .075% .075% .075% .020% Mid Cap Value Fund* See below Stock Index Fund* See below Small Cap Index Fund* See below Socially Responsible Fund* .250% .250% .250% .250% High Yield Bond Fund* .450% .450% .350% .300% Aggressive Growth LifeStyle Fund* .100% .100% .100% .100% Moderate Growth LifeStyle Fund* .100% .100% .100% .100% Conservative Growth LifeStyle Fund* .100% .100% .100% .100% Municipal Money Market Fund* .250% .250% .200% .150% Science & Technology Fund .600% .600% .600% .550% Josephthal Strategic Growth Fund .500% .450% .425% .400%
*Fund is subadvised by American General Investment Management, L.P. ("AGIM"), a wholly owned indirect subsidiary of American General Corporation. 68 The subadvisory fee schedules for the Large Cap Growth Fund, the International Small Cap Fund, the Mid Cap Growth Fund, the Balanced Fund, the Mid Cap Value Fund, the Stock Index Fund, and the Small Cap Index Fund follow: For the Large Cap Growth Fund, AGAM pays the Subadvisor a fee at the rate of .500% on the first $50,000,000, .450% between $50,000,000 and $200,000,000, .425% between $200,000,000 and $500,000,000, .400% between $500,000,000 and $850,000,000, and .350% on the excess over $850,000,000. For the Mid Cap Growth Fund, AGAM pays the Subadvisor a fee at the rate of .550% on the first $50,000,000, .500% between $50,000,000 and $100,000,000, .450% between $100,000,000 and $250,000,000, .400% between $250,000,000 and $500,000,000, and .350% on the excess over $500,000,000. For the Balanced Fund, AGAM pays the Subadvisor a fee at the rate of .400% on the first $100,000,000, .350% between $100,000,000 and $250,000,000, and .300% on the excess over $250,000,000. For the International Small Cap Fund, AGAM pays the Subadvisor a fee at the rate of .500% on the first $300,000,000, .450% between $300,000,000 and $500,000,000, and .400% on the excess over $500,000,000. For the Mid Cap Value Fund, AGAM pays the Subadvisor a fee at the rate of .500% on the first $100,000,000, .475% between $100,000,000 and $250,000,000, .450% between $250,000,000 and $500,000,000, .425% between $500,000,000 and $750,000,000, and .400% on the excess over $750,000,000. For the Stock Index Fund, AGAM pays the Subadvisor a fee at the rate of .020% of the first $2,000,000,000 and .010% on the excess over $2,000,000,000. For the Small Cap Index Fund, AGAM pays the Subadvisor a fee at the rate of .030% on the first $150,000,000 and .020% on the excess over $150,000,000. The subadvisory fee paid to T. Rowe Price Associates, Inc. may be discounted based on the aggregate domestic equity assets subadvised by T. Rowe Price. Such discount ranges from 5% for assets between $750 million and $1.5 billion, up to 10% for assets above $3 billion. For the fiscal years ended October 31, 1998, 1999 and 2000, the Trust paid total advisory fees to the Adviser of $5,793,489, $5,811,566, and $6,799,159, respectively. The dollar amounts represented by each of the Funds are as follows:
11/1/97 to 11/1/98 TO 11/1/99 TO FUND 10/31/98 10/31/99 10/31/00 Mid Cap Growth Fund $ 313,427 $ 390,888 $ 555,072 International Small Cap Fund 181,592 159,614 320,210 Large Cap Growth Fund 255,953 335,777 571,885 Global Equity Fund 1,164,468 951,657 523,879 Growth & Income Fund 1,527,239 1,912,464 2,086,628 International Equity Fund 257,885 230,737 299,101 Strategic Income Fund 619,206 498,515 322,001 Core Bond Fund 102,778 94,898 663,440 U.S. Government Fund 479,512 411,390 300,110 Municipal Bond Fund 102,477 89,986 76,875 Money Market Fund 38,630 44,172 56,326 Balanced Fund 747,288 681,955 486,301 Small Cap Growth Fund 3,034/1/ 9,513 139,442 Mid Cap Value Fund N/A N/A 57,112/3/ Stock Index Fund N/A N/A 27,616/3/ Small Cap Index Fund N/A N/A 7,173/3/ Socially Responsible Fund N/A N/A 23,116/3/ High Yield Bond Fund N/A N/A 170,074/3/ Aggressive Growth LifeStyle Fund N/A N/A 6,966/3/ Moderate Growth LifeStyle Fund N/A N/A 6,368/3/ Conservative Growth LifeStyle Fund N/A N/A 5,736/3/ Municipal Money Market Fund N/A N/A 8,044/3/ Science & Technology Fund N/A N/A 53,172/3/ Josephthal Strategic Growth Fund N/A N/A 32,512/2/
69 /1/ For the period January 6, 1998, (commencement of operations) to October 31, 1998. /2/ For the period September 18, 2000, (commencement of operations) to October 31, 2000. /3/ For the period July 7, 2000 to October 31, 2000. For the fiscal year ended October 31, 1999, and from November 1, 1999 to July 7, 2000, VALIC, an affiliate of the Adviser and the investment adviser to the VALIC Funds, was paid total advisory fees of $588,503 and $540,574, respectively, for managing the Funds noted below. The dollar amounts represented by each of the VALIC Funds are as follows: 11/01/98 11/01/99 FUND to 10/31/99 to 07/07/00 Mid Cap Value Fund $ 51,545 $ 65,361 Stock Index Fund 29,869 48,901 Small Cap Index Fund 16,062 14,788 Socially Responsible Fund 15,928 16,057 High Yield Bond Fund 426,557 310,091 Aggressive Growth LifeStyle Fund 6,889 10,087 Moderate Growth LifeStyle Fund 7,247 9,978 Conservative Growth LifeStyle Fund 7,049 9,390 Municipal Money Market Fund 27,357 24,903 Science & Technology Fund N/A 31,018/2/ /2/ For the period March 1, 2000, (commencement of operations) to July 7, 2000. 70 For the fiscal years ended October 31, 1998, 1999 and 2000, the Adviser paid total subadvisory fees of $2,717,929, $2,701,966, and $3,194,477, respectively. The dollar amounts represented by each of the Funds are as follows: 11/1/97 to 11/1/98 to 11/1/99 to FUND 10/31/98 10/31/99 10/31/00 Mid Cap Growth Fund $ 177,891 $ 221,855 $ 316,341 International Small Cap Fund 112,414 98,810 173,739 Large Cap Growth Fund 142,195 186,543 313,631 Global Equity Fund 607,233 500,828 285,818 Growth & Income Fund 629,517 768,487 831,412 International Equity Fund 143,270 128,186 165,746 Strategic Income Fund 279,664 227,935 150,251 Core Bond Fund 38,542 35,587 265,944 U.S. Government Fund 179,817 154,269 112,544 Municipal Bond Fund 42,359 37,494 31,952 Money Market Fund 14,486 16,565 21,204 Balanced Fund 348,785 319,497 231,868 Small Cap Growth Fund 1,756/1/ 5,910 80,730 Mid Cap Value Fund N/A N/A 31,827/3/ Stock Index Fund N/A N/A 2,047/3 Small Cap Index Fund N/A N/A 768/3/ Socially Responsible Fund N/A N/A 9,029/3/ High Yield Bond Fund N/A N/A 91,401/3/ Aggressive Growth LifeStyle Fund N/A N/A 6,966/3/ Moderate Growth LifeStyle Fund N/A N/A 6,368/3/ Conservative Growth LifeStyle Fund N/A N/A 5,736/3/ Municipal Money Market Fund N/A N/A 5,873/3/ Science & Technology Fund N/A N/A 35,200/3/ Josephthal Strategic Growth Fund N/A N/A 18,062/2/
/1/ For the period January 6, 1998, (commencement of operations) to October 31, 1998. /2/ For the period September 18, 2000, (commencement of operations) to October 31, 2000. /3/ For the period July 7, 2000 to October 31, 2000. For the fiscal year ended October 31, 1999, and from November 1, 1999 to July 7, 2000, VALIC, an affiliate of the Adviser, paid total subadvisory fees of $325,777 and $276,034, respectively. The dollar amounts represented by each of the VALIC Funds are as follows: 71 11/01/98 11/01/99 FUND TO 10/31/99 TO 07/07/00 - -------------------------------------------------------------------------------- Mid Cap Value Fund $ 34,431 $ 43,575 Stock Index Fund* 1,601 N/A Small Cap Index Fund* 1,416 N/A Socially Responsible Fund N/A N/A High Yield Bond Fund 274,611 199,342 Aggressive Growth LifeStyle Fund N/A N/A Moderate Growth LifeStyle Fund N/A N/A Conservative Growth LifeStyle Fund N/A N/A Municipal Money Market Fund 13,717 12,451 Science & Technology Fund N/A 20,666/2/
* Bankers Trust Company was terminated as sub-adviser effective September 1, 1999. /2/ For the period March 1, 2000, (commencement of operations) to July 7, 2000. For the fiscal years ended October 31, 1998, 1999 and 2000, the Adviser and VALIC waived and, to the extent necessary, reimbursed the Funds the dollar amounts reflected below:
ADVISORY FEES WAIVED 11/01/97 11/01/98 11/01/99 FUND TO 10/31/98 TO 10/31/99 TO 10/31/00 - ------------------------------------------------------------------------------------------------------ Mid Cap Growth Fund $ 87,864 $ 91,998 $ 143,698 International Small Cap Fund 56,791 51,624 166,768 Large Cap Growth Fund 73,294 84,102 220,117 Global Equity Fund 0 102,604 115,350 Growth & Income Fund 243,058 414,305 460,894 International Equity Fund 34,607 58,359 101,244 Strategic Income Fund 47,269 113,062 133,830 Core Bond Fund 50,377 74,346 66,001 U.S. Government Securities Fund 118,394 14,964 181,196 Municipal Bond Fund 38,418 61,828 76,875 Money Market Fund 38,630 44,172 56,326 Balanced Fund 138,673 190,199 169,480 Small Cap Growth Fund 3,034 9,513 107,930 Mid Cap Value Fund N/A 51,545 72,036 Stock Index Fund N/A 29,869 76,517 Small Cap Index Fund N/A 16,062 48,995 Socially Responsible Fund N/A 15,928 39,173 High Yield Bond Fund N/A 283,446 257,818 Aggressive Growth Lifestyle Fund N/A 0 15,187 Moderate Growth Lifestyle Fund N/A 0 12,863 Conservative Growth Lifestyle Fund N/A 0 12,047 Municipal Money Market Fund N/A 27,357 32,947 Science & Technology Fund N/A N/A 84,190 Josephthal Strategic Growth Fund N/A N/A 32,512
72
EXPENSES REIMBURSED 11/01/97 11/01/98 11/01/99 FUND TO 10/31/98 TO 10/31/99 TO 10/31/00 - --------------------------------------------------------------------------------------------------------- Mid Cap Growth Fund $ 0 $ 0 $ 0 International Small Cap Fund 0 0 0 Large Cap Growth Fund 0 0 0 Global Equity Fund 0 0 0 Growth & Income Fund 0 0 0 International Equity Fund 0 0 0 Strategic Income Fund 0 0 0 Core Bond Fund 0 0 0 U.S. Government Securities Fund 0 0 0 Municipal Bond Fund 0 0 1,102 Money Market Fund 45,328 61,050 16,474 Balanced Fund 0 0 0 Small Cap Growth Fund 41,228 43,243 0 Mid Cap Value Fund N/A 23,588 0 Stock Index Fund N/A 27,335 78,373 Small Cap Index Fund N/A 31,391 0 Socially Responsible Fund N/A 57,680 44,971 High Yield Bond Fund N/A 283,446 0 Aggressive Growth Lifestyle Fund N/A 0 0 Moderate Growth Lifestyle Fund N/A 0 0 Conservative Growth Lifestyle Fund N/A 0 0 Municipal Money Market Fund N/A 20,061 16,152 Science & Technology Fund N/A N/A 31,721 Josephthal Strategic Growth Fund N/A N/A 2,143
Subadvisory fees paid to AGIM for the period from March 13, 2000 through October 31, 2000, were allocated among the Funds as follows: U.S. Government Securities Fund $ 67,415 Money Market Fund 16,031 Core Bond Fund 263,882 Municipal Bond Fund 21,531 Strategic Income Fund 90,080
Subadvisory fees paid to AGIM for the period from July 10, 2000 through October 31, 2000, were allocated among the Funds as follows: Small Cap Index Fund $ 768 Stock Index Fund 2,047 Socially Responsible Fund 9,029 Aggressive Growth LifeStyle Fund 6,966 Moderate Growth LifeStyle Fund 6,368 Conservative Growth LifeStyle Fund 5,736 High Yield Bond Fund 91,401 Municipal Money Market Fund 5,873
The total subadvisory fees paid to AGIM were $587,127 for the period March 13, 2000 through October 31, 2000. For the year ended October 31, 2000, the net investment advisory fees retained by the Adviser after payment of subadvisory fees was $3,604,682, allocated among the Funds as follows: 73
ANNUAL PERCENTAGE FUND DOLLAR AMOUNT OF FUND NET ASSETS - ------------------------------------------------------------------------------------------ Mid Cap Growth Fund $ 238,731 0.40% International Small Cap Fund 146,471 0.48% Large Cap Growth Fund 258,254 0.40% Global Equity Fund 238,061 0.43% Growth & Income Fund 1,255,216 0.40% International Equity Fund 133,355 0.40% Strategic Income Fund 171,750 0.40% Core Bond Fund 397,496 0.38% U.S. Government Securities Fund 187,566 0.38% Municipal Bond Fund 44,923 0.35% Money Market Fund 35,122 0.13% Balanced Fund 254,433 0.40% Small Cap Growth Fund 58,712 0.36% Mid Cap Value Fund 25,285 0.40% Stock Index Fund 25,569 0.25% Small Cap Index Fund 6,405 0.25% Socially Responsible Fund 14,087 0.40% High Yield Bond Fund 78,673 0.38% Aggressive Growth LifeStyle Fund 0 0 Moderate Growth LifeStyle Fund 0 0 Conservative Growth LifeStyle Fund 0 0 Municipal Money Market Fund 2,171 0.10% Science & Technology Fund 17,952 0.30% Josephthal Strategic Growth Fund 14,450 0.40%
For the period November 1, 1999 to July 7, 2000, the net advisory fees retained by VALIC after payment of subadvisory fees was $235,085, allocated among the VALIC Funds as follow:
FUND - ------------------------------------------------------------- Mid Cap Value Fund $ 21,786 Stock Index Fund 48,901 Small Cap Index Fund 14,788 Socially Responsible Fund 16,057 High Yield Bond Fund 110,749 Municipal Money Market Fund 12,452 Science & Technology Fund 10,352
The Advisory Agreement and each Subadvisory Agreement (collectively, the "Agreements") will continue in effect as to a Fund for a period no more than two years from the date of its execution or the execution of an amendment making the agreement applicable to that Fund only so long as such continuance is specifically approved at least annually either by the Trustees or by the vote of a majority of the outstanding voting securities of each of the Funds of the Fund, provided that in either event such continuance shall also be approved by the vote of the majority of the Trustees who are not interested persons of any party to the Agreements, cast in person at a meeting called for the purpose of voting on such approval. The required shareholder approval of any continuance of any of the Agreements shall be effective with respect to any Fund if a majority of the outstanding voting securities of the class of capital stock of that Fund vote to approve such continuance, notwithstanding that such continuance may not have been approved by a majority of the outstanding voting securities of the Fund. The Agreements may be terminated at any time, without the payment of penalty, by the Trustees or by the vote of a majority of the outstanding voting securities of the applicable Fund of the Trust, with respect to any Fund by the vote of a majority of the outstanding shares of such Fund, or by the Adviser or applicable Subadvisor on 60 days' written notice to the other party or parties to the Agreement and, in the case of the Subadvisory Agreements, to the Fund. Each of the Agreements will automatically terminate in the event of its assignment. The Agreements may be amended by the parties provided that such amendment is specifically approved by the vote of a majority of the outstanding voting securities of the Trust or applicable Fund(s), as the case may be, and by the vote of a majority of the Trustees who are not interested persons of the Trust, of the Adviser or of the applicable Subadvisor, cast in person at a meeting called for the purpose of voting upon such approval. The required shareholder approval of any amendment shall be effective with respect to any Fund if a majority of the outstanding voting securities of that Fund vote to approve the amendment, notwithstanding that the amendment may not be approved by a majority of the outstanding voting securities of (i) any other Fund affected by the amendment or (ii) all the Funds of the Trust. 74 Each Subadvisory Agreement provides that the Subadvisor will not be liable to the Trust or the Adviser for any losses resulting from any matters to which the agreement relates other than losses resulting from the Subadvisor's willful misfeasance, bad faith or gross negligence in the performance of, or from reckless disregard of, its duties. FUND EXPENSES Subject to the expense waiver discussed above, the Trust is responsible for the payment of all expenses of its organization, operations and business, except for: (1) those expenses the Adviser has agreed to bear pursuant to the Advisory Agreement, (2) those expenses the Distributor has agreed to bear pursuant to its Distribution Agreement with the Trust, or (3) those expenses the Subadvisors have agreed to pay pursuant to the Subadvisory Agreements. Among the expenses to be borne by the Fund, in addition to certain expenses incurred by the Adviser or Distributor, as described above, are the expense of the advisory and distribution fees; all charges and expenses relating to the transfer, safekeeping, servicing and accounting for the Trust's property, including charges of depositories, custodians and other agents; all expenses of maintaining and servicing shareholder accounts, including charges of the Trust's transfer, dividend disbursing, shareholder recordkeeping, redemption and other agents; costs of shareholder reports and other communications to current shareholders; the expenses of meetings of the Trust's shareholders and the solicitation of management proxies in connection therewith; all expenses of preparing Trust Prospectuses and Statements of Additional Information; the expenses of determining the Trusts' net asset value per share; the compensation of Trustees who are not directors, officers or employees of the Adviser and all expenses of meetings of the Trustees; all charges for services and expenses of the Trust's legal counsel and independent auditors; all fees and expenses of registering and qualifying, and maintaining the registration and qualification of, the Trust and its shares under all federal and state laws applicable to the Trust and its business activities; all expenses associated with the issue, transfer and redemption of Trust shares; brokers' and other charges incident to the purchase, sale or lending of the Trust's securities; taxes and other governmental fees payable by the Fund; and any nonrecurring expenses including litigation expenses and any expenses the Trust may incur as a result of its obligation to indemnify its Trustees, officers and agents. All expenses are accrued daily and deducted from total income before dividends are paid. DISTRIBUTION PLANS The Trust currently offers four classes of shares in each Fund other than the Municipal Bond Fund, the Municipal Money Market Fund and the Josephthal Strategic Growth Fund: "Class A" shares, "Class B" shares, "Class C" shares, and "Institutional Class I" shares. The Municipal Bond Fund, the Municipal Money Market Fund and the Josephthal Strategic Growth Fund offer only Class A, Class B and Class C shares. In addition, the Core Bond Fund and the High Yield Bond Fund also offer "Institutional Class II" shares. Class A, Class B, Class C and Institutional I shares of the Trust are continuously offered through participating brokers which are members of the NASD and which have dealer agreements with the Distributor. In addition to the front end sales charge which may be deducted at the time of purchase of Class A shares and the CDSC which may apply on redemption of Class B shares, each class of shares of each Fund is authorized under the Distribution Plan applicable to that class of shares (the "Class A Plan," the "Class B Plan" and the "Class C Plan," collectively, the "Plans") adopted pursuant to Rule 12b-1 under the 1940 Act to use the assets attributable to such class of shares of the Fund to finance certain activities relating to the distribution of shares to investors. The Plans are "compensation" plans providing for the payment of a fixed percentage of average net assets to finance distribution expenses. The Plans provide for the payment by each class of shares of each Fund of the Trust, other than the Money Market Fund and the Municipal Money Market Fund, of a monthly distribution and service fee to the Distributor, as principal underwriter for the Fund. Portions of the fees prescribed below are used to provide payments to the Distributor, to promotional agents, to brokers, dealers or financial institutions (collectively, "Selling Agents") and to Service Organizations for ongoing account services to shareholders and are deemed to be "service fees" as defined in paragraph (b)(9) of Section 2830 of the Conduct Rules of the National Association of Securities Dealers, Inc. Under the Class A Plan, Class A shares of each Fund (except as described in the next sentence) are subject to a fee of up to .35% of their respective average annual net assets, of which .25% constitutes a "service fee." Class A shares of the Municipal Bond Fund are subject to a fee of up to .15% of Class A average annual net assets, the entire amount of which constitutes a "service fee," and Class A shares of the Money Market Fund and Municipal Money Market Fund bear no such fees. Under the Class B Plan, Class B shares of each Fund (with the exception of the Money Market Fund and Municipal Money Market Fund) are subject to a fee of up to 1.00% of their respective average annual net assets, .25% of which constitutes a "service fee." Under the Class C Plan, Class C shares of each Fund (with the exception of the Money Market Fund and Municipal Money Market Fund) are subject to a fee of up to 1.00% of their respective average annual net assets, .25% of which constitutes a "service fee." 75 Payments under the Plans are used primarily to compensate the Distributor for distribution services provided by it in connection with the offering and sale of the applicable class of shares, and related expenses incurred, including payments by the Distributor to compensate or reimburse Selling Agents for sales support services provided and related expenses incurred by such Selling Agents. Such services and expenses may include the development, formulation and implementation of marketing and promotional activities, the preparation, printing and distribution of prospectuses and reports to recipients other than existing shareholders, the preparation, printing and distribution of sales literature, expenditures for support services such as telephone facilities and expenses and shareholder services as the Trust may reasonably request, provision to the Trust of such information, analyses and opinions with respect to marketing and promotional activities as the Trust may, from time to time, reasonably request, commissions, incentive compensation or other compensation to, and expenses of, account executives or other employees of the Distributor or Selling Agents, attributable to distribution or sales support activities, respectively, overhead and other office expenses of the Distributor or Selling Agents, attributable to distribution or sales support activities, respectively, and any other costs and expenses relating to distribution or sales support activities. The distribution and service fees attributable to the Class B shares and Class C shares are designed to permit an investor to purchase shares without the assessment of a front end sales charge, and, with respect to the Class C shares, without the assessment of a front end sales charge or a CDSC, and at the same time permit the Distributor to compensate securities dealers with respect to sales of such shares. The amounts payable by the Aggressive Growth LifeStyle Fund, the Moderate Growth LifeStyle Fund and the Conservative Growth LifeStyle Fund (the "LifeStyle Funds") under the Plans to the Distributor or any other party will be reduced by any amounts paid with respect to the Institutional Class I shares of each Portfolio in which a LifeStyle Fund invests (each an "Underlying Portfolio") pursuant to the Administrative and Shareholder Services Agreement (the "Services Agreement") between the Fund and AGAM. To the extent that any payments made by an Underlying Portfolio pursuant to the Services Agreement should be deemed to be indirect financing of any activity primarily intended to result in the sale of shares of the Fund within the meaning of the Rule, then such payments shall be deemed authorized by the Plans. The Distributor is authorized by each Plan to retain any excess of the fees it receives thereunder over its payments to selected dealers and its expenses incurred in connection with providing distribution services. Thus, payments under a Plan may result in a profit to the Distributor. The Distributor may from time to time assist dealers by, among other things, providing sales literature to, and holding educational programs for the benefit of, dealers' registered representatives. Participation of registered representatives in such informational programs will be in accordance with NASD Conduct Rules 2820 and 2830. The Distributor may also provide additional promotional incentives to dealers in connection with sales of shares of all classes of the Funds of the Trust. Payments for educational programs and promotional incentives will be provided for out of the front end sales charges and CDSCs retained by the Distributor, any applicable Distribution Plan payments or the Distributor's other resources. Other than Distribution Plan payments, the Fund does not bear distribution expenses. Each of the Distributor and, with respect to shares purchased before October 1, 1997, the Former Distributor currently pays a trail commission to securities dealers, with respect to accounts that such dealers continue to service for shares sold after April 1, 1994 as follows: Class A shares--0.25% annually, commencing from the date the purchase order is accepted, for all Funds (except the Municipal Bond Fund, for which the trail commission is 0.15%, and the Money Market Fund, for which no trail commission is paid); Class B shares--0.25% annually, for all Funds (except the Municipal Bond Fund, for which the trail commission is 0.15%, and the Money Market Fund, for which no trail commission is paid); and Class C shares--1.00% annually, for all Funds other than the Core Bond, U.S. Government Securities, Municipal Bond and Money Market Funds and 0.90% annually, for the Core Bond, U.S. Government Securities and Municipal Bond Fund (no trail commission is paid on the Money Market Fund). The trail commission payable following conversion of Class B and Class C shares to Class A shares will be in accordance with the amounts paid for Class A shares. For Class B and Class C shares sold on or after May 1, 1995, trail commissions commence 13 months after purchase. For Class B and Class C shares sold prior to May 1, 1995, trail commissions commence the date the purchase order is accepted. Trail commissions for shares sold prior to April 1, 1994 will be paid as noted below. In the case of Class B shares and Class C shares sold on or after May 1, 1995, the Distributor and, with respect to shares purchased before October 1, 1997, the Former Distributor, will advance to securities dealers the first year service fee at a rate equal to 0.25% of the purchase price of such shares and, as compensation therefor, the Distributor may retain the service fee paid by the Fund with respect to such shares for the first year after purchase. In the case of sales of Class B shares, the Distributor will pay each dealer a fee of 4% of the amount of 76 Class B shares purchased (0.25% is the advancement of the first year service fee and the remainder is a commission or transaction fee). No commission or transaction fee is paid for sales of shares of Class B of the Money Market Fund. In the case of sales of Class C shares, the Distributor will pay each securities dealer a fee of 1.00% (0.90% in the case of the Core Bond, U.S. Government Securities and Municipal Bond Fund) of the purchase price of Class C shares purchased through such securities dealer (0.25% is the advancement of the first year service fee and the remainder is a commission or transaction fee). No commission or transaction fee is paid for sales of shares of Class C of the Money Market Fund or the Municipal Money Market Fund. In adopting the Plans, the Trustees determined that the adoption of the Plans is in the best interests of the Trust and its shareholders, that there is a reasonable likelihood that the Plans will benefit the Trust and its shareholders, and that the Plans are essential to, and an integral part of, the Trust's program for financing the sale of shares of the various Funds of the Trust to the public. The Distributor is a broker/dealer registered under the Securities Exchange Act of 1934, as amended ("1934 Act") and a member of the NASD. The Distributor's address is the same as that of the Trust. Neither a Plan nor any related agreements can take effect until approved by a majority vote of both all the Trustees and those Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of a Plan or in any agreements related to it (the "Independent Trustees"), cast in person at a meeting called for the purpose of voting on such Plan and the related agreements. The Plans will continue in effect only so long as their continuance is specifically approved at least annually by the Trustees in the manner described above. The Trustees will receive quarterly and annual statements concerning distribution and shareholder servicing expenditures. In such statements, only expenditures properly attributable to the sale or servicing of a particular class of shares will be used to justify any distribution or servicing fee charged to that class. Expenditures not related to the sale or servicing of a particular class will not be presented to the Trustees to justify any fee attributable to that class. The statements, including the allocations upon which they are based, will be subject to the review and approval of the Independent Trustees in the exercise of their fiduciary duty. Each Plan may be terminated at any time with respect to any one or more Funds by a majority vote of the Independent Trustees or by vote of a majority of the outstanding voting securities attributable to Class A, Class B and Class C shares, as applicable, of such Fund or Funds. If a Plan is terminated by the Trustees or is otherwise discontinued with respect to one or more Funds, no further payments would be made by the Trust in respect of the Class A, Class B and Class C shares, as applicable, of such Fund or Funds under that Plan. A Plan may remain in effect with respect to Class A, Class B, or Class C shares, as applicable, of a Fund even if it has been terminated with respect to the Class A, Class B and Class C shares, as applicable, of one or more other Funds. A Plan may not be amended with respect to any class of any Fund so as to materially increase the amount of the fees payable thereunder unless the amendment is approved by a vote of at least a majority of the outstanding voting securities of such class of such Fund. In addition, no material amendment to a Plan may be made unless approved by the Trustees in the manner described above for Trustee approval of the Plans. During the fiscal year ended October 31, 2000, the Funds paid to the Distributor the following distribution and service fees: 77
DISTRIBUTION AND SERVICE FEES ------------------------------------------- Fund Class A Class B Class C - ---- ------- ------- ------- Growth & Income Fund $141,047 $1,077,287 $1,627,385 Large Cap Growth Fund 26,687 269,230 250,016 Mid Cap Growth Fund 30,089 247,274 232,919 Mid Cap Value Fund 2,735 22,195 494 Science & Technology Fund 4,218 43,890 1,345 Small Cap Growth Fund 8,617 57,253 22,481 Small Cap Index Fund 3,791 14,594 41 Socially Responsible Fund 2,119 11,576 91 Stock Index Fund 8,638 74,799 549 Global Equity Fund 32,316 178,789 310,964 International Equity Fund 19,093 162,244 63,986 International Small Cap Fund 21,276 129,910 114,276 Balanced Fund 20,979 127,489 434,292 Core Bond Fund 12,104 44,808 35,079 High Yield Bond Fund 281 4,873 744 Municipal Bond Fund 7,687 46,249 30,606 Strategic Income Fund 26,192 180,981 165,037 U.S. Government Securities Fund 110,086 98,571 87,079 Money Market Fund 0 0 0 Municipal Money Market Fund 656 1,452 0 Aggressive Growth LifeStyle Fund 1,213 29,870 175 Moderate Growth LifeStyle Fund 479 26,882 107 Conservative Growth LifeStyle Fund 454 24,671 79
For the period November 1, 1999 through July 7, 2000, the VALIC Funds noted below paid to an affiliate, AGD, the distributor of such Funds, the following distribution and service fees:
DISTRIBUTION AND SERVICE FEES ------------------------------ Fund Class A CLASS B - ---- ------- ------- Mid Cap Value Fund $ 3,973 $ 46,651 Science & Technology Fund 2,052 24,120 Small Cap Index Fund 5,865 29,296 Socially Responsible Fund 3,085 24,201 Stock Index Fund 11,958 135,685 High Yield Bond Fund 292 7,157 Municipal Money Market Fund 7,465 20,404
78 UNDERWRITERS For the periods November 1, 1997 to October 31, 1998, November 1, 1998 to October 31, 1999, and November 1, 1999 to October 31, 2000, the Distributor received underwriting commissions of $560,557; $342,421 and $1,989,697, respectively. The dollar amounts were comprised as reflected below, with respect to shares of the following Funds:
11/1/97 TO 11/1/98 TO 11/1/99 TO FUND 10/31/98 10/31/99 10/31/00 - --------------------------------------------------------------------------------------------- Mid Cap Growth Fund $ 37,678 $ 29,267 $ 68,999 International Small Cap Fund 7,460 2,890 117,475 Large Cap Growth Fund 35,566 26,686 56,135 Global Equity Fund 50,852 39,745 7,865 Growth & Income Fund 232,745 179,324 174,121 International Equity Fund 10,257 13,846 19,419 Strategic Income Fund 52,633 9,887 2,290 Core Bond Fund 18,138 5,727 5,347 U.S. Government Securities Fund 58,690 19,362 8,221 Municipal Bond Fund 15,834 1,493 11,883 Balanced Fund 37,883 12,245 8,394 Small Cap Growth Fund 2,821/1/ 1,949 47,942 Mid Cap Value Fund N/A N/A 17,499/4/ Stock Index Fund N/A N/A 41,949/4/ Small Cap Index Fund N/A N/A 1,340/4/ Socially Responsible Fund N/A N/A 1,956/4/ High Yield Bond Fund N/A N/A 4,143/4/ Aggressive Growth LifeStyle Fund N/A N/A 24,452/4/ Moderate Growth LifeStyle Fund N/A N/A 15,148/4/ Conservative Growth LifeStyle Fund N/A N/A 25,925/4/ Municipal Money Market Fund N/A N/A N/A Money Market Fund N/A N/A N/A Science & Technology Fund N/A N/A 63,722/2/ Josephthal Strategic Growth Fund N/A N/A 1,265,472/3/
/1/ For the period January 6, 1998, (commencement of operations) to October 31, 1998. /2/ For the period March 1, 2000, (commencement of operations) to October 31, 2000. /3/ For the period September 18, 2000, (commencement of operations) to October 31, 2000. /4/ For the period July 7, 2000 to October 31, 2000. 79 Of the total underwriting commissions received during the three fiscal year periods, $95,918, $58,916 and $126,810, respectively, were retained by the Distributor. The balance of such commissions was paid to securities dealers and the promotional agent. During such periods the Distributor did not receive directly or indirectly from the Trust any compensation on the redemption or repurchase of Trust shares, brokerage commissions or other underwriting compensation. For the fiscal year ending October 31, 1999, and for the period November 1, 1999 to July 7, 2000, AGD and the underwriter to the VALIC Funds received underwriting commissions of $90,073 and $307,778, respectively. The dollar amounts were comprised as reflected below, with respect to shares of the following funds: 11/01/98 11/01/99 FUND to 10/31/99 to 07/07/00 - ---- ------------ ----------- Mid Cap Value Fund $ 4,005 $ 16,222 Stock Index Fund 42,505 85,990 Small Cap Index Fund 2,906 7,078 Socially Responsible Fund 4,929 11,402 High Yield Bond Fund 661 9,565 Aggressive Growth LifeStyle Fund 16,130 51,561 Moderate Growth LifeStyle Fund 6,298 28,987 Conservative Growth LifeStyle Fund 12,639 30,647 Municipal Money Market Fund N/A N/A Money Market Fund N/A N/A Science & Technology Fund N/A 66,326/2/
/2/ For the period March 1, 2000, (commencement of operations) to October 31, 2000. Of the total underwriting commissions received during the above referenced periods, $4,675 and $32,166, respectively, were retained by AGD. The balance of such commissions was paid to American General Financial Advisors, Inc., an affiliated broker-dealer. During such periods AGD did not receive directly or indirectly from the Funds any compensation on the redemption or repurchase of Fund shares, brokerage commissions or other underwriting compensation. 80 OTHER SERVICES AGREEMENT The Trust has entered into a Services Agreement with AGAM for the provision of recordkeeping and shareholder services to retirement and employee benefit plans and the LifeStyle Funds purchasing Class I shares. Under the terms of the Services Agreement, the Trust pays AGAM a fee on Class I shares equal to .25% of average net assets of each Fund's Class I shares, except for the LifeStyle Funds. For the period November 1, 1999 through July 7, 2000, Mid Cap Value, Science & Technology, Socially Responsible, High Yield Bond, Stock Index, Small Cap Index, and Municipal Money Market Funds had a similar agreement in which the Funds paid VALIC Retirement Services Company ("VRSCO") and VALIC Investment Services Company ("VISCO"), affiliates of VALIC, for the provision of recordkeeping and shareholder services to retirement and employee benefit plans purchasing Class I shares pursuant to an administrative services agreement identical to the one in place for the Trust. For the fiscal year ended October 31, 1999 and 2000, the Funds paid in the aggregate $7,836 and $81,290, respectively, to AGAM, VRSCO and VISCO for such services. The dollar amounts of such payments are reflected below.
PAYMENTS TO VRSCO/VISCO PAYMENTS TO AGAM ----------------------- ---------------- FUND 11/01/98 11/01/99 11/01/99 to 10/31/99 to 10/31/00 to 10/31/00 ----------- ------------ ----------- Growth & Income Fund N/A N/A $ 6,405 Large Cap Growth Fund N/A N/A 9,860 Mid Cap Growth Fund N/A N/A 7,458 Mid Cap Value Fund $ 3,579 $ 4,268 7,121 Science & Technology Fund N/A 528 381 Small Cap Growth Fund N/A N/A 8,767 Small Cap Index Fund N/A 0 0 Socially Responsible Fund 4,044 5,002 3,706 Stock Index Fund N/A 0 0 Global Equity Fund N/A N/A 0 International Equity Fund N/A N/A 10,494 International Small Cap Fund N/A N/A 0 Balanced Fund N/A N/A 2,974 Core Bond Fund N/A N/A 12,555 High Yield Bond Fund 213 24 85 Municipal Bond Fund N/A N/A 0 Strategic Income Fund N/A N/A 1,662 U.S. Government Securities Fund N/A N/A 0 Money Market Fund N/A N/A 0 Municipal Money Market Fund N/A 0 0 Aggressive Growth LifeStyle Fund N/A N/A 0 Moderate Growth LifeStyle Fund N/A N/A 0 Conservative Growth LifeStyle Fund N/A N/A 0
The Trust has entered into an Advisory Agreement with AGAM which includes reimbursement to AGAM for various expenses related to financial, accounting and administrative services provided to the Funds. For the fiscal years ended October 31, 1998, 1999 and 2000, the Funds paid in the aggregate $1,195,976, $1,216,461 and $1,387,842, respectively, to AGAM for such services. The dollar amounts for each Fund are as follows: FUND 11/01/97 11/01/98 11/01/99 - ---- to 10/31/98 to 10/31/99 to 10/31/00 ----------- ----------- ----------- Growth & Income Fund $ 341,295 $ 434,861 $ 488,309 Large Cap Growth Fund 43,869 56,337 92,681 Mid Cap Growth Fund 52,159 63,966 87,397 Mid Cap Value Fund N/A N/A 6,104 Science & Technology Fund N/A N/A 5,184 Small Cap Growth Fund 451 1,488 16,007 Small Cap Index Fund N/A N/A 2,699 Socially Responsible Fund N/A N/A 3,611 Stock Index Fund N/A N/A 10,388 Global Equity Fund 200,695 164,347 100,111 International Equity Fund 44,659 39,260 48,918 International Small Cap Fund 27,027 23,176 46,369 Balanced Fund 152,504 140,051 101,734 Core Bond Fund 26,199 24,557 130,390 High Yield Bond Fund N/A N/A 21,839 Municipal Bond Fund 26,126 23,167 19,678 Strategic Income Fund 130,292 104,964 70,665 U.S. Government Securities Fund 121,860 106,197 81,338 Money Market Fund 28,840 34,090 41,454 Municipal Money Market Fund N/A N/A 2,388 Aggressive Growth LifeStyle Fund N/A N/A 0 Moderate Growth LifeStyle Fund N/A N/A 0 Conservative Growth LifeStyle Fund N/A N/A 0 Josephthal Strategic Growth Fund Fund N/A N/A 10,578
81 Boston Financial Data Services, Inc., Boston, Massachusetts, is the ("Transfer Agent") for the Funds. The Transfer Agent receives a fee from each Fund for services provided. For the fiscal periods ended October 31, 1998, 1999 and 2000, the Funds paid in the aggregate $1,212,886, $1,329,046, and $1,962,026, respectively, in transfer agent fees. The dollar amounts for each Fund are as follows: 11/01/97 11/01/98 11/01/99 FUND to 10/31/98 to 10/31/99 to 10/31/00 - ---- ----------- ----------- ----------- Growth & Income Fund $ 304,950 $ 376,715 $ 638,191 Large Cap Growth Fund 63,373 89,017 137,166 Mid Cap Growth Fund 85,509 102,694 130,916 Mid Cap Value Fund N/A N/A 14,674 Science & Technology Fund N/A N/A 14,449 Small Cap Growth Fund 7,218 9,187 32,653 Small Cap Index Fund N/A N/A 7,661 Socially Responsible Fund N/A N/A 8,993 Stock Index Fund N/A N/A 29,570 Global Equity Fund 205,154 184,116 155,674 International Equity Fund 68,183 61,348 80,226 International Small Cap Fund 44,898 44,945 69,971 Balanced Fund 135,205 129,193 143,751 Core Bond Fund 33,461 37,925 108,293 High Yield Bond Fund N/A N/A 29,985 Municipal Bond Fund 12,092 18,297 29,045 Strategic Income Fund 111,198 103,440 98,918 U.S. Government Securities Fund 112,805 101,959 122,589 Money Market Fund 28,840 70,210 76,553 Municipal Money Market Fund N/A N/A 6,733 Aggressive Growth LifeStyle Fund N/A N/A 0 Moderate Growth LifeStyle Fund N/A N/A 0 Conservative Growth LifeStyle Fund N/A N/A 0 Josephthal Strategic Growth Fund N/A N/A 26,015
National Financial Date Services, Inc., 330 West 9th Street, Kansas City, Missouri, 64105, was the ("Transfer Agent") for Mid Cap Value, Stock Index, Socially Responsible, High Yield Bond, Aggressive Growth LifeStyle, Conservative Growth LifeStyle, Moderate Growth LifeStyle, Municipal Money Market and Science & Technology Funds for the periods November 1, 1998 through October 31, 1999, and November 1, 1999 through July 7, 2000. For such periods, the Funds paid in the aggregate $257,310 and $287,957, respectively, in transfer agent fees. The dollar amounts for each Fund are as follows: 11/01/98 11/01/99 FUND to 10/31/99 to 07/07/00 - ---- ----------- ----------- Mid Cap Value Fund $ 18,640 $ 27,440 Science & Technology Fund N/A 10,090 Small Cap Index Fund 15,744 16,591 Socially Responsible Fund 17,278 20,323 Stock Index Fund 28,946 57,713 High Yield Bond Fund 161,837 139,859 Municipal Money Market Fund 14,865 15,941 Aggressive Growth LifeStyle Fund 0 0 Moderate Growth LifeStyle Fund 0 0 Conservative Growth LifeStyle Fund 0 0
82 VALIC had entered into an Accounting Services Agreement to provide accounting services for Mid Cap Value, Stock Index, Small Cap Index, Socially Responsible, High Yield Bond, Aggressive Growth LifeStyle, Conservative Growth LifeStyle, Moderate Growth LifeStyle, Municipal Money Market and Science & Technology Funds. For the fiscal year ended October 31, 1999, and for the period November 1, 1999 to July 7, 2000, the Funds paid VALIC in the aggregate $28,981 and $27,375, respectively, for these services. The dollar amounts for each Fund are as follows: 11/01/98 11/01/99 FUND to 10/31/99 to 07/07/00 - ---- ----------- ----------- Mid Cap Value Fund $ 2,066 $ 2,615 Science & Technology Fund N/A 1,033 Small Cap Index Fund 1,725 1,584 Socially Responsible Fund 1,915 1,927 Stock Index Fund 3,323 5,433 High Yield Bond Fund 18,307 13,289 Municipal Money Market Fund 1,645 1,494 Aggressive Growth LifeStyle Fund 0 0 Moderate Growth LifeStyle Fund 0 0 Conservative Growth LifeStyle Fund 0 0
PORTFOLIO BROKERAGE Pursuant to the Subadvisory Agreements, the Subadvisors are responsible for placing all orders for the purchase and sale of portfolio securities of the Funds, the portfolio transactions for which are the responsibility of the Adviser. The Subadvisors have no formula for the distribution of the Funds' brokerage business, their intention being to place orders for the purchase and sale of securities with the primary objective of obtaining the most favorable overall results for the Funds. The cost of securities transactions for each Fund will consist primarily of brokerage commissions or dealer or underwriter spreads. Bonds and money market instruments are generally traded on a net basis and do not normally involve either brokerage commissions or transfer taxes. Occasionally, securities may be purchased directly from the issuer. For securities traded primarily in the over-the-counter market, the Subadvisors will, where possible, deal directly with dealers who make a market in the securities unless better prices and execution are available elsewhere. Such dealers usually act as principals for their own account. The Subadvisors consider various factors in selecting brokers through which orders for client accounts are executed. The Subadvisors' primary consideration is the broker's ability to provide the best execution of the trade (including both trade price and commission). Assuming equal execution capabilities, the Subadvisors also take other factors into account. In determining which brokers provide best execution, the Subadvisors look primarily to the stock price quoted by the broker, and normally place orders with the broker through which they can obtain the most favorable price. If the same price is available from more than one 83 broker, a Subadvisor's judgment as to the following factors may influence the selection of a broker for a particular trade: the execution, clearance and settlement capabilities of the brokers under consideration; the nature of the security being traded; the difficulty of execution; the size of the transaction; the desired timing of the trade; the activity existing and expected in the market for the particular security; confidentiality; the financial stability of the brokers under consideration; actual or apparent operational problems of any broker under consideration; and the negotiated commission rates available at the time of the trade. The Subadvisors may also consider the willingness of particular brokers to sell shares of the Fund, subject to best execution and difficulty of execution. The Subadvisors may also consider the nature and extent of research services provided when they select brokers. Assuming equal execution capabilities as described above, the Subadvisors may direct commission business to brokers who provide research services. Such services include, but are not limited to: analyses and reports concerning economic factors and trends, industries, specific securities, portfolio strategy, and valuation and performance of accounts; advice regarding critical factors supporting research recommendations and special reports or information based on the specific requests of a Subadvisor's portfolio manager/analysts. The Subadvisors may also from time to time obtain research services prepared by third parties and provided by brokers in exchange for a predetermined amount of commission business. These services include portfolio monitoring, analysis and performance measurement systems, various economic forecasting and research services covering stocks and bonds, research and trading conferences, and a source of information as to block trading opportunities. Some third party arrangements are cancelable at any time while others require notice. Such third party arrangements do not involve a substantial amount of the Subadvisors' commission business on behalf of clients. The Subadvisors may employ affiliated brokers for portfolio transactions. In accordance with industry practice, commission rates are normally determined through negotiations with brokers conducted by the Subadvisors' traders. These negotiations take into account industry norms for particular transactions, the size and type of trades, the size and expertise of the brokerage firm involved and the nature of brokerage and research services provided, including special services in connection with a particular trade. (Such special services could include, among other things, the assumption of market risk in connection with a trade or series of trades or the facilitation of trades in a thin or volatile market.) Commission rates paid by the Subadvisors in those cases may be higher than those charged by brokers for execution of similar trades without the provision of research and/or special services. No precise monetary value can be assigned to research and special execution services furnished to the Subadvisors by brokers. The Subadvisors will review all research services and will determine if the amounts of commissions directed to brokers are reasonable in relation to the value of the brokerage and research services provided, viewed in terms of both particular transactions and the Subadvisors' overall responsibilities with respect to the accounts over which they exercise investment discretion. Each Subadvisor will maintain an internal allocation procedure to identify those brokers who provide them with research services and the amount of research services they provide, and will endeavor to direct sufficient commissions to them to ensure the continued receipt of such services as the Subadvisor believes to be valuable. Research services furnished by brokers may be used in servicing all of the Funds of the Trust advised by a Subadvisor and any other accounts over which that Subadvisor exercises investment discretion, although not all of such services may be used in connection with any particular Fund that paid commissions to the brokers providing such services. The Subadvisors' practices in selecting brokers will be reviewed periodically by the Trustees. The Funds may enter into directed brokerage arrangements under which products or services (other than execution of securities transactions), expense reimbursements, or commissions are recaptured for a Fund from or through a broker-dealer, in exchange for directing the Fund's brokerage transactions to that broker-dealer. The Subadvisors and/or their affiliates currently manage portfolios and accounts other than those of the Trust. Although investment recommendations or determinations for the Trust's Funds will be made by the Subadvisors independently from the investment recommendations and determinations made by them for any other portfolio or account or by the Subadvisors' affiliates for the portfolios or accounts they manage, investments deemed appropriate for the Trust's Funds by the Subadvisors may also be deemed appropriate by them or affiliated advisers for other portfolios or accounts, so that the same security may be purchased or sold at or about the same time for both the Trust's Funds and such other portfolios or accounts. In such circumstances, the Subadvisors may determine that orders for the purchase or sale of the same security for the Trust's Funds and one or more other portfolios or accounts should be combined, in which event the transactions will be priced and allocated in a manner deemed by the Subadvisors to be equitable and in the best interests of the Trust's Funds and such other portfolios or accounts. While in some instances combined orders could adversely affect the price or volume of a security, the Subadvisors and the Trust believe that its participation in such transactions on balance will produce better overall results for the Trust. 84 For the fiscal years ended October 31, 1998, 1999, and 2000, the Funds paid brokerage commissions in connection with portfolio transactions of $947,399; $1,173,068, and $2,137,413, respectively. The dollar amounts represented by each of the Funds are as follows:
11/1/97 TO 11/1/98 TO 11/1/99 TO FUND 10/31/98 10/31/99 10/31/00 - ---- ---------- ---------- ---------- Mid Cap Growth Fund $ 123,987 $ 142,896 $ 143,814 International Small Cap Fund 37,107 164,253 853,646 Large Cap Growth Fund 59,360 74,175 120,284 Global Equity Fund 156,058 254,432 431,830 Growth & Income Fund 96,897 161,296 206,068 International Equity Fund 151,566 81,511 85,245 Balanced Fund 321,229 293,100 182,002 Small Cap Growth Fund 1,195 1,405 38,047 Mid Cap Value Fund N/A N/A 48,831 Science & Technology Fund N/A N/A 8,382 Small Cap Index Fund N/A N/A 1,479 Socially Responsible Fund N/A N/A 1,194 Stock Index Fund N/A N/A 1,626 Josephthal Strategic Growth Fund N/A N/A 14,965
The increase in brokerage commissions for the International Small Cap Fund and the Global Equity Fund resulted from repositioning of each Fund's portfolio by the new manager. For the Small Cap Growth Fund, the increase resulted from transitioning the portfolio out of poor performing small cap growth stocks. From November 1, 1999 to October 31, 2000, brokerage commissions were paid to Donaldson, Lufkin & Jenrette/CS First Boston as follows:
% OF AGGREGATE $ % OF TRUST'S BROKERAGE AMOUNT OF 11/01/99 TO COMMISSIONS REPRESENTED TRANSACTIONS FOR FUND 10/31/00 FOR THE PERIOD THE PERIOD - ---- ------------ ----------------------- ------------------ Growth & Income $ 31,481 15.3% 15.8% Balanced 5,977 3.3% 2.9% Global Equity 6,830 1.6% 1.6% International Small Cap 2,880 0.3% 0.4% Small Cap Growth 324 0.9% 0.5% Mid Cap Growth 1,083 0.8% 0.6% Mid Cap Value 950 1.9% 2.6% Socially Responsible 16 1.3% 0.5% Josephthal Strategic 1,350 9.0% 6.4% Growth Science & Technology 139 1.5% 1.5%
85 From November 1, 1999 to October 31, 2000, brokerage commissions were paid to Morgan Stanley as follows: % OF AGGREGATE $ % OF TRUST'S BROKERAGE AMOUNT OF 11/01/99 TO COMMISSIONS REPRESENTED TRANSACTIONS FOR FUND 10/31/00 FOR THE PERIOD THE PERIOD - ---- ----------- ----------------------- ----------------- Growth & Income $ 6,583 3.2% 3.1% Balanced 14,803 8.1% 5.6% Global Equity 37,509 8.7% 7.5% International Equity 5 0.0% 0.0% International Small Cap 25,244 3.0% 2.9% Small Cap Growth 1,038 2.7% 1.1% Mid Cap Growth 2,319 1.6% 1.1% Mid Cap Value 2,135 4.4% 4.3% Science & Technology 1,236 14.7% 1.5% Josephthal Strategic 1,170 7.8% 8.3% Growth
From November 1, 1999 to October 31, 2000, brokerage commissions were paid to Neuberger Berman as follows: % OF AGGREGATE $ % OF TRUST'S BROKERAGE AMOUNT OF 11/01/99 TO COMMISSIONS REPRESENTED TRANSACTIONS FOR FUND 10/31/00 FOR THE PERIOD THE PERIOD - ---- ---------- ---------------------- ----------------- Mid Cap Value $ 23,089 47.3% 51.9%
From November 1, 1999 to October 31, 2000, brokerage commissions were paid to Salomon Smith Barney as follows: % OF AGGREGATE $ % OF TRUST'S BROKERAGE AMOUNT OF 11/01/99 TO COMMISSIONS REPRESENTED TRANSACTIONS FOR FUND 10/31/00 FOR THE PERIOD THE PERIOD - ---- ----------- ---------------------- ----------------- Growth & Income $ 11,981 5.8% 5.3% Balanced 8,689 4.8% 3.7% Global Equity 14,436 3.3% 4.2% International Equity 754 0.9% 2.7% International Small Cap 8,797 1.0% 1.4% Small Cap Growth 1,059 2.8% 1.2% Mid Cap Growth 1,188 0.8% 0.5% Mid Cap Value 15,944 32.7% 11.2% Science & Technology 1,233 14.7% 1.3%
From November 1, 1999 to October 31, 2000, brokerage commissions were paid to JP Morgan as follows: % of aggregate $ % OF TRUST'S BROKERAGE AMOUNT OF 11/01/99 TO COMMISSIONS REPRESENTED TRANSACTIONS FOR FUND 10/31/00 FOR THE PERIOD THE PERIOD - ---- ----------- ----------------------- ----------------- Growth & Income $ 1,575 3.2% 4.7% Global Equity 6,964 3.4% 1.7% Mid Cap Value 10,545 2.4% 2.5%
86 From November 1, 1998 to October 31, 1999, brokerage commissions were paid to Salomon Smith Barney as noted below. Effective March, 2000, Salomon Smith Barney was no longer an affiliate of any Fund.
% OF AGGREGATE % OF TRUST'S BROKERAGE $ AMOUNT OF 11/0/98 TO COMMISSIONS REPRESENTED TRANSACTIONS FOR FUND 10/31/99 FOR THE PERIOD THE PERIOD International Small Cap Fund $ 12 0.00% 0.00% International Equity Fund 3,794 4.65% 3.52% Global Equity Fund 13,375 5.25% 4.46% Small Cap Growth Fund 13 0.93% 1.07% Large Cap Growth Fund 2,773 3.74% 5.45% Growth & Income Fund 5,316 3.30% 2.38% Balanced Fund 3,232 1.10% 1.94%
From November 1, 1998 to October 31, 1999, brokerage commissions were paid to J.P. Morgan Securities as noted below. Effective April, 1999, J.P. Morgan Securities was no longer an affiliate of any Fund.
% OF AGGREGATE % OF TRUST'S BROKERAGE $ AMOUNT OF 11/0/98 TO COMMISSIONS REPRESENTED TRANSACTIONS FOR FUND 10/31/99 FOR THE PERIOD THE PERIOD International Small Cap Fund $ 169 1.00% 0.11% International Equity Fund 485 0.59% 0.34% Global Equity Fund 10,986 4.32% 3.38% Large Cap Growth Fund 2,341 3.16% 3.31% Growth & Income Fund 3,306 2.05% 2.38% Balanced Fund 9,958 3.40% 3.63%
For the fiscal year ended October 31, 1999, and from November 1, 1999 to July 7, 2000, the following VALIC Funds paid aggregate brokerage commissions of $57,738 and $56,797, respectively. The dollar amounts by each Fund are as follows:
YEAR ENDED PERIOD OF 11/01/99 FUND 10/31/99 TO 07/07/00 ---------- ------------------ Mid Cap Value Fund $41,428 $37,840 Small Cap Index Fund 5,721 4,879 Socially Responsible Fund 4,603 3,641 Stock Index Fund 5,986 2,889 High Yield Bond Fund 0 0 Municipal Money Market Fund 0 0 Aggressive Growth LifeStyle Fund 0 0 Moderate Growth LifeStyle Fund 0 0 Conservative Growth LifeStyle Fund 0 0 Science & Technology Fund N/A 7,548
87 For the same periods, the above referenced Funds did not pay brokerage commissions to any of such Funds' affiliated brokers. MULTIPLE PRICING SYSTEM The Trust's Multiple Pricing System permits an investor to choose the method of purchasing shares that is most beneficial given the amount of the purchase and the length of time the investor expects to hold the shares. CLASS A SHARES. Purchases of Class A shares of less than $1 million are offered for sale at net asset value per share plus a front end sales charge of up to 5.75% for the Equity Funds (4.75% for the Income Funds) payable at the time of purchase (with the exception of Class A shares of the Money Market Fund and Municipal Money Market Fund, which are offered without such a charge). Equity Funds are defined to include Growth & Income, Large Cap Growth, Mid Cap Growth, Mid Cap Value, Science & Technology, Small Cap Growth, Small Cap Index, Socially Responsible, Stock Index, Global Equity, International Equity, International Small Cap, Balanced, Aggressive Growth LifeStyle, Conservative Growth LifeStyle, Moderate Growth LifeStyle and Josephthal Strategic Growth Funds. Income Funds are defined to include Core Bond, High Yield Bond, Municipal Bond Strategic Income and U.S. Government Securities Funds. Purchases of Class A shares of $1 million or more are offered for sale at net asset value without a front end sales charge but are subject to a contingent deferred sales charge ("CDSC") of 1% of the dollar amount subject thereto during the first year after purchase. In addition, Class A shares are subject to a distribution fee of up to .10% of their respective average annual net assets and a service fee of up to .25% of their respective average annual net assets (with the exception of Class A shares of the Money Market Fund and Municipal Money Market Fund, which bear no such fees, and Class A shares of the Municipal Bond Fund, which are subject to a service fee of up to .15% of Class A average annual net assets and are not subject to any distribution fee). Certain purchases of Class A shares qualify for reduced front end sales charges. CLASS B SHARES. Class B shares are offered for sale for purchases of $250,000 or less. Class B shares are offered for sale at net asset value without a front end sales charge, but are subject to a CDSC of 5% of the dollar amount subject thereto during the first and second year after purchase, and declining by 1% each year thereafter to 0% after the sixth year. In addition, Class B shares are subject to a distribution fee of up to .75% of their respective average annual net assets and a service fee of up to .25% of their respective average annual net assets (with the exception of Class B shares of the Money Market Fund and Municipal Money Market Fund, which bear no such fees). The Class B shares enjoy the benefit of permitting all of the investor's dollars to work from the time the investment is made. The higher ongoing distribution and service fees paid by Class B shares will cause such shares to have a higher expense ratio and to pay lower dividends than Class A shares. Class B shares purchased on or after October 1, 1997 will automatically convert to Class A shares eight years after the end of the calendar month in which the shareholder's order to purchase was accepted. CLASS C SHARES. Class C shares are offered for purchases of less than $1 million, at net asset value without a front end sales charge. Class C shares are subject to a CDSC of 1% of the dollar amount subject thereto during the first year after purchase. Class C shares are subject to a distribution fee of up to .75% of their respective average annual net assets and a service fee of up to .25% of their respective average annual net assets (with the exception of Class C shares of the Money Market Fund and Municipal Money Market Fund, which bear no such fees). Class C shares, like Class B shares, enjoy the benefit of permitting all of the investor's dollars to work from the time the investment is made. The higher ongoing distribution and service fees paid by Class C shares will cause such shares to have a higher expense ratio and to pay lower dividends than Class A shares. Class C shares purchased on or after July 1, 1999 will not be converted to Class A shares after ten years. Class C shares purchased before July 1, 1999 will automatically convert to Class A shares ten years after the end of the calendar month in which the shareholder's order to purchase was accepted. INSTITUTIONAL CLASS I SHARES. Institutional Class I shares are offered for sale through employer plans. Institutional Class I shares are available to any qualifying employer plan once the plan establishes a minimum account balance of $1 million with the Trust. 88 Institutional Class I shares of each Fund are subject to an administrative services fee of .25% of each Fund's respective average annual net assets. Institutional Class I shares are also available for purchase by or through the following: (1) Certain broker-dealers and other financial institutions that have entered into an agreement with the Distributor which includes a requirement that such shares be sold for the benefit of clients participating in a "wrap account" or a similar managed account program under which clients (a) pay an asset-based fee and (b) will have at least $1 million invested in Institutional Class I shares. (2) Registered investment advisers offering a "wrap account" or a similar managed account program under which clients (a) pay an asset-based fee and (b) will have at least $1 million invested in Institutional Class I shares. (3) Trust institutions and bank trust departments that (a) charge an asset-based fee and (b) will have at least $1 million invested in Institutional Class I shares. (4) A charitable organization (as defined for purposes of Section 501(c)(3) of the Code) investing $1 million or more. Institutional Class I shares are also available for purchase by the Aggressive, Moderate and Conservative Growth LifeStyle Funds. INSTITUTIONAL CLASS II SHARES. Institutional Class II shares are offered for sale only through employer plans, and are available for the Core Bond Fund and High Yield Bond Fund only. Institutional Class II shares are available to any qualifying employer plan once the plan establishes a minimum account balance of $500 million with the Trust. CONTINGENT DEFERRED SALES CHARGE. Purchases of $1 million or more of Class A shares are subject to a CDSC of 1% if redeemed within one year of purchase; purchases of Class B shares are subject to a CDSC of 5% during the first and second year after purchase declining by 1% each year thereafter to 0% after the sixth year; and Class C shares are subject to a CDSC of 1% if redeemed within one year of purchase. The applicable percentage is assessed on an amount equal to the lesser of the original purchase price or the redemption price of the shares redeemed. The CDSC is not applicable with respect to redemption of shares of the Money Market Fund and Municipal Money Market Fund which were initially purchased as such and which were never exchanged for shares of the same class of another Fund. However, in the case of shares of the Money Market Fund and Municipal Money Market Fund which were obtained through an exchange, such shares are subject to any applicable CDSC due at redemption. Similarly, shares initially purchased as shares of the Money Market Fund and Municipal Money Market Fund which are subsequently exchanged for shares of the same class of other Funds will be subject to any applicable CDSC due at redemption. CONVERSION FEATURE. Class B shares (purchased on or after October 1, 1997) and Class C shares (purchased before July 1, 1999) of all Funds except the Money Market Fund and Municipal Money Market Fund will automatically convert to Class A shares eight years and ten years, respectively, after the end of the calendar month in which the shareholder's order to purchase was accepted and will thereafter no longer be subject to the higher distribution and service fees. Such conversion will be on the basis of the relative net asset values per share, without the imposition of any sales charge, fee or other charge. (For Class B shares purchased prior to October 1, 1997 such conversion will take place six years after purchase.) Class B and Class C shares of the Money Market Fund and Municipal Money Market Fund do not convert to Class A shares of the Money Market Fund and Municipal Money Market Fund at any time, as shares of all classes of the Money Market Fund and Municipal Money Market Fund do not bear any distribution or service fees. In addition, because Class B and Class C shares of the Money Market Fund and Municipal Money Market Fund are not subject to any distribution or service fees, the applicable conversion period is tolled for any period of time in which Class B or Class C shares are 89 held in that Fund. For example, if Class B shares of a Fund other than the Money Market Fund and Municipal Money Market Fund are exchanged for Class B shares of the Money Market Fund two years after purchase and are subsequently exchanged one year later for Class B shares of a Fund other than the Money Market Fund and Municipal Money Market Fund, the one year of ownership in the Money Market Fund and Municipal Money Market Fund does not count in the determination of the time of conversion to Class A shares. For purposes of the conversion of Class B and Class C shares to Class A shares, shares purchased through the reinvestment of dividends and distributions paid on Class B shares, or purchased prior to July 1, 1999 through the reinvestment of dividends or distributions paid on Class C shares, as the case may be, will be considered to be held in a separate sub-account. Each time any Class B shares or Class C shares in the shareholder's Fund account (other than those in the sub- account) convert to Class A shares, a pro rata portion of the Class B shares or Class C shares, as the case may be, in the sub-account will also convert to Class A shares. The Trust believes that the conversion of either Class B or Class C shares to Class A shares does not constitute a taxable event under Federal income tax law. If the Trust's view on this matter changes, it may suspend conversion of Class B or Class C shares. In that event, which the Trust considers unlikely, no further conversions of Class B or Class C shares would occur, and those shares might continue to be subject to higher distribution and service fees for an indefinite period that may extend beyond the period ending eight years or ten years, respectively, after the end of the calendar month in which the shareholder's order to purchase was accepted. FACTORS FOR CONSIDERATION. The Trust's Multiple Pricing System is designed to provide investors with the option of choosing the class of shares which is best suited to their individual circumstances and objectives. The different sales charges, distribution and service fees and conversion features applicable to each class, as outlined above, should all be taken into consideration by investors in making the determination of which alternative is best suited for them. There are several key distinctions among the classes of shares that investors should understand and evaluate in comparing the options presented by the Multiple Pricing System. Class A shares are subject to lower distribution and service fees than are Class B and Class C shares, and, accordingly, pay correspondingly higher dividends per share. However, because a front end sales charge is deducted at the time of purchase for purchases of less than $1 million of Class A shares, investors purchasing Class A shares do not have all of their funds invested initially and, therefore, initially own fewer shares than they would own if they had invested the identical sum in Class B shares or Class C shares instead. In addition, Class C shares are subject to the same ongoing distribution and service fees as Class B shares but are subject to a CDSC for a shorter period of time (one year as opposed to six years) than Class B shares. However, Class B shares convert to Class A shares, and lower ongoing distribution and service fees, in a shorter time frame than do Class C shares. In light of these distinctions among the classes of shares, investors should weigh such factors as (i) whether they qualify for a reduced front end sales load for a purchase of Class A shares; (ii) whether, at the time of purchase, they anticipate being subject to a CDSC upon redemption if they purchase Class A shares (purchases of $1 million or more), Class B shares or Class C shares; (iii) the differential in the relative amounts that would be paid during the anticipated life of investments (which are made at the same time and in the same amount) in each class which are attributable to (a) the front end sales charge (for purchases of less than $1 million) and any applicable CDSC (for purchases of $1 million or more) and accumulated distribution and service fees payable with respect to Class A shares and (b) the accumulated distribution and service fees (and any applicable CDSC) payable with respect to Class B shares or Class C shares prior to their conversion to Class A shares; and (iv) to what extent the differential referred to above might be offset by the higher yield of Class A shares. Investors should also weigh these considerations against the fact that the higher continued distribution and service fees associated with Class B shares and Class C shares will be offset to the extent any return is realized on the additional funds initially invested and that there can be no assurance as to the return, if any, which will be realized on such additional funds. Class A shares are, in general, the most beneficial for the investor who qualifies for reduced front end sales charges. For this reason, Class B shares are not offered for purchases in excess of $250,000 and Class C shares are not offered for purchases of $1 million or more. Investors should consult their investment representative for assistance in evaluating the relative benefits of the different classes of shares. Dividends paid by a Fund with respect to each class of shares will be calculated in substantially the same manner at the same time on the same day, except that distribution and service fees and any other costs specifically attributable to a particular class of shares will 90 be borne solely by the applicable class. Shares of a Fund may be exchanged for shares of the same class of any other Fund, but not for shares of other classes of any Fund. Taxable dividends from any source, other than long-term capital gains, distributed to individuals by mutual funds are currently taxed at federal income tax rates of up to 39.6%, and the effective tax rate may be higher due to limitations at higher income levels on allowable deductions and exemptions. Long-term capital gains distributed to individuals by mutual funds are currently taxed at a federal income tax rate of 20%. Taxable dividends from any source, including long-term capital gains, distributed to corporations by mutual funds are currently taxed at federal income tax rates of up to 35%. Additionally, state taxes on mutual fund distributions reduce after-tax returns. PURCHASE, REDEMPTION AND PRICING Certain Qualified Purchasers. No front end sales charge or CDSC is applicable to any sale of Class A shares to any current or retired Trustee or officer of the Trust or of a Fund, or to the immediate families (i.e., the spouse, children, mother or father) of such persons, or any director, officer, or full- time employee or registered representative (and when permitted, the employees thereof) of broker/dealers having Dealer Agreements with the Distributor ("Selling Broker") and their immediate families (or any trust, pension, profit sharing or other benefit plan for the benefit of such persons), or any full-time employee of a bank, savings and loan, credit union or other financial institution that utilizes a Selling Broker to clear purchases of Fund shares, and their immediate families. In addition, no front end sales charge or CDSC is applicable on any sale to American General Corporation or any of its affiliates, the 91 Subadvisors, or to a director, officer, full-time employee or sales representative of American General Corporation or any of its affiliates, the Subadvisors or any of their affiliates, or to the immediate families of such persons, or any trust, pension, profit-sharing or other benefit plan for the benefit of such persons. Furthermore, no front end sales charge or CDSC is applicable to any sale of Class A shares to: (1) financial institution trust departments investing an aggregate of $1 million or more in the Funds; (2) accounts for which broker/dealers, financial institutions, or financial planners charge and account management fee (also called a "wrap" fee); (3) tax-qualified plans with more than $1 million in plan assets; (4) tax-qualified plans purchasing shares with loan repayments from participants; and (5) by a Fund in connection with the acquisition of another investment company. No front end sales charge or CDSC on Class A shares is applicable to continuing purchase payments made in connection with Code Section 401 qualified plans that were invested in the Fund prior to April 1, 1994. A qualified retirement plan that is currently a shareholder of the Fund may make additional purchases of Class A shares at net asset value (i.e., without the imposition of a front end sales load or CDSC). A commission or transaction fee of 1.00% will be paid by the Distributor to broker-dealers, banks and other financial service firms subject to a chargeback to the firm for redemptions made within one year from the date of purchase. Shares may be sold at net asset value to certain categories of investors, including to shareholders of other investment companies, who invest in North American Funds in response to certain promotional activities. Class A shares may be purchased at net asset value by certain broker-dealers and other financial institutions which have entered into an agreement with the Distributor, which includes a requirement that such shares be sold for the benefit of clients participating in a "wrap account" or a similar account program under which such clients pay a fee to such broker-dealer or other financial institution. Class A shares may also be purchased at net asset value by registered investment advisers for the benefit of client accounts if the adviser charges a fee (other than brokerage commissions) for his services. DETERMINATION OF NET ASSET VALUE The following supplements the discussion set forth in the Prospectus. The assets belonging to each class of shares of a Fund will, in each case, be invested together in a single portfolio. The net asset value of each class will be determined separately by subtracting the expenses and liabilities allocated to that class from the assets belonging to that class. The Trustees have authorized the Funds to value certain debt securities by reference to valuations obtained from pricing services which take into account appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data in determining valuations of such securities, without extensive reliance upon quoted prices, since such valuations are believed by the Trustees to more accurately reflect the fair value of such securities. Securities held by each of the Funds other than the Money Market Fund and the Municipal Money Market Fund, except for money market instruments with remaining maturities of 60 days or less, are valued as follows: securities which are traded on stock exchanges are valued at the last sales price as of the close of the Exchange, or lacking any sales, at the closing bid prices. Securities traded only in the "over-the-counter" market are valued at the last bid prices quoted by brokers that make markets in the securities at the close of trading on the Exchange. Securities and assets for which market quotations are not readily available or not obtained from a pricing service are valued at fair value as determined in good faith by the Trustees, although the actual calculations may be made by persons acting pursuant to the direction of the Trustees. If approved by the Trustees, the Fund may make use of a pricing service or services in determining the net asset value of the classes of the Funds. All instruments held by the Money Market Fund and the Municipal Money Market Fund and money market instruments with a remaining maturity of 60 days or less held by the other Funds will be valued on an amortized cost basis. Under this method of valuation, the instrument is initially valued at cost (or in the case of instruments initially valued at market value, at the market value on the day before its remaining maturity is such that it qualifies for amortized cost valuation); thereafter, the Fund assumes a constant proportionate amortization in value until maturity of any discount or premium, regardless of the impact of fluctuating interest rates on 92 the market value of the instrument. While this method provides certainty in valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price that would be received upon sale of the instrument. The Money Market Fund and the Municipal Money Market Fund uses the amortized cost valuation method in reliance upon Rule 2a-7 under the 1940 Act. As required by Rule 2a-7, the Money Market Fund and the Municipal Money Market Fund will maintain a dollar weighted average maturity of 90 days or less. The Trustees have established procedures designed to stabilize, to the extent reasonably possible, the Money Market Fund's and the Municipal Money Market Fund's price per share (for each class) as computed for the purposes of sales and redemptions at $1.00. REDEMPTION IN KIND Although it is each of the Funds' present policy to make payment of redemption proceeds in cash, if the Trustees determine it appropriate, redemption proceeds may be paid in whole or in part by a distribution in kind of marketable securities held by that Fund subject to the limitation that each Fund is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day period for any one account. If a redemption in kind is made, a shareholder might be required to bear transaction costs, including brokerage commissions, to dispose of such securities. A Fund will endeavor to only distribute securities for which there is an active trading market. REPURCHASE OF SHARES The Distributor is authorized to repurchase Fund shares through certain securities dealers who have entered into dealer agreements with the Distributor. The offer to repurchase may be suspended by the Distributor at any time. Dealers may charge for their services in connection with a repurchase, but neither the Fund nor the Distributor makes any such charge. Repurchase arrangements differ from redemptions in that the dealer buys the shares as principal from his customer in lieu of tendering shares to the Fund for redemption as agent for the customer. The proceeds to the shareholder will be the net asset value of the shares repurchased as next determined after receipt of the repurchase order by the dealer. By a repurchase, the customer should be able to receive the sale proceeds from the dealer more quickly. Shareholders should contact their dealers for further information as to how to effect a repurchase and the dealer's charges applicable thereto. PAYMENT FOR THE SHARES PRESENTED Payment for shares presented for redemption will be based on the net asset value of the applicable class of the applicable Fund next computed after a request is received in proper form at the offices of the transfer agent' as described below. Certain redemptions of Class A, B and C shares may be subject to a CDSC, which will be deducted from the redemption proceeds. Payment proceeds will be mailed within seven days following receipt of all required documents. However, payment may be postponed or the right of redemption suspended (i) for any period during which the New York Stock Exchange is closed for other than customary weekend and holiday closing or during which trading on the New York Stock Exchange is restricted; (ii) for any period during which an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Fund fairly to determine the value of its net assets; or (iii) for such other periods as the Commission may by order permit for the protection of shareholders, provided that applicable rules and regulations of the Commission shall govern as to whether the conditions described in (i) and (ii) exist. Payment of proceeds may also be delayed if the shares to be redeemed or repurchased were purchased by check and that check has not cleared (which may be up to 15 days or more). CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENTS State Street Bank and Trust Company ("State Street"), 225 Franklin Street, Boston, Massachusetts 02110, currently acts as Custodian of all the Fund's assets, as well as the bookkeeping, transfer and dividend disbursing agent for all of the Funds of the Trust. State Street may make arrangements to perform certain of its functions through Boston Financial Data Services. State Street has selected various banks and trust companies in foreign countries to maintain custody of certain foreign securities. State Street is authorized to use the facilities of the Depositary Trust Company, the Participants Trust Company and the book-entry system of the Federal Reserve Banks. 93 CAPITAL STOCK All shares of beneficial interest, $.001 par value per share, of each Fund have equal voting rights (except as described below with respect to matters specifically affecting a class of shares) and have no preemptive or conversion rights. The Trust's Agreement and Declaration of Trust permits the issuance of multiple classes of shares pursuant to the Multiple Pricing System. Shares of each class of a Fund represent interests in that Fund in proportion to each share's net asset value. The per share net asset value of each class of shares in a Fund is calculated separately and may differ as between classes as a result of the differences in distribution and service fees payable by the classes and the allocation of certain incremental class-specific expenses to the appropriate class to which such expenses apply. All shares of the Trust have equal voting rights and will be voted in the aggregate, and not by series (Fund) or class, except where voting by series or class is required by law or where the matter involved affects only one series or class (for example, matters pertaining to the plan of distribution relating to Class A shares will only be voted on by Class A shares). Matters required by the 1940 Act to be voted upon by each affected series include changes to (i) the Advisory Agreement, (ii) a Subadvisory Agreement and (iii) fundamental investment objectives and policies. The Trust is not generally required to hold annual meetings of shareholders. However, the Trustees may call special meetings of shareholders for action by shareholder vote as may be requested in writing by the holders of 25% or more of the outstanding shares of the Trust (10% in the case of a meeting requested for the purpose of removing a Trustee) or as may be required by applicable laws. Shareholders seeking to call a meeting for the purpose of removing a Trustee will be assisted by the Trust in communicating with other shareholders, provided the shareholders seeking to call a meeting are at least ten in number, have been shareholders for at least six months and hold in the aggregate at least one percent of the outstanding shares or shares having a value of at least $25,000, whichever is less. Also, Trustees may be removed by action of the holders of two-thirds or more of the outstanding shares of the Fund. The Trustees are authorized to create additional series and classes of shares at any time without approval by shareholders. Under Massachusetts law, shareholders of a business trust may, in certain circumstances, be held personally liable as partners for the obligations of the Trust. However, the Trust's Agreement and Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of each Fund of the Trust and requires that notice of such disclaimer be given in each instrument entered into or executed by the Trust. The Agreement and Declaration of Trust also provides for indemnification out of a Fund's property for any shareholder of such Fund held personally liable for any of the Fund's obligations. Thus, the risk of a shareholder being personally liable as a partner for obligations of a Fund is limited to the unlikely circumstance in which the Fund itself would be unable to meet its obligations. PERFORMANCE INFORMATION From time to time the Trust may advertise certain information about the performance of all classes of one or more of the Funds. Such performance information may include time periods prior to the establishment of the multi- class distribution system. Information about performance of a class of shares of a Fund is not intended to indicate future performance. The Trust's annual report to shareholders, which is available without charge upon request, contains further discussions of Fund performance. The Funds may advertise the yield and/or total return performance for all classes of one or more of the Funds in accordance with the rules of the SEC. The Municipal Bond Fund and the Municipal Money Market Fund may also present from time to time yield, tax-equivalent yield and standardized and nonstandardized total return in advertisements. When yield is used in sales literature, the total return figures will also be included. The Commission has issued rules setting forth the uniform calculation of both yield and total return, but shareholders' actual experience may be more or less than the figures produced by these formulas. Each Fund may include the total return for all classes of shares in advertisements or other written material. Each such piece will include at least the average annual total return quotations for one year, five years, ten years (if available) and/or from the commencement of operations. Total return is measured by comparing the value of an investment at the beginning of the relevant period to the redemption value of the investment at the end of the period; the calculation assumes the initial investment is made at the current maximum net offering price, assumes immediate reinvestment of any dividends or capital gains distributions and adjusts for the current maximum sales charge of 5.75% for Class A shares of the Equity Funds or 4.75% for Class A shares of the Fixed Income Funds and the applicable CDSC imposed on a redemption of Class B shares or Class C shares held for the period indicated. Yield and total return are calculated separately for each class of a Fund. Each of the Funds may advertise yield for all classes, accompanied by total return. The yield will be computed by dividing the net investment income per share distributed during a recent one month period (after deducting expenses net of reimbursements applicable to each class) by the maximum offering price (including the maximum front end sales charge or applicable CDSC) on the last day of the period, and annualizing the result (assuming compounding of interest) in order to arrive at annual percentage rate. The Municipal Bond Fund and the Municipal Money Market Fund may also present from time to time the tax- equivalent yield of all 94 classes. The tax-equivalent yield is calculated by determining the portion of yield which is tax-exempt and calculating the equivalent taxable yield and adding to such amount any fully taxable yield. The Money Market Fund may advertise yield and effective yield for all classes. The yield is based upon the income earned by the Fund over a seven-day period and is then annualized, i.e., the income earned in the period is assumed to be earned every seven days over a 365 day period and is stated as a percentage of the investment. Effective yield is calculated similarly, but when annualized the income earned by the investment is assumed to be reinvested monthly in shares of the same class and thus compounded in the course of a 365 day period. The effective yield will be higher than the yield because of the compounding effect of this assumed reinvestment. All performance information may be compared with data published by Lipper Analytical Services, Inc. or to unmanaged indices of performance, including, but not limited to, the Dow Jones Industrial Average, S&P 500, S&P MidCap 400 Index, Value Line Composite, Lehman Brothers Aggregate Bond Index, Government Corporate, Municipal, Corporate and Aggregate Indices, Merrill Lynch Government & Agency and Intermediate Agency Indices, Russell 2000 Index, Lehman Brothers Aggregate Index, Russell Midcap Value Index, Salomon Smith Barney High Yield Market Index, Lehman Brothers Municipal Bond Index, Lehman Intermediate Government Index, Merrill Lynch 1-10 Year Government Index, Russell 2000 Growth Index, or the Morgan Stanley Capital International (MCSI) World Index, the EAFE Index, MSCI All Country World or U.S.Index. In addition, during certain time periods the yield and total return of a class and/or a Fund may be affected by expense waivers and/or expense reimbursements. When so affected, the yield and total return figures will be accompanied by a statement regarding such waiver and/or reimbursement. While performance information may be helpful in evaluating whether a Fund may be fulfilling its objective, past performance should not be regarded as representative of future results. Yields and net asset values will fluctuate with market conditions and the value of shares redeemed may be more or less than their cost. The Money Market Fund and the Municipal Money Market Fund operate under procedures designed to stabilize the net asset value of all classes at $1.00 per share. A Fund will include performance data for each class of a Fund in any advertisement or information including performance data of such Fund. The Fund may also utilize performance information in hypothetical illustrations provided in narrative form. A Fund may advertise its yield and/or total return performance for all classes of shares of one or more of the Funds, calculated in accordance with the rules of the SEC. Such performance information may include time periods prior to the implementation of the Multiple Pricing System on April 1, 1994, and will be calculated as described below. For purposes of quoting and comparing the performance of the classes of the Funds to that of other mutual funds and to stock or other relevant indices in advertisements or in reports to shareholders, performance will be stated in terms of total return and yield. Both "total return" and "yield" figures are based on historical performance, show the performance of a hypothetical investment and are not intended to indicate future performance. Under the rules of the SEC, funds advertising performance must include total return quotes, "T" below, calculated according to the following formula: P(1 + T)/n/ = ERV Where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years (1, 5 or 10) ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the "n" year period (or fractional portion thereof) at the end of such period. The average annual total return will be calculated under the foregoing formula and the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication, and will cover one, five, and ten year periods (if available) plus the time period since the effective date of the Fund's registration statement. When the period since inception for a Fund is less than one year, the total return quoted will be the aggregate return for the period. In calculating the ending redeemable value, for Class A shares, the current maximum front end sales charge of 5.75% for the 95 Equity Funds and 4.75% for the Fixed Income Funds (as a percentage of the offering price) is deducted from the initial $1,000 payment, and for Class B shares, the applicable CDSC imposed on a redemption of shares held for the period is deducted. The formula also assumes that all dividends and distributions have been reinvested at net asset value as described in the Prospectus on the reinvestment dates during the period. Total return, or "T" in the formula above, is computed by finding the average annual compounded rates of return over the 1, 5 and 10 year periods (or fractional portions thereof) that would equate the initial amount invested to the ending redeemable value. Any sales charges that might in the future be made applicable to reinvestments would be included as would any recurring account charges that might be imposed by the Trust. The figures shown in the table below are, for all classes, restated to reflect front end sales charges and CDSCs currently payable by each class of shares under the Multiple Pricing System (as described above), and (for all of the tables presented below) are based on the distribution and service fees and other expenses actually paid by each Fund for the periods presented, rather than the distribution and service fees and other expenses currently payable by each class of shares under the Multiple Pricing System, which in certain cases are different. Until April 1, 1994, each Fund paid distribution and service fees under the Prior Plan. The following tables set forth the average annual total returns for each class of shares of each Fund for certain periods of time ending October 31, 2000, restated to reflect the effects of the maximum front end sales charges and any applicable CDSCs payable be an investor under the Multiple Pricing System:
CLASS A SHARES THROUGH 10/31/00 ONE YEAR % FIVE YEARS % TEN YEARS % SINCE INCEPTION INCEPTION DATE - --------------------------------------------------------------------------------------------------------------------- Mid Cap Growth Fund 27.27% N/A N/A 17.11% 03/04/96 International Small Cap Fund 16.24% N/A N/A 12.77% 03/04/96 Large Cap Growth Fund -0.41% N/A N/A 16.16% 03/04/96 Global Equity Fund -25.62% 2.78% N/A 2.29% 04/01/94 Growth & Income Fund -3.50% 18.20% N/A 17.54% 04/01/94 International Equity Fund -9.58% 5.49% N/A 4.95% 01/09/95 Strategic Income Fund -0.85% 5.65% N/A 5.04% 11/01/93 Core Bond Fund -0.61% 3.73% N/A 5.96% 05/01/91 U.S. Government Securities Fund 0.74% 4.08% 6.20% 6.23% 08/28/89 Municipal Bond Fund 1.73% 3.90% N/A 3.86% 07/06/93 Balanced Fund -0.41% 8.44% N/A 9.00% 04/01/94 Small Cap Growth Fund 35.36% N/A N/A 21.56% 01/06/98 Mid Cap Value Fund 27.63% N/A N/A 24.26% 11/02/98 Stock Index Fund -1.12% N/A N/A 10.91% 11/02/98 Small Cap Index Fund 5.31% N/A N/A 8.29% 11/02/98 Socially Responsible Fund -3.36% N/A N/A 8.83% 11/02/98 High Yield Bond Fund -4.71% N/A N/A -1.28% 11/02/98 Aggressive Growth LifeStyle Fund 9.58% N/A N/A 14.54% 11/02/98 Moderate Growth LifeStyle Fund 6.76% N/A N/A 10.92% 11/02/98 Conservative Growth LifeStyle Fund 5.19% N/A N/A 8.70% 11/02/98 Science & Technology Fund N/A N/A N/A -23.85% 11/02/98 Josephthal Strategic Growth Fund N/A N/A N/A -6.22% 09/01/00
96
CLASS B SHARES THROUGH 10/31/00 ONE YEAR % FIVE YEARS % SINCE INCEPTION INCEPTION DATE - ------------------------------------------------------------------------------------------------------------------------------ Mid Cap Growth Fund 29.04% N/A 17.52% 03/04/96 International Small Cap Fund 17.16% N/A 13.07% 03/04/96 Large Cap Growth Fund 0.01% N/A 16.67% 03/04/96 Global Equity Fund -25.37% 3.09% 2.66% 04/01/94 Growth & Income Fund -3.25% 18.70% 17.97% 04/01/94 International Equity Fund -9.29% 5.73% 5.27% 01/09/95 Strategic Income Fund -1.67% 5.69% 6.22% 04/01/94 Core Bond Fund -1.30% 3.81% 5.07% 04/01/94 U.S. Government Securities Fund -0.09% 4.10% 5.11% 04/01/94 Municipal Bond Fund 0.92% 3.70% 4.75% 04/01/94 Balanced Fund 0.17% 8.78% 9.38% 04/01/94 Small Cap Growth Fund 37.62% N/A 22.03% 01/06/98 Mid Cap Value Fund 29.26% N/A 24.60% 11/02/98 Stock Index Fund -0.79% N/A 10.79% 11/02/98 Small Cap Index Fund 5.83% N/A 8.41% 11/02/98 Socially Responsible Fund -3.12% N/A 9.00% 11/02/98 High Yield Bond Fund -5.79% N/A -2.18% 11/02/98 Aggressive Growth LifeStyle Fund 11.30% N/A 15.78% 11/02/98 Moderate Growth LifeStyle Fund 8.22% N/A 12.04% 11/02/98 Conservative Growth LifeStyle Fund 6.66% N/A 9.69% 11/02/98 Science & Technology Fund N/A N/A -23.72% 03/01/00 Josephthal Strategic Growth Fund N/A N/A -5.48% 09/01/00
CLASS C SHARES THROUGH 10/31/00 ONE YEAR % FIVE YEARS % TEN YEARS % SINCE INCEPTION INCEPTION DATE - --------------------------------------------------------------------------------------------------------------------- Mid Cap Growth Fund 32.95% N/A N/A 17.77% 03/04/96 International Small Cap Fund 21.43% N/A N/A 13.42% 03/04/96 Large Cap Growth Fund 4.06% N/A N/A 16.90% 03/04/96 Global Equity Fund -22.20% 3.45% N/A 5.62% 11/01/90 Growth & Income Fund 0.74% 18.89% N/A 15.13% 05/01/91 International Equity Fund -6.01% 5.97% N/A 5.34% 01/09/95 Strategic Income Fund 2.32% 6.00% N/A 6.22% 04/01/94 Core Bond Fund 2.70% 4.15% N/A 5.07% 04/01/94 U.S. Government Securities Fund 3.91% 4.44% N/A 5.11% 04/01/94 Municipal Bond Fund 4.91% 4.04% N/A 4.75% 04/01/94 Balanced Fund 3.86% 9.00% 11.12% 8.10% 08/28/89 Small Cap Growth Fund 41.54% N/A N/A 22.98% 01/06/98 Mid Cap Value Fund N/A N/A N/A 8.53% 07/31/00 Stock Index Fund N/A N/A N/A -6.16% 07/17/00 Small Cap Index Fund N/A N/A N/A -3.98% 08/23/00 Socially Responsible Fund N/A N/A N/A -1.11% 07/28/00 High Yield Bond Fund N/A N/A N/A -4.26% 08/21/00 Aggressive Growth LifeStyle Fund N/A N/A N/A -2.75% 08/10/00 Moderate Growth LifeStyle Fund N/A N/A N/A -3.28% 07/12/00 Conservative Growth LifeStyle Fund N/A N/A N/A -0.94% 07/20/00 Science & Technology Fund N/A N/A N/A -8.71% 07/12/00 Josephthal Strategic Growth Fund N/A N/A N/A -1.50% 09/01/00
97
CLASS I SHARES ONE YEAR SINCE INCEPTION INCEPTION DATE Mid Cap Growth Fund N/A -0.85% 07/10/00 Large Cap Growth Fund N/A -9.04% 07/10/00 Growth & Income Fund N/A -4.04% 07/10/00 International Equity Fund N/A -10.82% 07/10/00 Strategic Income Fund N/A -0.10% 07/10/00 Core Bond Fund N/A 1.85% 07/10/00 Balanced Fund N/A 1.07% 07/10/00 Small Cap Growth Fund N/A -7.34% 07/10/00 Mid Cap Value Fund 36.17% 27.97% 11/02/98 Socially Responsible Fund 2.72% 12.30% 11/02/98 High Yield Bond Fund 0.04% 1.23% 11/02/98 Money Market Fund N/A 1.84% 07/10/00 Science & Technology Fund N/A -19.20% 03/01/00 Aggressive Growth LifeStyle Fund 16.22% 17.98% 11/02/98 Moderate Growth LifeStyle Fund 13.10% 14.24% 11/02/98 Conservative Growth LifeStyle Fund 11.54% 11.90% 11/02/98
CLASS II SHARES ONE YEAR SINCE INCEPTION INCEPTION DATE - --------------- -------- --------------- -------------- Core Bond Fund N/A 1.81% 07/10/00 High Yield Bond Fund 0.30% 1.51% 11/02/98
For the fiscal period ending October 31, 2000, the Adviser waived certain fees in respect of the Funds. Absent such waivers, the returns shown above would be lower. The performance data quoted represents past performance; investment returns and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. On July 10, 1992, the former Aggressive, Moderate and Conservative Asset Allocation Trusts were reorganized into the Balanced Fund. The Balanced Fund's investment objectives, policies and restrictions are identical to the old Moderate Asset Allocation Trust. The performance figures shown above for the Balanced Fund therefore are based on the past performance of the former Moderate Asset Allocation Trust for the period prior to July 10, 1992. 98 A Fund's yield is a way of showing the rate of income the Fund earns on its investments as a percentage of the Fund's share price. Under the rules of the SEC, yield must be calculated according to the following formula: a-b 6 YIELD = 2[(--- + 1) - 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. Yields for the classes of the Funds used in advertising are computed by dividing the class of the Fund's interest and dividend income for a given 30 day period, net of expenses, by the average number of shares entitled to receive distributions during the period, dividing this figure by the offering price (including the applicable front end sales charge or CDSC) at the end of the period and annualizing the result (assuming compounding of income) in order to arrive at an annual percentage rate. Income is calculated for purposes of yield quotations in accordance with standardized methods applicable to all stock and bond mutual funds. Dividends from equity investments are treated as if they were accrued on a daily basis, solely for the purposes of yield calculations. In general, interest income is reduced with respect to bonds trading at a premium over their par value by subtracting a portion of the premium from income on a daily basis, and is increased with respect to bonds trading at a discount by adding a portion of the discount to daily income. Capital gains and losses generally are excluded from the calculation. Income calculated for the purposes of calculating the Fund's yield differs from income as determined for other accounting purposes. Because of the different accounting methods used, and because of the compounding assumed in yield calculations, the yield quoted for a class of a Fund may differ from the rate of distributions paid over the same period or the rate of income reported in the Fund's financial statements. The yields for Classes A, B and C of the Core Bond Fund for the 30 day period ended October 31, 2000, were 4.28%, 3.90%, and 3.88%, respectively. The yields for Classes A, B and C of the U.S. Government Securities Fund for the 30 day period ended October 31, 2000 were 5.15%, 4.80% and 4.83%, respectively. The yields for Classes A, B and C of the Strategic Income Fund for the 30 day period ended October 31, 2000 were 9.01%, 8.88% and 8.93%, respectively. The yields for Classes A, B and C of the High Yield Bond Fund for the 30 day period ended October 31, 2000, were 10.40%, 10.26% and 9.98%, respectively. The yield for Institutional Class I for the 30 day period ended October 31, 2000, of the Core Bond Fund, Strategic Income Fund and the High Yield Bond Fund were 4.68%, 9.66% and 11.12%, respectively. The yield for the Institutional Class II of the Core Bond Fund and High Yield Bond Fund for the 30 day period ended October 31, 2000, were 4.91% and 11.37%, respectively. For the fiscal period ending October 31, 2000, the Adviser waived certain fees in respect of the Funds. Absent such waivers, the returns shown above would be lower. Therefore, the yield for those Funds encompassing the periods during which no advisory fees were paid will be higher than the yields the Funds would have realized had the suspension of advisory fees not been in effect. The yields for Classes A, B and C of the Municipal Bond Fund for the 30 day period ended October 31, 2000 were 4.19%, 3.61% and 3.62%, respectively. With respect to the Municipal Bond Fund, tax-equivalent yields are computed by 99 dividing that portion of yield that is tax-exempt by one, minus a stated income tax rate and adding the quotient to that portion, if any, of the yield that is not tax-exempt. The tax equivalent yield for the 30 day period ended October 31, 2000, for Classes A, B and C were 6.55%, 5.64% and 5.66%, respectively. Yields for the Money Market Fund and Municipal Money Market Fund will be computed on the basis of seven-day periods, and such quotations will be in lieu of total return quotations for the one, five and ten year periods described above. Yields will be computed by dividing the net change, exclusive of capital changes, in the value of a hypothetical account having a balance of one share at the beginning of the seven-day period by the value of the account at the beginning of the period and multiplying the return so determined ("base period return") by 365/7. Effective yields will be computed by compounding the base period return in accordance with the following formula: Effective yield = [(Base period return +1)/365/7/] - 1 For the seven-day period ended October 31, 2000, current yields for Classes A, B and C of the Money Market Fund were 5.92%, 5.91% and 5.92%, respectively. For the seven-day period ended October 31, 2000, the effective yields for Classes A, B and C of the Money Market Fund were 6.08%, 6.07% and 6.08%, respectively. For the seven-day period ended October 31, 2000, the current yield for Classes A, B and C of the Municipal Money Market Fund was 1.96%, the effective yield was 1.98%, and the tax equivalent yield was 3.06%. Yield and total return are calculated separately for each class of shares of a Fund. As discussed above, these calculations adjust for the different front end sales charges and CDSCs currently payable with respect to each class, and are based on distribution and service fees and other expenses actually paid by each Fund for the periods presented. The Trust may also from time to time include in advertising a total aggregate return figure or an average annual total return figure that is not calculated according to the formula set forth above in order to compare performance more accurately with other measures of investment return. Each class of a Fund may quote an aggregate total return figure in comparing total return with data published by Lipper Analytical Services, Inc. or with the performance of various indices including, but not limited to, the Dow Jones Industrial Average, S&P 500, S&P MidCap 400 Index, Value Line Composite, Lehman Brothers Aggregate Bond Index, Government Corporate, Municipal, Corporate and Aggregate Indices, Merrill Lynch Government & Agency and Intermediate Agency Indices, Russell 2000 Index, Lehman Brothers Aggregate Index, Russell Midcap Value Index, MSCI All Country World or U.S.Index, Salomon Smith Barney High Yield Market Index, Lehman Brothers Municipal Bond Index, Lehman Intermediate Government Index, Merrill Lynch 1-10 Year Government Index, Russell 2000 Growth Index, the Morgan Stanley Capital International (MCSI) World Index, or the EAFE Index. For such purposes, aggregate total return is calculated for the specified periods of time by assuming the investment of $1,000 in shares of a class of a Fund and assuming the reinvestment of each dividend or other distribution at net asset value on the reinvestment date. Percentage increases are determined by subtracting the initial value of the investment from the ending value and by dividing the remainder by the beginning value. The Trust does not, for these purposes, deduct from the initial value invested any amount representing front end sales charges or CDSCs applicable to a class. To calculate its average annual total return, the aggregate return is then annualized according to the Commission's formula for total return quotes, outlined above. When the period since inception is less than one year, the total return quoted will be the aggregate return for the period. The Trust will, however, disclose the maximum front end sales charge or CDSC applicable to each class and will also disclose that the performance data does not reflect sales charges and that the inclusion of sales charges would reduce the performance quoted. Such alternative total return information will be given no greater prominence in such advertising than the information prescribed under Commission rules and all advertisements containing performance data will include a legend disclosing that such performance data represent past 100 performance and that the investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The Trust may also advertise the performance rankings assigned certain Funds (or classes thereof) or their Subadvisors by various publications and statistical services, including but not limited to SEI, Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, Intersec Research Survey of Non-U.S. Equity Fund Returns, Frank Russell International Universe, and any other data which may be presented from time to time by such analysis as Dow Jones, Morningstar, Chase Investment Performance, Wilson Associates, Stanger, CDA Investment Technology, the Consumer Price Index ("CPI"), The Bank Rate Monitor National Index, IBC/Donaghue's Average/U.S. Government and Agency, or as they appear in various publications including but not limited to The Wall Street Journal, Forbes, Barrons, Fortune, Money Magazine, The New York Times, Financial World and Financial Services Week. Calculated in the manner set forth above, the average annual total returns for each class of shares of each Fund for the one, five and ten-year periods ended October 31, 2000 and since inception to October 31, 2000 are as follows:
CLASS A SHARES THROUGH 10/31/00 ONE YEAR % FIVE YEARS % TEN YEARS % SINCE INCEPTION INCEPTION DATE Mid Cap Growth Fund 34.88% N/A N/A 18.61% 03/04/96 International Small Cap Fund 23.34% N/A N/A 14.21% 03/04/96 Large Cap Growth Fund 5.66% N/A N/A 17.65% 03/04/96 Global Equity Fund -21.08% 4.00% N/A 3.21% 04/01/94 Growth & Income Fund 2.39% 19.61% N/A 18.61% 04/01/94 International Equity Fund -4.06% 6.75% N/A 6.03% 01/09/95 Strategic Income Fund 4.09% 6.69% N/A 5.78% 11/01/93 Core Bond Fund 4.35% 4.74% N/A 6.50% 05/01/91 U.S. Government Securities Fund 5.76% 5.09% 6.72% 6.69% 08/28/89 Municipal Bond Fund 6.80% 4.91% N/A 4.55% 07/06/93 Balanced Fund 5.67% 9.73% N/A 9.99% 04/01/94 Small Cap Growth Fund 43.62% N/A N/A 24.14% 01/06/98 Mid Cap Value Fund 36.19% N/A N/A 28.00% 11/02/98 Stock Index Fund 4.91% N/A N/A 14.24% 11/02/98 Small Cap Index Fund 11.74% N/A 11.55% 11/02/98 Socially Responsible Fund 2.54% N/A N/A 12.11% 11/02/98 High Yield Bond Fund 0.04% N/A N/A 1.15% 11/02/98 Aggressive Growth LifeStyle Fund 16.27% N/A N/A 17.99% 11/02/98 Moderate Growth LifeStyle Fund 13.27% N/A N/A 14.25% 11/02/98 Conservative Growth LifeStyle Fund 11.61% N/A 11.97% 11/02/98 Science & Technology Fund N/A N/A N/A -19.20% 03/01/00 Josephthal Strategic Growth Fund N/A N/A N/A -0.50% 09/18/00
101
CLASS B SHARES THROUGH 10/31/00 ONE YEAR % FIVE YEARS % SINCE INCEPTION INCEPTION DATE - ------------------------------------------------------------------------------------------------------------------------------ Mid Cap Growth Fund 34.04% N/A 17.75% 03/04/96 International Small Cap Fund 22.16% N/A 13.34% 03/04/96 Large Cap Growth Fund 5.01% N/A 16.91% 03/04/96 Global Equity Fund -21.44% 3.44% 2.66% 01/01/94 Growth & Income Fund 1.75% 18.90% 17.97% 04/01/94 International Equity Fund -4.79% 6.05% 5.41% 01/09/95 Strategic Income Fund 3.33% 6.00% 6.22% 04/01/94 Core Bond Fund 3.70% 4.15% 5.07% 04/01/94 U.S. Government Securities Fund 4.91% 4.44% 5.11% 04/01/94 Municipal Bond Fund 5.92% 4.05% 4.75% 04/01/94 Balanced Fund 5.17% 9.07% 9.38% 04/01/94 Small Cap Growth Fund 42.62% N/A 23.01% 01/06/98 Mid Cap Value Fund 34.91% N/A 26.59% 11/02/98 Stock Index Fund 4.21% N/A 13.03% 11/02/98 Small Cap Index Fund 10.83% N/A 10.69% 11/02/98 Socially Responsible Fund 1.88% N/A 11.27% 11/02/98 High Yield Bond Fund -0.83% N/A 0.34% 11/02/98 Aggressive Growth LifeStyle Fund 16.30% N/A 17.93% 11/02/98 Moderate Growth LifeStyle Fund 13.22% N/A 14.26% 11/02/98 Conservative Growth LifeStyle Fund 11.66% N/A 11.95% 11/02/98 Science & Technology Fund N/A N/A -19.70% 03/01/00 Josephthal Strategic Growth Fund N/A N/A -0.50% 09/18/00
102
CLASS C SHARES THROUGH 10/31/00 ONE YEAR % FIVE YEARS % TEN YEARS % SINCE INCEPTION INCEPTION DATE - ---------------------------------------------------------------------------------------------------------------------- Mid Cap Growth Fund 33.95% N/A N/A 17.77% 03/04/96 International Small Cap Fund 22.43% N/A N/A 13.42% 03/04/96 Large Cap Growth Fund 5.06% N/A N/A 16.90% 03/04/96 Global Equity Fund -21.42% 3.45% N/A 5.62% 11/01/90 Growth & Income Fund 1.74% 18.99% N/A 15.13% 05/01/91 International Equity Fund -5.07% 5.97% N/A 5.34% 01/09/95 Strategic Income Fund 3.32% 6.00% N/A 6.22% 04/01/94 Core Bond Fund 3.70% 4.15% N/A 5.07% 04/01/94 U.S. Government Securities Fund 4.91% 4.44% N/A 5.11% 04/01/94 Municipal Bond Fund 5.91% 4.04% N/A 4.75% 04/01/94 Balanced Fund 4.86% 9.00% 11.12% 8.10% 08/28/89 Small Cap Growth Fund 42.54% N/A N/A 22.98% 01/06/98 Mid Cap Value Fund N/A N/A N/A 9.53% 07/31/00 Stock Index Fund N/A N/A N/A -5.21% 07/17/00 Small Cap Index Fund N/A N/A N/A -3.07% 08/23/00 Socially Responsible Fund N/A N/A N/A -0.11% 07/28/00 High Yield Bond Fund N/A N/A N/A -3.29% 08/21/00 Aggressive Growth LifeStyle Fund N/A N/A N/A -1.77% 08/10/00 Moderate Growth LifeStyle Fund N/A N/A N/A -2.30% 07/12/00 Conservative Growth LifeStyle Fund N/A N/A N/A 0.06% 07/20/00 Science & Technology Fund N/A N/A N/A -7.78% 07/12/00 Josephthal Strategic Growth Fund N/A N/A N/A -0.50% 09/01/00
CLASS I SHARES ONE YEAR SINCE INCEPTION INCEPTION DATE - ---------------------------------------------------------------------------------------------------------- Mid Cap Growth Fund N/A -0.96% 07/10/00 Large Cap Growth Fund N/A -9.04% 07/10/00 Growth & Income Fund N/A -4.04% 07/10/00 International Equity Fund N/A -10.82% 07/10/00 Strategic Income Fund N/A -0.10% 07/10/00 Core Bond Fund N/A 1.85% 07/10/00 Balanced Fund N/A 1.07% 07/10/00 Small Cap Growth Fund N/A -7.34% 07/10/00 Mid Cap Value Fund 36.17% 27.97% 11/02/98 Socially Responsible Fund 2.72% 12.30% 11/02/98 High Yield Bond Fund 0.04% 1.23% 11/02/98 Money Market Fund N/A 1.84% 07/10/00 Science & Technology Fund N/A -19.20% 03/01/00 Aggressive Growth LifeStyle Fund 16.22% 17.98% 11/02/98 Moderate Growth LifeStyle Fund 13.10% 14.24% 11/02/98 Conservative Growth LifeStyle Fund 11.54% 11.90% 11/02/98
103
CLASS II SHARES ONE YEAR SINCE INCEPTION INCEPTION DATE - ----------------------------------------------------------------------------------------------------- Core Bond Fund N/A 1.81% 07/10/00 High Yield Bond Fund 0.30% 1.51% 11/02/98
The Funds have been and still are subject to certain fee reimbursements. Absent such reimbursement, the returns shown above would be lower. The Trust may also from time to time include in advertising and sales literature the following: 1) information regarding its Fund Subadvisors, such as information regarding a Subadvisor's specific investment expertise, client base, assets under management or other relevant information; 2) quotations about the Trust, its portfolios or its investment Subadvisors that appear in various publications and media; and 3) general discussions of economic theories, including but not limited to discussions of how demographics and political trends may effect future financial markets, as well as market or other relevant information. The Trust will include performance data for each class of shares of a Fund in any advertisement or information including performance data of such Fund. TAXABLE EQUIVALENT YIELDS A TAX-EXEMPT YIELD OF: TAXABLE INCOME** MARGINAL FEDERAL INCOME 3% 4% 5% 6% 7% 8% SINGLE JOINT TAX RATE IS EQUIVALENT TO A TAXABLE YIELD OF: - ---------------- ----------------- ----------------------- --------------------------------------- $0-$27,050 $ 0-$45,200 15% 3.53, 4.71, 5.88, 7.06, 8.24, 9.41 $27,050-$65,550 $ 45,200-$109,250 28% 4.17, 5.56, 6.94, 8.33, 9.72, 11.11 $65,550-$136,750 $109,250-$166,500 31% 4.35, 5.80, 7.25, 8.70, 10.14, 11.59 $136,750-$297,350 $166,500-$297,350 36% 4.69, 6.25, 7.81, 9.38, 10.94, 12.50 over $297,350 over $297,350 39.6% 4.97, 6.62, 8.28, 9.93, 11.59, 13.25
* Certain taxpayers may, to the extent such taxpayers itemize deductions or claim personal exemptions, be subject to a higher marginal rate. In addition, the tax rate on net capital gains of individuals may not exceed 20%. **Taxable Income amounts apply for taxable years beginning in 2001. The amounts are indexed annually for inflation. PORTFOLIO TURNOVER During the fiscal years ended 2000 and 1999, respectively, the portfolio turnover rate for certain of the Funds was as follows: Small Cap Growth Fund - 222% and 129%; Global Equity Fund - 207% and 38%; International Small Cap Fund - 537% and 202%; and U.S. Government Securities Fund - 193% and 63%. The increased portfolio turnover rates for the Small Cap Growth Fund resulted from poor performance of small cap growth stocks. The increased portfolio turnover rates of the Global Equity Fund and the International Small Cap Fund in 2000 versus 1999 resulted form the portfolio management styles of the portfolio managers who assumed responsibility for managing the respective Funds in July 1999 and the repositioning of the Funds' portfolios by the new managers. The increased portfolio turnover rates of the U.S. Government Securities Fund in 2000 versus 1999 resulted from the portfolio management styles of the portfolio manager who assumed responsibility for managing the Fund in March 2000 and the repositioning of the Fund's portfolio by the new manager. 104 A 100% portfolio turnover rate would occur if all of the securities in the portfolio were replaced during the period. Portfolio turnover rates for certain of the Funds are higher than those of other mutual funds. Although each Fund purchases and holds securities with the goal of meeting its investment objectives, portfolio changes are made whenever a Sub-advisor believes they are advisable, usually without reference to the length of time that a security has been held. The Funds may, therefore, engage in a significant number of short- term transactions. Portfolio turnover rates may also increase as a result of the need for a Fund to effect significant amounts of purchases or redemptions of portfolio securities due to economic, market, or other factors that are not within a sub-advisor's control. Higher portfolio turnover rates increase the brokerage costs a Fund pays and may adversely affect its performance. If a Fund realized capital gains when it sells portfolio investments, it generally must pay those gains out to shareholders, increasing their taxable distributions. This may adversely affect the after-tax performance of the Funds for shareholders with taxable accounts. TAXES The following information supplements the disclosure contained in the Prospectus under the heading "Taxes." No attempt is made to present a detailed explanation of all federal, state, local and foreign tax concerns, and the discussion set forth here and in the Prospectus do not constitute tax advice. Investors are urged to consult their own tax advisers with specific questions relating to federal, state, local and foreign taxes. Each Fund intends to qualify as a regulated investment company (a "RIC") under Subchapter M of the "Code" and to continue to so qualify. Qualification as a RIC requires, among other things, that each Fund: (a) derive at least 90% of its gross income in each taxable year from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stocks, securities or currencies; and (b) diversify its holdings so that, at the end of each quarter of each taxable year, (i) at least 50% of the total value of a Fund's assets is represented by cash, cash items, U.S. government securities, securities of other regulated investment companies and other securities with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the total value of a Fund's assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities (other than U.S. government securities or the securities of other regulated investment companies) of any one issuer or of two or more issuers which such Fund controls and which are engaged in the same, similar or related trades or businesses. As a RIC, a Fund will not be subject to federal income tax on its investment company taxable income (as that term is defined in the Code, determined without regard to the deduction for dividends paid) and "net capital gains" (the excess of a Fund's net long-term capital gains over net short-term capital losses), if any, that it distributes in each taxable year to its shareholders, provided that it distributes with respect to each taxable year at least 90% of the sum of its taxable net investment income, its net tax-exempt income and the excess, if any, of net short term capital gains over net long-term capital losses for such year. Each Fund expects to designate amounts retained as undistributed net capital gains in a notice to its shareholders each of whom (i) will be required to include in income for United States federal income tax purposes, as long-term capital gains, its proportionate share of the undistributed amount, (ii) will be entitled to credit its proportionate share of the 35% tax paid by a Fund on the undistributed amount against its federal income tax liability and to claim refunds to the extent such credits exceed such tax liability and (iii) will be entitled to increase its tax basis, for federal income tax purposes, in its shares by an amount equal to 65% of the amount of undistributed net capital gains included in the shareholder's income. A Fund will be subject to a nondeductible 4% excise tax on the amount by which the aggregate income it distributes in any calendar year is less than the sum of: (a) 98% of a Fund's ordinary income for such calendar year; (b) 98% of its capital gain net income (the excess of capital gains over capital losses, in each case both long- and short-term) for the one-year period ending on October 31 of such calendar year; and (c) 100% of the ordinary income and capital gain net income from any prior calendar year to the extent that such amounts were not previously distributed or subject to tax under Subchapter M of the Code. If a Fund does not qualify for taxation as a RIC for any taxable year, such Fund's taxable income will be subject to corporate income taxes, and all distributions from earnings and profits, including distributions of net capital gain (if any), will be taxable to shareholders as ordinary income. In addition, in order to requalify for taxation as a RIC, such Fund may be required to recognize unrealized gains, pay substantial taxes and interest, and make certain distributions. Each Fund expects to make sufficient distributions such that it will not be subject to the corporate income and excise taxes. Certain investments, including investments in assets "marked to market" for federal income tax purposes, debt obligations issued at a discount (including, for example, zero coupon securities), as well as certain other investments generally will, and debt obligations purchased at a discount may, cause a Fund to realize income prior to the receipt of cash payments with respect to these investments. 105 In such cases a Fund may be required to borrow money or sell assets (including when it is not advantageous to do so) to generate the cash necessary to make sufficient distributions to its shareholders necessary to avoid any Fund level tax liability. In addition, investments in options, futures contracts, hedging transactions, forward contracts and certain other transactions will be subject to special tax rules (including mark-to-market, constructive sale, straddle, wash sale, short sale and other rules), the effect of which may be to accelerate income to a Fund, defer a Fund's losses, cause adjustments in the holding periods of a Fund's securities, convert long term capital-gains into short term capital-gains and convert short-term capital losses into long-term capital losses. These transactions could therefore affect the amount, timing and character of distributions to shareholders. A Fund's transactions in foreign currencies, foreign currency-denominated debt securities and certain foreign currency options, futures contracts (and similar instruments) may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in the value of the foreign currency concerned. Investment by a Fund in a "passive foreign investment company" ("PFIC") could subject a Fund to a U.S. federal income tax (including interest charges) on distributions received from such PFIC or on proceeds received from the disposition of shares in the PFIC, which tax cannot be eliminated by making distributions to Fund shareholders. However, such tax and interest charges may be avoided in certain circumstances. First, a Fund may elect to treat a PFIC as a "qualified electing fund," in which case such Fund will be required to include its share of the PFIC's ordinary income and net capital gain annually, regardless of whether it receives any distribution from the PFIC. Second, a Fund also may make an election to mark the gains (and, to a limited extent, losses) in the PFIC stock "to market" as though it had sold and repurchased its holdings in the PFIC on the last day of the Fund's taxable year. Such gains and losses are treated as ordinary income and loss. The qualified electing fund and mark-to-market elections may have the effect of accelerating the recognition of income (without the receipt of cash) and increase the amount required to be distributed for the Fund to avoid Fund level taxation. Making either of these elections therefore may require a Fund to liquidate other investments (including when it is not advantageous to do so) to meet its distribution requirement, which also may accelerate the recognition of gain and affect a Fund's total return. Certain dividends and interest received by a Fund may be subject to foreign withholding taxes. If more than 50% of a Fund's assets at year end consists of stock or securities in foreign corporations, such Fund may elect to permit shareholders to claim a credit or deduction on their income tax returns for their pro rata portion of qualified taxes paid by such Fund to foreign countries. If eligible the Fund(s) intend to make this election. If the election is made, shareholders will include in gross income from foreign sources their pro rata share of such taxes. A shareholder's ability to claim a foreign tax credit or deduction in respect of foreign taxes paid by a Fund may be subject to certain limitations imposed by the Code (including a holding period requirement applied at both the Fund and shareholder level), as a result of which a shareholder may not get a full credit or deduction for the amount of such taxes. Shareholders who do not itemize deductions on their federal income tax returns may claim a credit (but no deduction) for such taxes. Each year that a Fund makes this election, it will report to its shareholders the amount per share of foreign income taxes it has elected to have treated as paid by its shareholders and the portion of the dividend which represents income derived from sources within each such foreign jurisdiction (including U.S. possessions). If a shareholder sells or otherwise disposes of a share of a Fund before holding it for more than six months, any loss on the sale of such share shall be (i) treated (to the extent not disallowed as described in (ii) below) as a long-term capital loss to the extent of any capital gain dividend received or undistributed capital gain deemed received by the shareholder with respect to such share or (ii) in the case of the Municipal Bond Fund and the Municipal Money Market Fund, disallowed to the extent of any exempt-interest dividends received with respect to such share. In addition, all or a portion of a loss realized on a redemption or other disposition of Fund shares may be disallowed to the extent the shareholder acquired other shares of the same Fund within a 61-day period beginning 30 days before and ending 30 days after the date on which such shares are redeemed or otherwise disposed of. Any disallowed loss will result in an adjustment to the shareholder's tax basis in some or all of the other shares acquired. A sales load incurred in connection with the purchase of Fund shares will not be taken into account in determining the gain or loss on the sale or exchange of shares within 91 days of such purchase, where the proceeds are reinvested in another Fund of the Trust, at a reduced (or eliminated) load. The disregarded load will be added to the tax basis of the newly acquired shares. Distributions of taxable income and proceeds from the sale of investments held by a Fund for one year or less are taxable to Fund shareholders as ordinary income. Distributions of the excess of net long-term capital gain over net short-term capital loss (including any capital losses carried forward from prior years) earned by the Fund are taxable to shareholders of the Fund as long-term capital 106 gains (generally at a 20% rate for noncorporate shareholders), whether received in cash or in additional shares and regardless of the length of time their shares have been held. Certain distributions declared in October, November or December and paid the following January will be taxed to shareholders as if received on December 31 of the year in which they are declared. Dividends and distributions on a Fund's shares are generally subject to federal income tax as described herein to the extent they do not exceed such Fund's realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholder's investment. Such distributions are likely to occur in respect of shares purchased at a time when the Fund's net asset value reflects gains that are either unrealized, or realized but not distributed. Such realized gains may be required to be distributed even when a Fund's net asset value also reflects unrealized losses. Redemptions and exchanges of a Fund's shares are taxable events and, accordingly, shareholders may realize gain or loss on these transactions. In general, any gain realized upon a taxable disposition of shares will be treated as long-term capital gain if the shares have been held for more than one year. Otherwise, the gain on the sale, exchange or redemption of Fund shares will be treated as short-term capital gain. Generally, unless a shareholder of a Fund includes his or her taxpayer identification number (social security number for individuals) in the Shareholder Application and certifies that he or she is not subject to backup withholding, the Fund is required to withhold and remit to the U.S. Treasury 31% from taxable dividends and other reportable payments (including proceeds of redemption transactions) to the shareholder. Backup withholding may also be required in certain other cases. Depending on the residence of the shareholder for tax purposes, distributions may also be subject to state and local taxes or withholding taxes. Some states do not permit RICs to pass through to their shareholders the state and local income tax exemptions available to direct owners of certain types of securities unless the RIC owns a required amount of those securities. The exemption from state and local income taxes does not preclude states from asserting other taxes on the ownership of Fund shares or securities held by a Fund. To the extent that a Fund invests to a substantial degree in U.S. government securities that are subject to favorable state and local tax treatment, shareholders of such a Fund will be notified as to the extent to which distributions from the Fund are attributable to interest on such securities. MUNICIPAL BOND FUND AND MUNICIPAL MONEY MARKET FUND Each of the Municipal Bond Fund and the Municipal Money Market Fund (each a "Municipal Fund") intends to qualify to pay "exempt-interest dividends," as that term is defined in the Code, by holding at the end of each quarter of its taxable year at least 50% of the value of its total assets in the form of municipal obligations described in section 103(a) of the Code. Because each Municipal Fund will primarily invest in municipal obligations, dividends from the Fund will generally be exempt from regular federal income tax in the hands of shareholders (subject to the possible application of the alternative minimum tax). Further, gain from a sale of redemption of shares of each Municipal Fund will be taxable to shareholders as capital gain even though the increase in value of such shares is attributable to tax-exempt income. Thus, it will normally be advantageous for each Municipal Fund to declare exempt-interest dividends frequently. Taxpayers must disclose to the Internal Revenue Service on their tax returns the entire amount of tax-exempt interest (including exempt- interest dividends on shares of a Municipal Fund) received or accrued during the year. Federal tax law imposes an alternative minimum tax ("AMT") with respect to both corporations and individuals based on certain items of tax preference. Interest on certain municipal obligations is treated as a tax preference item for purposes of the AMT. In addition, corporate shareholders must include the full amount of exempt-interest dividends in computing the preference items for purposes of the AMT on corporations. The Fund will annually supply shareholders with a report indicating the percentage of portfolio income attributable to municipal obligations subject to the alternative minimum tax. Taxpayers that may be subject to the alternative minimum tax should consult their tax advisers before investing in the Fund. Tax-exempt distributions received from each Municipal Fund are taken into account in determining, and may increase, the portion of social security and certain railroad retirement benefits that may be subject to federal income tax. Interest on indebtedness incurred or continued by a shareholder to purchase or carry shares of a Municipal Fund is not deductible if such Fund distributes exempt-interest dividends to the shareholder during the taxable year. Any recognized gain or income attributable to market discount on long-term (i.e., obligations with a term of more than one year) tax-exempt obligations purchased after April 30, 1993 is taxable as ordinary income (except to the extent of a portion of the discount attributable to original issue discount). This rule may increase the amount of ordinary income dividends received by shareholders. Shares of each Municipal Fund are not a suitable investment for tax-exempt institutions and may not be a suitable investment for retirement plans qualified under Section 401 of the Code, H.R. 10 plans and individual retirement accounts, because such plans and accounts are generally tax-exempt and, therefore, would not gain any additional benefit from the receipt of exempt-interest dividends from a Municipal Fund. Moreover, subsequent distributions of such dividends to the beneficiaries will be taxable. 107 In addition, exempt-interest dividends, if any, attributable to interest received on certain private activity obligations and certain industrial development bonds will not be tax-exempt to any shareholders who are "substantial users" of the facilities financed by such obligations or bonds or who are "related persons" of such substantial users. "Substantial user" includes a "non-exempt person" who regularly uses in his trade or business a part of a facility financed from the proceeds of industrial development bonds, and the same definition should apply in the case of private activity bonds. "Related persons" include, among others, certain related natural persons, affiliated corporations, partnerships and their partners and S Corporations and their shareholders. The foregoing is not a complete statement of all of the provisions of the Code covering the definitions of "substantial user" and "related person". For additional information, investors (especially those who are "substantial users" or "related persons") should consult their tax advisers before investing in a Municipal Fund. In the course of managing its investments, each Municipal Fund may realize some capital gains (and/or losses) and other taxable income. Any distributions by such Fund of its share of such gains or other taxable income would be taxable to the shareholders. However, it is expected that such amounts would normally be insubstantial in relation to the tax-exempt interest earned by each Municipal Fund. In addition, the receipt of exempt-interest dividends from each of the Funds affect the federal tax liability of certain foreign corporations, S corporations and insurance companies. A notice detailing the tax status of dividends and distributions paid by each Municipal Fund will be mailed annually to its shareholders. As part of this notice, the Fund will report to its shareholders the percentage of interest income earned by the Fund during the preceding year on tax-exempt obligations indicating, on a state-by-state basis, the source of such income. DESCRIPTION OF TAX CONSEQUENCES Descriptions of tax consequences set forth in this Statement of Additional Information and in the Prospectus are intended to be a general guide. Investors should consult their tax advisers with respect to the specific tax consequences of an investment in a Fund, including the effect and applicability of state, local, foreign, and other tax laws and the possible effects of changes in federal or other tax laws. This discussion is not intended as a substitute for careful tax planning. INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP serve as the Trust's independent accountants. Their address is 160 Federal Street, Boston, Massachusetts 02110. INDEX FUNDS The Small Cap Index Fund is not promoted, sponsored or endorsed by, nor in any way affiliated with Frank Russell Company. Frank Russell Company is not responsible for and has not reviewed the Fund's registration statement nor any associated literature or publications and Frank Russell Company makes no representation or warranty, express or implied, as to their accuracy, or completeness, or otherwise. Frank Russell Company reserves the right, at any time and without notice, to alter, amend, terminate or in any way change its Index(es). Frank Russell Company has no obligation to take the needs of any particular fund or its participants or any product or person into consideration in determining, comprising or calculating the Index(es). Frank Russell Company's publication of the Index(es) in no way suggests or implies an opinion by Frank Russell Company as to the attractiveness or appropriateness of investment in any or all securities upon which the Index(es) is (are) based. FRANK RUSSELL 108 COMPANY MAKES NO REPRESENTATION, WARRANTY, OR GUARANTEE AS TO THE ACCURACY, COMPLETENESS, RELIABILITY, OR OTHERWISE OF THE INDEX(ES) OR ANY DATA INCLUDED IN THE INDEX(ES). FRANK RUSSELL COMPANY MAKES NO REPRESENTATION OR WARRANTY REGARDING THE USE, OR THE RESULTS OF USE, OF THE INDEX(ES) OR ANY DATA INCLUDED THEREIN, OR ANY SECURITY (OR COMBINATION THEREOF) COMPRISING THE INDEX(ES). FRANK RUSSELL COMPANY MAKES NO OTHER EXPRESS OR IMPLIED WARRANTY, AND EXPRESSLY DISCLAIMS ANY WARRANTY, OF ANY KIND, INCLUDING WITHOUT MEANS OR LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEX(ES) OR ANY DATA OR ANY SECURITY (OR COMBINATION THEREOF) INCLUDED THEREIN. The Stock Index Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's Corporation ("S&P"). S&P makes no representation or warranty, express or implied, to the Trust or its participants regarding the advisability of investing in securities generally or in the Stock Index Fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P has no obligation to take the need of the Trust or its investors into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the Stock Index Fund or the timing of the issuance or sale of such Fund or in the determination or calculation of the equation by which such Fund is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the Fund. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. 109 APPENDIX A RATINGS OF CORPORATE DEBT INSTRUMENTS MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") FIXED-INCOME SECURITY RATINGS "Aaa" Fixed-income securities which are rated "Aaa" are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge". Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. "Aa" Fixed-income securities which are rated "Aa" are judged to be of high quality by all standards. Together with the "Aaa" group they comprise what are generally known as high grade fixed-income securities. They are rated lower than the best fixed-income securities because margins of protection may not be as large as in "Aaa" securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long- term risks appear somewhat larger than in "Aaa" securities. "A" Fixed-income securities which are rated "A" possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. "Baa" Fixed-income securities which are rated "Baa" are considered as medium grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such fixed-income securities lack outstanding investment characteristics and in fact have speculative characteristics as well. Fixed-income securities rated "Aaa", "Aa", "A" and "Baa" are considered investment grade. "Ba" Fixed-income securities which are rated "Ba" are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate, and therefore not well safeguarded during both good and bad times in the future. Uncertainty of position characterizes bonds in this class. "B" Fixed-income securities which are rated "B" generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. "Caa" Fixed-income securities which are rated "Caa" are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. "Ca" Fixed-income securities which are rated "Ca" present obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. "C" Fixed-income securities which are rated "C" are the lowest rated class of fixed-income securities, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Rating Refinements: Moody's may apply numerical modifiers, "1", "2", and "3" in each generic rating classification from "Aa" through "B" in its municipal fixed- income security rating system. The modifier "1" indicates that the security ranks in the higher end of its generic rating category; the modifier "2" indicates a mid-range ranking; and a modifier "3" indicates that the issue ranks in the lower end of its generic rating category. A-1 COMMERCIAL PAPER RATINGS Moody's Commercial Paper ratings are opinions of the ability to repay punctually promissory obligations not having an original maturity in excess of nine months. The ratings apply to Municipal Commercial Paper as well as taxable Commercial Paper. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: "Prime-1", "Prime-2", "Prime-3". Issuers rated "Prime-1" have a superior capacity for repayment of short-term promissory obligations. Issuers rated "Prime-2" have a strong capacity for repayment of short-term promissory obligations; and Issuers rated "Prime-3" have an acceptable capacity for repayment of short-term promissory obligations. Issuers rated "Not Prime" do not fall within any of the Prime rating categories. MUNICIPAL BOND RATINGS "AAA" Municipal bonds rated Aaa 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 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" Municipal bonds rated Aa are judged to be 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, fluctuation of protective elements may be of greater amplitude, or there may be other elements present which make the long- term risks somewhat larger. "A" Municipal bonds rated A possess many favorable investment attributes and are considered upper medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. "BAA" Municipal bonds rated Baa are considered medium-grade obligations. 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. These bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well. "BA" Municipal bonds rated Ba are judged to have predominantly speculative elements and their future cannot be considered 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. "CON(-)" Municipal bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operation experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting condition attaches. Parenthetical rating denotes probable credit stature upon the completion of construction or the elimination of the basis of the condition. MUNICIPAL NOTE RATINGS Moody's ratings for state, municipal and other short-term obligations will be designated Moody's Investment Grade ("MIG"). This distinction is in recognition of the differences between short-term credit risk and long-term risk. Factors affecting the liquidity of the borrower are uppermost in importance in short- term borrowing; factors of the first importance in long-term borrowing risk are of lesser importance in the short run. Symbols used will be as follows: "MIG 1" Notes are of the best quality enjoying strong protection from established cash flows of funds for their servicing or from established and broad-based access to the market for refinancing or both. "MIG 2" Notes are of high quality, with margins of protection ample, although not so large as in the preceding group. "MIG 3" Notes are of favorable quality, with all security elements accounted for, but lacking the undeniable strength of the preceding grades. Market access for refinancing, in particular, is likely to be less well established. A-2 "MIG 4" Notes are of adequate quality, carrying specific risk but having protection and not distinctly or predominantly speculative. STANDARD & POOR'S RATINGS SERVICES ("STANDARD & POOR'S") FIXED-INCOME SECURITY RATINGS A Standard & Poor's fixed-income security 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 ratings are based on current information furnished by the issuer or obtained by Standard & Poor's from other sources it considers reliable. 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; and (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. 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 reasons. "AAA" Fixed-income securities rated "AAA" have the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. "AA" Fixed-income securities rated "AA" have a very strong capacity to pay interest and repay principal and differs from the highest-rated issues only in small degree. "A" Fixed-income securities rated "A" have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than fixed-income securities in higher-rated categories. "BBB" Fixed-income securities rated "BBB" are regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits 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 fixed-income securities in this category than for fixed- income securities in higher-rated categories. Fixed-income securities rated "AAA", "AA", "A" and "BBB" are considered investment grade. "BB" Fixed-income securities rated "BB" have less near-term vulnerability to default than other speculative grade fixed-income securities. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity or willingness to pay interest and repay principal. "B" Fixed-income securities rated "B" have a greater vulnerability to default but presently have the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions would likely impair capacity or willingness to pay interest and repay principal. "CCC" Fixed-income securities rated "CCC" have a current identifiable vulnerability to default, and the obligor is dependent upon favorable business, financial and economic conditions to meet timely payments of interest and repayments of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. "CC" The rating "CC" is typically applied to fixed-income securities subordinated to senior debt which is assigned an actual or implied "CCC" rating. "C" The rating "C" is typically applied to fixed-income securities subordinated to senior debt which is assigned an actual or implied "CCC-" rating. A-3 "CI" The rating "CI" is reserved for fixed-income securities on which no interest is being paid. "NR" Indicates that no rating has been requested, that there is insufficient information on which to base a rating or that Standard & Poor's does not rate a particular type of obligation as a matter of policy. Fixed-income securities rated "BB", "B", "CCC", "CC" and "C" are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. "BB" indicates the least degree of speculation and "C" the highest degree of speculation. While such fixed-income securities will likely have some quality and protective characteristics, these are out- weighed by large uncertainties or major risk exposures to adverse conditions. Plus (+) or minus (-): The rating from "AA" TO "CCC" may be modified by the addition of a plus or minus sign to show relative standing with the major ratings categories. COMMERCIAL PAPER RATINGS 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 commercial paper rating is not a recommendation to purchase or sell a security. The ratings are based upon current information furnished by the issuer or obtained by Standard & Poor's from other sources it considers reliable. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information. Ratings are graded into group categories, ranging from "A" for the highest quality obligations to "D" for the lowest. Ratings are applicable to both taxable and tax-exempt commercial paper. Issues assigned "A" ratings are regarded as having the greatest capacity for timely payment. Issues in this category are further refined with the designation "1", "2", and "3" to indicate the relative degree of safety. "A-1" Indicates that the degree of safety regarding timely payment is very strong. "A-2" Indicates capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as overwhelming as for issues designated "A-1". "A-3" Indicates a satisfactory capacity for timely payment. Obligations carrying this designation are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. "B" Issues rated B are regarded as having only speculative capacity for timely payment. "C" This rating is assigned to short-term debt obligations with a doubtful capacity for payment. "D" Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. MUNICIPAL BOND RATINGS "AAA" Municipal bonds rated AAA are the highest-grade obligations. They possess the ultimate degree of protection as to principal and interest. In the market, they move with interest rates and, hence, provide the maximum safety on all counts. "AA" Municipal bonds rated AA also qualify as high-grade obligations, and in the majority of instances differ from AAA issues only in a small degree. Here, too, prices move with the long-term money market. "A" Municipal bonds rated A are regarded as upper medium-grade. They have considerable investment strength but are not entirely free from adverse effects of changes in economic and trade conditions. Interest and principal are regarded as safe. They predominantly reflect money rates in their market behavior but also, to some extent, economic conditions. A-4 "BBB" Municipal bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. MUNICIPAL NOTE RATINGS Until June 29, 1984, S&P used the same rating symbols for notes and bonds. After June 29, 1984, for new municipal note issues due in three years or less, the ratings below will usually be assigned. Notes maturing beyond three years will most likely receive a bond rating of the type recited above. "SP-1" Issues carrying this designation have a very strong or strong capacity to pay principal and interest. Issues determined to possess overwhelming safety characteristics will be given a "plus" (+) designation. "SP-2" Issues carrying this designation have a satisfactory capacity to pay principal and interest. FITCH COMMERCIAL PAPER RATINGS Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, CDs, medium-term notes, and municipal and investment notes. The short- term rating places greater emphasis that a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. "F-1+" Exceptionally strong credit quality. Regarded as having the strongest degree of assurance for timely payment. "F-1" Very strong credit quality. Reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. "F-2" Good credit quality. A satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned F-1+ and F-1 ratings. "F-3" Fair credit quality. Have characteristics suggesting that the degree of assurance for timely payment is adequate; however, near-term adverse changes could cause these securities to be rated below investment grade. "F-5" Weak credit quality. Have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions. "LOC" The symbol LOC indicates that the rating is based on a letter of credit issued by a commercial bank. MUNICIPAL BOND RATINGS "AAA" Municipal bonds rated AAA are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal which is unlikely to be affected by reasonable foreseeable events. "AA" Municipal bonds rated AA are considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong although not quite as strong bonds rated AAA and not significantly vulnerable to foreseeable future developments. "A" Municipal bonds rated A 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. A-5 "BBB" Municipal bonds rated BBB 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 have an adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. "BB" Municipal bonds rated BB are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. Plus (+) or minus (-) signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus or minus signs are not used with the AAA category. A-6 APPENDIX B DESCRIPTION OF INDICES The Standard & Poor's 500 Index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. Standard & Poor's chooses the member companies for the 500 based on market size, liquidity and industry group representation. The Standard & Poor's 400 Midcap Index is comprised of stocks in the middle capitalization range which are not included in the S&P 500. The Russell Midcap Value Index is a market-weighted total return index that measures the performance of companies within the Russell Midcap Index having lower price-to-book ratios and lower forecasted growth values. The Russell 2000 Growth Index is a market-weighted total return index that measures the performance of companies within the Russell 2000 Index having higher price-to-book ratios and higher forecasted growth values. The Russell 2000 Index consists of the smallest 2000 companies in the Russell 3000 Index, representing approximately 7% of the Russell 3000 total market capitalization. The returns shown for the index are total returns, which include reinvestment of dividends. The Morgan Stanley Capital International (MSCI) World Index is a composite that includes all 23 MSCI developed market countries. The MSCI EAFE Index is an aggregate of 21 individual country indexes that collectively represent many of the major markets of the world. The MSCI All Country Work ex U.S. Index measures the performance of the stock market in the following countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and the United Kingdom. The Lehman Brothers Aggregate Bond Index is comprised of the Lehman Brothers Government/Corporate Index, the Mortgage-Backed Securities Index and the Asset- Backed Securities Index. The Salomon Smith Barney High Yield Market Index includes cash-pay, deferred- interest and Rule 144A bonds with remaining maturities of at least one year and a minimum amount outstanding of $100 million. The issuers must be domiciled in the United States or Canada for consideration in this index. The Lehman Brothers Municipal Bond Index is comprised of approximately 38,542 bonds with a minimum credit rating of at least Baa and outstanding par value of $5 million on transactions of $50 million. B-1 NORTH AMERICAN FUNDS PART C. OTHER INFORMATION Item 23. Exhibits - ------------------ (a) (1) Amended and Restated Agreement and Declaration of Trust dated February 18, 1994. (8) (2) Declaration of Trust Amendment -- Establishment and Designation of Additional Series of Shares for the International Growth and Income Fund dated December 28, 1994. (8) (3) Declaration of Trust Amendment -- Establishment and Designation of Classes A, B and C, dated March 17, 1994. (8) (4) Declaration of Trust Amendment -- Establishment and Designation of Additional Series of Shares for the Growth Equity, International Small Cap and Small/Mid Cap Funds dated February 28, 1996. (8) (5) Declaration of Trust Amendment -- Redesignation of Series of Shares of Beneficial Interest known as the Growth Fund dated February 28, 1996. (8) (6) Declaration of Trust Amendment -- Redesignation of Series of Shares of Beneficial Interest known as the Global Growth Fund and the Asset Allocation Fund dated October 1, 1996. (8) (7) Declaration of Trust Amendment -- Establishment of the Tax-Sensitive Equity Fund and Emerging Growth Fund series. (10) (8) Declaration of Trust Amendment -- Establishment of 11 additional series of shares and 2 additional classes of shares. (14) (b) By-laws of North American Funds -- previously filed as Exhibit (b)(2) to North American Funds initial registration statement on Form N-1A (File No. 33-27958) dated April 5, 1989. (10) (c) See Articles 4 and 5 of the North American Funds Amended and Restated Declaration of Trust; and see Articles 2 and 9 of the By-laws of North American Funds. (d) (1) Investment Advisory Agreement dated June 1, 2000, between North American Funds and American General Asset Management Corp. (17) (2) Subadvisory Agreement between American General Asset Management Corp. and American General Investment Management, L.P. dated March 10, 2000. (17) (3) Subadvisory Agreement between American General Asset Management Corp. and Wellington Management Company dated March 10, 2000. (14) (4) Subadvisory Agreement between American General Asset Management Corp. and Morgan Stanley Dean Witter Investment Management, Inc. dated March 10, 2000. (14) 1 (5) Subadvisory Agreement between American General Asset Management Corp. and INVESCO Funds Group, Inc. dated March 10, 2000. (14) (6) Subadvisory Agreement between American General Asset Management Corp. and Founders Asset Management, LLC dated March 10, 2000. (14) (7) Subadvisory Agreement between American General Asset Management Corp. and T. Rowe Price Associates, Inc. dated March 10, 2000. (14) (8) Subadvisory Agreement between American General Asset Management Corp. and Neuberger Berman Management, Inc. dated March 10, 2000. (14) (9) Subadvisory Agreement between American General Asset Management Corp. and Credit Suisse Asset Management, LLC dated March 10, 2000. (15) (10) Subadvisory Agreement between American General Asset Management Corp. and Josephthal & Company, Inc. dated September 1, 2000. (16) (e) (1) Distribution Agreement between North American Funds and American General Funds Distributors, Inc. dated March 10, 2000. (14) (2) Dealer Agreement dated February 1, 2001, among American General Funds Distributors, Inc. and selected Broker-Dealers. (17) (f) Not Applicable. (g) (1) Custodian Agreement between North American Funds and Boston Safe Deposit and Trust Company. (1) (2) Custodian Agreement dated June 1, 1989, between North American Funds and State Street Bank and Trust Company. (1) (3) Amendment to Custodian Agreement dated July 1, 1996, between North American Funds and State Street Bank and Trust Company. (17) (4) Amendment to Custodian Agreement dated December 22, 2000, between North American Funds and State Street Bank and Trust Company. (17) (5) Transfer and Shareholder Services Contract between North American Funds and State Street Bank and Trust Company. (1) (6) Transfer and Shareholder Services Contract dated December 29, 2000, between North American Funds and State Street Bank and Trust Company. (17) (7) Forms of Sub-Custodian Agreements between State Street Bank and Trust Company and the Bank of New York, Chemical Bank and Bankers Trust. (5) (8) Administrative and Shareholder Services Agreement between American General Asset Management Corp. and North American Funds dated June 13, 2000. (17) (h) Not Applicable. 2 (i) (1) Opinion of Ruth Ann Fleming, Esq. (10) (2) Opinion of Christina M. Perrino, Esq. (10) (3) Opinion of Christina M. Perrino, Esq. (4) (4) Opinion of Christina M. Perrino, Esq. (10) (5) Opinion of Jeffrey M. Ulness, Esq. (10) (6) Opinion of Tracy A. Kane, Esq. (10) (7) Opinion of Counsel of Betsy Anne Seel, Esq. (10) (8) Opinion of Counsel of Betsy Anne Seel, Esq. (6) (9) Opinion of Ropes and Gray dated December 18, 1997, regarding the Tax- Sensitive Equity Fund and the Emerging Growth Fund. (10) (10) Form of Opinion of Ropes and Gray regarding 10 new series of shares of the Trust. (14) (11) Form of Opinion of Ropes and Gray regarding the Josephthal Strategic Growth Fund. (16) (12) Opinion of Sullivan & Worcester, LLP. (17) (j) Consent of PricewaterhouseCoopers, LLP. (17) (k) Not Applicable. (l) Letter containing Investment Undertaking of North American Life Assurance Company. (3) (m) (1) Amended and Restated Rule 12b-1 Distribution Plan for Class A shares dated September 26, 1997. (9) (2) Distribution Plan Amendment for Class A shares dated December 16, 1997. (17) (3) Distribution Plan Amendment for Class A shares dated February 27, 2000. (17) (4) Distribution Plan Amendment for Class A shares dated June 13, 2000. (17) (5) Amended and Restated Rule 12b-1 Distribution Plan for Class B shares dated September 26, 1997. (9) (6) Distribution Plan Amendment for Class B shares dated December 16, 1997. (17) (7) Distribution Plan Amendment for Class B shares dated February 27, 2000. (17) (8) Distribution Plan Amendment for Class B shares dated June 13, 2000. (17) 3 (9) Amended and Restated Rule 12b-1 Distribution Plan for Class C shares dated September 26, 1997. (9) (10) Distribution Plan Amendment for Class C shares dated December 16, 1997. (17) (11) Distribution Plan Amendment for Class C shares dated February 27, 2000. (17) (12) Distribution Plan Amendment for Class C shares dated June 13, 2000. (17) (n) Amended and Restated Rule 18f-3 Plan dated February 27, 2000. (14) (o) (Reserved) (p) (1) Code of Ethics for North American Funds, filed herein as exhibit (p)(2)(g). (17) (2) Sub-Advisers Codes of Ethics. (a) Wellington Management Company, LLP. (17) (b) Founders Asset Management, LLC. (17) (Adopted the parent Mellon Financial Corporation's Code of Ethics) (c) INVESCO Funds Group, Inc. (17) (d) Neuberger Berman Management, Inc. (17) (e) T. Rowe Price Associates, Inc. (17) (f) Credit Suisse Asset Management, LLC. (17) (g) American General Investment Management, L.P. (17) (h) Josephthal & Company, Inc. (17) (i) Morgan Stanley Dean Witter Investment Management, Inc. (q) Powers of Attorney for Dr. Judith L. Craven; Dr. Timothy J. Ebner; The Honorable Gustavo E. Gonzales, Jr.; Ms. Alice T. Kane; Mr. Ben H. Love; Dr. John E. Maupin, Jr.; Mr. Joseph T. Grause, Jr.; Mr. Kenneth J. Lavery; and Mr. William F. Devin. (17) ___________________________________________________________________________ (1) Previously filed as Exhibit to North American Funds' initial registration statement on Form N-1A (File No. 33-27958) dated November 1, 1991. (2) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 1 on Form N-1A (File No. 33-27958) dated December 29, 1989. (3) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 2 on Form N-1A (File No. 33-27958) dated August 29, 1990. (4) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 7 on Form N-1A (File No. 33-27958) dated November 1, 1991. 4 (5) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 17 on Form N-1A (File No. 33-27958) dated April 1, 1994. (6) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 21 on Form N-1A (File No. 33-27958) dated December 15, 1995. (7) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 22 on Form N-1A (File No. 33-27958) dated February 23, 1996. (8) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 25 on Form N-1A (File No. 33-27958) dated December 30, 1996. (9) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 26 on Form N-1A (File No. 33-27958) dated October 17, 1997. (10) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 27 on Form N-1A (File No. 33-27958) dated December 30, 1997. (11) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 28 on Form N-1A (File No. 33-27958) dated December 18, 1998. (12) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 29 on Form N-1A (File No. 33-27958) dated March 1, 1999. (13) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 31 on Form N-1A (File No. 33-27958) dated March 2, 2000. (14) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 32 on Form N-1A (File No. 33-27958) dated March 17, 2000. (15) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 33 on Form N-1A (File No. 33-27958) dated April 7, 2000. (16) Previously filed as Exhibit to North American Funds' Post-Effective Amendment No. 34 on Form N-1A (File No. 33-27958) dated June 15, 2000. (17) Filed herewith. 5 ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT - ----------------------------------------------------------------------- No person is directly or indirectly controlled by the Registrant. With respect to the portfolios of the Registrant, no person controls the Registrant by virtue of share ownership in the Registrant. While the Registrant disclaims any such control relationship, it may be deemed to be controlled by its investment adviser by virtue of the advisory relationship. In such case, the Registrant and its adviser, American General Asset Management Corp. ("AGAM"), a Delaware corporation, may be deemed to be under common control of the adviser's parent corporation. AGAM is a wholly- owned subsidiary of American General Corporation ("American General"), a Texas corporation which is based in Houston, Texas. American General is also the parent company of American General Funds Distributors, Inc., a Delaware corporation and the Registrant's distributor. American General is also the parent company of American General Investment Management, L.P., the subadviser to several of the Funds. 1 ITEM 25. INDEMNIFICATION - ------------------------- Sections 6.4 and 6.5 of the Agreement and Declaration of Trust of the Registrant provide that the Registrant shall indemnify each of its Trustees and officers against all liabilities, including but not limited to amounts paid in satisfaction of judgements, in compromise or as fines and penalties, and against all expenses, including but not limited to accountants and counsel fees, reasonably incurred in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or legislative body, in which such trustee or officer may be or may have been involved as a party or otherwise or with which such person may be or may have been threatened, while in office or thereafter, by reason of being or having been such a trustee or officer, except that indemnification shall not be provided if it shall have been finally adjudicated in a decision on the merits by the court or other body before which the proceeding was brought that such trustee or officer (i) did not act in good faith in the reasonable belief that his or her action was in the best interests of the Registrant or (ii) is liable to the Registrant or its shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person's office. Registrant has preciously provided the undertaking set forth in Rule 481 under the Securities Act of 1933. 1 ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER - -------------------------------------------------------------- See "Management of the Fund" in the Prospectus and Statement of Additional Information and "Investment Management Arrangements" in the Statement of Additional Information for information regarding the business of the Adviser and each of the Subadvisors. For information as to the business, profession, vocation or employment of a substantial nature of each director, officer or partner of the Adviser and each of the Subadvisors, reference is made to the respective Form ADV, as amended, filed under the Investment Advisers Act of 1940, each of which is herein incorporated by reference. 1 ITEM 27. PRINCIPAL UNDERWRITERS - -------------------------------- (a) American General Funds Distributors, Inc., the Registrant's principal underwriter, does not serve as principal underwriter, depositor or investment adviser to any other investment company. (b) Officers and Directors of Principal Underwriter.
Name and Principal Positions and Offices Positions and Offices Business Address with Underwriter with Registrant ------------------- --------------------- --------------------- Alice T. Kane* Chairman Chairman and President Joseph T. Grause, Jr.* President Vice President John I. Fitzgerald* Vice President and Secretary Vice President and Secretary
* C/O American General Asset Management Corp. 286 Congress Street Boston, MA 02110 (c) Not Applicable 1 ITEM 28. LOCATION OF ACCOUNTS AND RECORDS - ------------------------------------------ All accounts, books and other documents required to be maintained under Section 31(a) of the Investment Company Act of 1940 are kept by American General Asset Management Corp., the Registrant's investment adviser, at its offices at 286 Congress Street, Boston, Massachusetts, 02210; by Credit Suisse Asset Management, Inc., the investment subadvisor to the Small Cap Growth Fund, at its offices at 466 Lexington Avenue, New York, New York, 10017-3147; by Wellington Management Company, LLP, the investment subadvisor to the Growth & Income Fund, the Tax-Sensitive Equity Fund and the Equity-Income Fund, at its offices at 75 State Street, Boston, Massachusetts, 02109; by Founders Asset Management, LLC, the investment subadvisor to the International Small Cap Fund, the Large Cap Growth Fund and the Growth Equity Fund, at its offices at 2930 East Third Avenue, Denver, Colorado, 80206; by the Registrant at its principal business office located at 286 Congress Street, Boston, Massachusetts, 02110; by T. Rowe Price Associates, Inc., the investment subadvisor to the Science & Technology Fund, at its offices at 100 East Pratt Street, Baltimore, Maryland, 21202; by Morgan Stanley Dean Witter Investment Management, Inc., the investment subadvisor of the International Equity Fund, at its offices at 1221 Avenue of the Americas, New York, New York, 10020; by INVESCO Funds Group, Inc., the investment subadvisor to the Balanced Fund and the Mid Cap Growth Fund, at its offices at 1166 Avenue of the Americas, New York, New York, 10036; by Neuberger Berman Management, Inc., the investment subadvisor to the Mid Cap Value Fund, at its offices at 805 Third Avenue, New York, New York, 10158; by American General Investment Management, L.P., the investment subadvisor to the Strategic Income Fund, the Municipal Bond Fund, the Money Market Fund, the Core Bond Fund, the Stock Index Fund, the Small Cap Index Fund, the Socially Responsible Fund, the High Yield Bond Fund, the Aggressive Growth LifeStyle Fund, the Moderate Growth LifeStyle Fund, the Conservative Growth LifeStyle Fund, the Municipal Money Market Fund, and the U.S. Government Securities Fund, at its offices at 2929 Allen Parkway, Houston, Texas, 77019; by Josephthal & Company, Inc., the investment subadvisor of the Josephthal Strategic Growth Fund, at its offices at 200 Park Avenue, 25th Floor, New York, New York, 10166; by Boston Safe Deposit and Trust Company, custodian for the Global Growth Fund's assets, at its offices at One Boston Place, Boston Massachusetts, 02108; or by State Street Bank and Trust Company, the custodian and transfer agent for all the other portfolios of the Registrant, at its offices at 225 Franklin Street, Boston, Massachusetts, 02110. 1 ITEM 29. NOT APPLICABLE - ------------------------ 1 ITEM 30. The Registrant undertakes to furnish to each person to whom a prospectus of the Registrant is delivered a copy of the Registrant's latest annual report to shareholders, upon request and without charge. 1 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, North American Funds has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, duly authorized, in the City of Boston, and Commonwealth of Massachusetts on the 21st day of February, 2001. NORTH AMERICAN FUNDS -------------------- Registrant By: /s/Alice T. Kane --------------------- Alice T. Kane President Attest: /s/John I. Fitzgerald - ------------------------------ John I. Fitzgerald Secretary Pursuant to the requirements of the Securities Act of 1933, as amended, this amended Registration Statement has been signed by the following persons in the capacities and on the 1st day of March, 2001. Title ----- * Trustee - ----------------------- William F. Devin * Trustee, Chairman and - ----------------------- President Alice T. Kane * Trustee - ----------------------- Kenneth J. Lavery * Trustee - ----------------------- Joseph T. Grause, Jr. * Trustee - ----------------------- Judith L. Craven * Trustee - ----------------------- Timothy J. Ebner * Trustee - ----------------------- Gustavo E. Gonzales, Jr. * Trustee - ----------------------- John E. Maupin, Jr. 1 * Trustee - ----------------------- Ben H. Love /s/Thomas J. Brown Treasurer; Principal Financial - ----------------------- And Accounting Officer Thomas J. Brown /s/John I. Fitzgerald *By John I. Fitzgerald, - ----------------------- Attorney-in-fact John I. Fitzgerald 2 Exhibit Index (d) (1) Investment Advisory Agreement dated June 1, 2000, between North American Funds and American General Asset Management Corp. (d) (2) Subadvisory Agreement between American General Asset Management Corp. and American General Investment Management, L.P. dated June 1, 2000. (e) (2) Dealer Agreement dated February 1, 2001, among American General Funds Distributors, Inc. and selected Broker-Dealers. (g) (3) Amendment dated July 1, 1996, to Custodian Agreement between North American Funds and State Street Bank and Trust Company. (g) (4) Amendment dated December 22, 2000, to Custodian Agreement between North American Funds and State Street Bank and Trust Company. (g) (6) Transfer and Shareholder Services Contract dated December 29, 2000, between North American Funds and State Street Bank and Trust Company. (g) (8) Administrative and Shareholder Services Agreement between American General Asset Management Corp. and North American Funds dated June 13, 2000. (i) (12) Opinion of Sullivan & Worcester, LLP. (j) Consent of PricewaterhouseCoopers, LLP. (m) (2) Distribution Plan Amendment for Class A shares dated December 16, 1997. (m) (3) Distribution Plan Amendment for Class A shares dated February 27, 2000. (m) (4) Distribution Plan Amendment for Class A shares dated June 13, 2000. (m) (6) Distribution Plan Amendment for Class B shares dated December 16, 1997. (m) (7) Distribution Plan Amendment for Class B shares dated February 27, 2000. (m) (8) Distribution Plan Amendment for Class B shares dated June 13, 2000. (m) (10) Distribution Plan Amendment for Class C shares dated December 16, 1997. (m) (11) Distribution Plan Amendment for Class C shares dated February 27, 2000. (m) (12) Distribution Plan Amendment for Class C shares dated June 13, 2000. (p) (1) Code of Ethics for North American Funds, filed herein as exhibit (p)(2)(g). (p) (2) Sub-Advisers Codes of Ethics. (p) (2) (a) Wellington Management Company, LLP. (b) Founders Asset Management, LLC. (c) INVESCO Funds Group, Inc. (d) Neuberger Berman Management, Inc. (e) T. Rowe Price Associates, Inc. (f) Credit Suisse Asset Management, LLC. (g) American General Investment Management, L.P. (h) Josephthal & Company, Inc. (i) Morgan Stanley Dean Witter Investment Management, Inc. (q) Powers of Attorney. EX-99.(D)(1) 2 0002.txt INVESTMENT ADVISORY AGREEMENT EXHIBIT (d)(1) INVESTMENT ADVISORY AGREEMENT AGREEMENT made this 1/st/ day of June, 2000, between North American Funds, a Massachusetts business trust (the "Trust"), and American General Asset Management Corp., a Delaware corporation (the "Adviser"). In consideration of the mutual covenants contained herein, the parties agree as follows: 1. APPOINTMENT OF ADVISER The Trust hereby appoints the Adviser, subject to the supervision of the Trustees of the Trust and the terms of this Agreement, as the investment adviser for each of the portfolios of the Trust specified in Appendix A to this Agreement as it shall be amended by the Adviser and the Trust from time to time (the "Funds"). The Adviser accepts such appointment and agrees to render the services and to assume the obligations set forth in this Agreement commencing on its effective date. The Adviser will be an independent contractor and will have no authority to act for or represent the Trust in any way or otherwise be deemed an agent unless expressly authorized in this Agreement or another writing by the Trust and Adviser. 2. DUTIES OF THE ADVISER a. Subject to the general supervision of the Trustees of the Trust and the terms of this Agreement, the Adviser will at its own expense select, contract with, and compensate investment subadvisers ("Subadvisers") to manage the investments and determine the composition of the assets of the Funds; provided, that any contract with a Subadviser (the "Subadvisory Agreement") shall be in compliance with and approved as required by the Investment Company Act of 1940, as amended ("Investment Company Act"). Subject always to the direction and control of the Trustees of the Trust, the Adviser will monitor compliance of each Subadviser with the investment objectives and related investment policies, as set forth in the Trust's registration statement as filed with the Securities and Exchange Commission, of any Fund or Funds under the management of such Subadviser, and review and report to the Trustees of the Trust on the performance of such Subadviser. b. The Adviser will oversee the administration of all aspects of the Trust's business and affairs and in that connection will furnish to the Trust the following services: (1) Office and Other Facilities. The Adviser shall furnish to the Trust --------------------------- office space in the offices of the Adviser or in such other place as may be agreed upon by the parties hereto from time to time and such other office facilities, utilities and office equipment as are necessary for the Trust's operations. (2) Trustees and Officers. The Adviser agrees to permit individuals who --------------------- are directors, officers or employees of the Adviser to serve (if duly elected or appointed) as Trustees or President, Vice President, Treasurer or Secretary of the Trust, without remuneration from or other cost to the Trust. (3) Other Personnel. The Adviser shall furnish to the Trust, at the --------------- Trust's expense, any other personnel necessary for the operations of the Trust. (4) Financial, Accounting, and Administrative Services. The Adviser shall -------------------------------------------------- maintain the existence and records of the Trust; maintain the registrations and qualifications of Trust shares under federal and state law; and perform all administrative, financial, accounting, bookkeeping and recordkeeping functions of the Trust except for any such functions that may be performed by a third party pursuant to a custodian, transfer agency or service agreement executed by the Trust. The Trust shall reimburse the Adviser for its expenses associated with all such services, including the compensation and related personnel expenses and expenses of office space, office equipment, utilities and miscellaneous office expenses, except any such expenses directly attributable to officers or employees of the Adviser who are serving as President, Vice President, Treasurer or Secretary of the Trust. The Adviser shall determine the expenses to be reimbursed by the Trust pursuant to expense allocation procedures established by the Adviser in accordance with generally accepted accounting principles. (5) Liaisons with Agents. The Adviser, at its own expense, shall maintain -------------------- liaison with the various agents and other persons employed by the Trust (including the Trust's transfer agent, custodian, independent accountants and legal counsel) and assist in the coordination of their activities on behalf of the Trust. Fees and expenses of such agents and other persons will be paid by the Trust. (6) Reports to Trust. The Adviser shall furnish to or place at the ---------------- disposal of the Trust such information, reports, valuations, analyses and opinions as the Trust may, at any time or from time to time, reasonably request or as the Adviser may deem helpful to the Trust, provided that the expenses associated with any such materials furnished by the Adviser at the request of the Trust shall be borne by the Trust. (7) Reports and Other Communications to Trust Shareholders. The Adviser ------------------------------------------------------ shall assist the Trust in developing (but not pay for) all general shareholder communications including regular shareholder reports. 3. EXPENSES ASSUMED BY THE TRUST In addition to paying the advisory fee provided for in Section 4, the Trust will pay all expenses of its organization, operations and business not specifically assumed or agreed to be paid by the Adviser as provided in this Agreement, by a Subadviser as provided in a Subadvisory Agreement, or by the Distributor as provided in the Distribution Agreement. Without limiting the generality of the foregoing, the Trust, in addition to certain expenses described in Section 2 above, shall pay or arrange for the payment of the following: a. Custody and Accounting Services. All expenses of the transfer, receipt, ------------------------------- safekeeping, servicing and accounting for the Trust's cash, securities, and other property, including all charges of depositories, custodians and other agents, if any; b. Shareholder Servicing. All expenses of maintaining and servicing --------------------- shareholder accounts, including all charges of the Trust's transfer, shareholder recordkeeping, dividend disbursing, redemption, and other agents, if any; c. Shareholder Communications. All expenses of preparing, setting in type, -------------------------- printing, and distributing reports and other communications to shareholders; d. Shareholder Meetings. All expenses incidental to holding meetings of Trust -------------------- shareholders, including the printing of notices and proxy material, and proxy solicitation therefor; -2- e. Prospectuses. All expenses of preparing, setting in type, and printing of ------------ annual or more frequent revisions of the Trust's prospectus and statement of additional information and any supplements thereto and of mailing them to shareholders; f. Pricing. All expenses of computing the net asset value per share for each ------- of the Funds, including the cost of any equipment or services used for obtaining price quotations and valuing its investment portfolio; g. Communication Equipment. All charges for equipment or services used for ----------------------- communication between the Adviser or the Trust and the custodian, transfer agent or any other agent selected by the Trust; h. Legal and Accounting Fees and Expenses. All charges for services and -------------------------------------- expenses of the Trust's legal counsel and independent auditors; i. Trustees and Officers. Except as expressly provided otherwise in paragraph --------------------- 2.b.(2), all compensation of Trustees and officers, all expenses incurred in connection with the service of Trustees and officers, and all expenses of meetings of the Trustees and Committees of Trustees; j. Federal Registration Fees. All fees and expenses of registering and ------------------------- maintaining the registration of the Trust under the Investment Company Act and the registration of the Trust's shares under the Securities Act of 1933, as amended (the "1933 Act"), including all fees and expenses incurred in connection with the preparation, setting in type, printing and filing of any registration statement and prospectus under the 1933 Act or the Investment Company Act, and any amendments or supplements that may be made from time to time; k. State Registration Fees. All fees and expenses of qualifying and ----------------------- maintaining qualification of the Trust and of the Trust's shares for sale under securities laws of various states or jurisdictions, and of registration and qualification of the Trust under all other laws applicable to the Trust or its business activities (including registering the Trust as a broker-dealer, or any officer of the Trust or any person as agent or salesman of the Trust in any state); l. Issue and Redemption of Trust Shares. All expenses incurred in connection ------------------------------------ with the issue, redemption, and transfer of Trust shares, including the expense of confirming all share transactions, and of preparing and transmitting certificates for shares of beneficial interest in the Trust; m. Bonding and Insurance. All expenses of bond, liability and other insurance --------------------- coverage required by law or regulation or deemed advisable by the Trust's Trustees including, without limitation, such bond, liability and other insurance expense that may from time to time be allocated to the Trust in a manner approved by its Trustees; n. Brokerage Commissions. All brokers' commissions and other charges incident --------------------- to the purchase, sale, or lending of the Trust's portfolio securities; o. Taxes. All taxes or governmental fees payable by or with respect to the ----- Trust to federal, state, or other governmental agencies, domestic or foreign, including stamp or other transfer taxes, and all expenses incurred in the preparation of tax returns; p. Trade Association Fees. All fees, dues, and other expenses incurred in ---------------------- connection with the Trust's membership in any trade association or other investment organization; and q. Nonrecurring and Extraordinary Expenses. Such nonrecurring expenses as may --------------------------------------- arise, including the costs of actions, suits, or proceedings to which the Trust is, or is threatened to be made, a party and the expenses the Trust may incur as a result of its legal obligation to provide indemnification to its Trustees, officers, agents and shareholders. -3- 4. COMPENSATION OF ADVISER For the services provided, the Trust will pay the Adviser with respect to each Fund the compensation specified in Appendix A of this Agreement. 5. NON-EXCLUSIVITY The services of the Adviser to the Trust are not to be deemed to be exclusive, and the Adviser shall be free to render investment advisory or other services to others (including other investment companies) and to engage in other activities. It is understood and agreed that the directors, officers, and employees of the Adviser are not prohibited from engaging in any other business activity or from rendering services to any other person, or from serving as partners, officers, directors, trustees or employees of any other firm or corporation, including other investment companies. 6. SUPPLEMENTAL ARRANGEMENTS The Adviser may enter into arrangements with other persons affiliated with the Adviser to better enable it to fulfill its obligations under this Agreement for the provision of certain personnel and facilities to the Adviser. 7. CONFLICTS OF INTEREST It is understood that Trustees, officers, agents and shareholders of the Trust are or may be interested in the Adviser as directors, officers, stockholders, or otherwise; that directors, officers, agents and stockholders of the Adviser are or may be interested in the Trust as Trustees, officers, shareholders or otherwise; that the Adviser may be interested in the Trust; and that the existence of any such dual interest shall not affect the validity hereof or of any transactions hereunder except as otherwise provided in the Agreement and Declaration of Trust of the Trust and the Articles of Incorporation of the Adviser, respectively, or by specific provision of applicable law. 8. REGULATION The Adviser shall submit to all regulatory and administrative bodies having jurisdiction over the services provided pursuant to this Agreement any information, reports or other material which any such body by reason of this Agreement may request or require pursuant to applicable laws and regulations. The Adviser will comply in all material respects with Rule 17j-1 under the Investment Company Act. 9. DURATION AND TERMINATION OF AGREEMENT This Agreement shall become effective on the later of (i) its execution and (ii) date of the meeting of the shareholders of the Trust, at which meeting this New Advisory Agreement is approved by the vote of a majority of the outstanding voting securities (as defined in the Investment Company Act) of each of the Funds. The Agreement will continue in effect for a period more than two years from the date of its execution only so long as such continuance is specifically approved at least annually either by the Trustees of the Trust or by the vote of a majority of the outstanding voting securities of each of the Funds, provided that in either event such continuance shall also be approved by the vote of a majority of the Trustees of the Trust who are not interested persons (as defined in the Investment Company Act) of any party to this Agreement cast in person at a meeting called for the purpose of voting on such approval. The required shareholder approval of the Agreement or of any continuance of the Agreement shall be effective with respect to any Fund if a majority of the outstanding voting securities of the series (as defined in Rule 18f-2(h) under the Investment Company Act) of shares of that Fund votes to approve the Agreement or its continuance, notwithstanding that the Agreement or its continuance may not have been approved by a majority of the outstanding voting securities of (a) any other Fund affected by the Agreement or (b) all the Funds of the Trust. -4- If the shareholders of any Fund fail to approve the Agreement or any continuance of the Agreement, the Adviser will continue to act as investment adviser with respect to such Fund pending the required approval of the Agreement or its continuance or of a new contract with the Adviser or a different adviser or other definitive action; provided, that the compensation received by the Adviser in respect of such Fund during such period is in compliance with Rule 15a-4 under the Investment Company Act. This Agreement may be terminated at any time, without the payment of any penalty, by the Trustees of the Trust, by the vote of a majority of the outstanding voting securities of the Trust, or with respect to any Fund by the vote of a majority of the outstanding voting securities of such Fund, on sixty days' written notice to the Adviser, or by the Adviser on sixty days' written notice to the Trust. This Agreement will automatically terminate, without the payment of any penalty, in the event of its assignment (as defined in the Investment Company Act). 10. PROVISION OF CERTAIN INFORMATION BY ADVISER The Adviser will promptly notify the Trust in writing of the occurrence of any of the following events: a. the Adviser fails to be registered as an investment adviser under the Investment Advisers Act or under the laws of any jurisdiction in which the Adviser is required to be registered as an investment adviser in order to perform its obligations under this Agreement; b. the Adviser is served or otherwise receives notice of any action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, public board or body, involving the affairs of the Trust; and c. the chief executive officer or controlling stockholder of the Adviser or the Fund manager of any Fund changes. 11. AMENDMENTS TO THE AGREEMENT This Agreement may be amended by the parties only if such amendment is specifically approved by the vote of a majority of the outstanding voting securities of each of the Funds affected by the amendment and by the vote of a majority of the Trustees of the Trust who are not interested persons of any party to this Agreement cast in person at a meeting called for the purpose of voting on such approval. The required shareholder approval shall be effective with respect to any Fund if a majority of the outstanding voting securities of the series of shares of that Fund vote to approve the amendment, notwithstanding that the amendment may not have been approved by a majority of the outstanding voting securities of (a) any other Fund affected by the amendment or (b) all the Funds of the Trust. 12. ENTIRE AGREEMENT This Agreement contains the entire understanding and agreement of the parties. 13. HEADINGS The headings in the sections of this Agreement are inserted for convenience of reference only and shall not constitute a part hereof. 14. NOTICES -5- All notices required to be given pursuant to this Agreement shall be delivered or mailed to the last known business address of the Trust or Adviser in person or by registered mail or a private mail or delivery service providing the sender with notice of receipt. Notice shall be deemed given on the date delivered or mailed in accordance with this section. 15. SEVERABILITY Should any portion of this Agreement for any reason be held to be void in law or in equity, the Agreement shall be construed, insofar as is possible, as if such portion had never been contained herein. 16. GOVERNING LAW The provisions of this Agreement shall be construed and interpreted in accordance with the laws of The Commonwealth of Massachusetts, or any of the applicable provisions of the Investment Company Act. To the extent that the laws of The Commonwealth of Massachusetts, or any of the provisions in this Agreement, conflict with applicable provisions of the Investment Company Act, the latter shall control. 17. LIMITATION OF LIABILITY The Declaration of Trust establishing the Trust, dated September 29, 1988, as amended and restated February 18, 1994, a copy of which, together with all amendments thereto (the "Declaration"), is on file in the office of the Secretary of The Commonwealth of Massachusetts, provides that the name "North American Funds" refers to the Trustees under the Declaration collectively as Trustees, but not as individuals or personally; and no Trustee, shareholder, officer, employee or agent of the Trust shall be held to any personal liability, nor shall resort be had to their private property, for the satisfaction of any obligation or claim, in connection with the affairs of the Trust or any Portfolio thereof, but only the assets belonging to the Trust, or to the particular Portfolio with which the obligee or claimant dealt, shall be liable. -6- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal by their duly authorized officers as of the date first mentioned above. North American Funds By: /s/ ________________________ American General Asset Management Corp. By: /s/ ________________________ -7- APPENDIX A 1. Growth and Income Fund: .725% of the first $50,000,000, .675% between $50,000,000 and $200,000,000, .625% between $200,000,000 and $500,000,000 and .550% on the excess over $500,000,000 of the average net assets of the Fund. 2. Balanced Fund: .775% of the first $200,000,000, .675% between $200,000,000 and $500,000,000 and .625% on the excess over $500,000,000 of the average net assets of the Fund. 3. U.S. Government Securities Fund: .600% of the first $200,000,000, .525% between $200,000,000 and $500,000,000 and .475% on the excess over $500,000,000 of the average net assets of the Fund. 4. Core Bond Fund: .600% of the first $200,000,000, .525% between $200,000,000 and $500,000,000 and .475% on the excess over $500,000,000 of the average net assets of the Fund. 5. Money Market Fund: .200% of the first $500,000,000 and .145% on the excess over $500,000,000 of the average net assets of the Fund. 6. Global Equity Fund: .900% of the first $500,000,000, and .700% on the excess over $500,000,000 of the average net assets of the Fund. 7. Municipal Bond Fund: .600% of the net assets of the Fund. 8. Strategic Income Fund: .750% of the first $50 million, .700% between $50,000,000 and $200,000,000, .650% between $200,000,000 and $500,000,000 and .600% on the excess over $500,000,000 of the average net assets of the Fund. 9. International Equity Fund: .900% of the first $50 million, .850% between $50,000,000 and $200,000,000, .800% between $200,000,000 and $500,000,000 and .750% on the excess over $500,000,000 of the average net assets of the Fund. 10. Mid Cap Growth Fund: .925% of the first $50,000,000, .900% between $50,000,000 and $200,000,000, .875% between $200,000,000 and $500,000,000 and .850% on the excess over $500,000,000 of the average net assets of the Fund. 11. International Small Cap Fund: 1.05% of the first $50,000,000, 1.00% between $50,000,000 and $200,000,000, .900% between $200,000,000 and $500,000,000 and .800% on the excess over $500,000,000 of the average net assets of the Fund. 12. Large Cap Growth Fund: .900% of the first $50,000,000, .850% between $50,000,000 and $200,000,000, .825% between $200,000,000 and $500,000,000 and .800% on the excess over $500,000,000 of the average net assets of the Fund. 13. Small Cap Growth Portfolio: 950% of the average net assets of the Fund. 14. Mid Cap Value Fund: .900% of the first $100,000,000, .875% between $100,000,000 and $250,000,000, .850% between $250,000,000 and $500,000,000, .825% between $500,000,000 and $750,000,000 and .800% on the excess over $750,000,000 of the average net assets of the Fund. 15. Stock Index Fund: .270% of the first $500,000,000 and .260% on the excess over $500,000,000 of the average net assets of the Fund. -8- 16. Small Cap Index Fund: .280% of the first $500,000,000 and .270% on the excess over $500,000,000 of the average net assets of the Fund. 17. Socially Responsible Fund: .650% of the average net assets of the Fund. 18. High Yield Bond Fund : .825% of the first $200,000,000, .725% between $200,000,000 and $500,000,000, and .675% on the excess over $500,000,000 of the average net assets of the Fund. 19. Growth Lifestyle Fund: .100% of the average net assets of the Fund. 20. Moderate Growth Lifestyle Fund: .100% of the average net assets of the Fund. 21. Conservative Growth Lifestyle Fund: .100% of the average net assets of the Fund. 22. Municipal Money Market Fund: .350% of the average net assets of the Fund. 23. Science & Technology Fund: .900% of the average net assets of the Fund. 24. Capital Appreciation Fund: .900% of the first $50,000,000, .850% between $50,000,000 and $200,000,000, .825% between $200,000,000 and $500,000,000 and .800% on the excess over $500,000,000 of the average net assets of the Fund. 25. Tax-Sensitive Equity Fund: .850% of the first $50 million, .800% between $50,000,000 and $200,000,000, .775% between $200,000,000 and $500,000,000 and .700% on the excess over $500,000,000 of the average net assets of the Fund. 26. Equity-Income Fund: .750% of the first $50 million, .650% between $50,000,000 and $200,000,000, .550% on the excess over $200,000,000 of the average net assets of the Fund. The Percentage Fee for each Fund shall be accrued for each calendar day and the sum of the daily fee accruals shall be payable monthly to the Adviser. The daily fee accruals will be computed by multiplying the fraction of one over the number of calendar days in the year by the applicable annual rate described in the preceding paragraph, and multiplying this product by the net assets of the Fund as determined in accordance with the Fund's prospectus and statement of additional information as of the close of business on the previous business day on which the Fund was open for business. If this Agreement becomes effective or terminates before the end of any month, the fee for the period from the effective date to the end of such month or from the beginning of such month to the date of termination, as the case may be, shall be prorated according to the proportion which such period bears to the full month in which such effectiveness or termination occurs. -9- EX-99.(D)(2) 3 0003.txt SUBAVISORY AGREEMENT EXHIBIT (d)(2) NORTH AMERICAN FUNDS SUBADVISORY AGREEMENT AGREEMENT made as of June 1/st/ 2000, between American General Asset Management Corp., a Delaware corporation (the "Adviser"), and American General Investment Management L.P., a Delaware limited partnership (the "Subadviser"). In consideration of the mutual covenants contained herein, the parties agree as follows: 1. APPOINTMENT OF SUBADVISER The Subadviser undertakes to act as investment subadviser to, and, subject to the supervision of the Trustees of North American Funds (the "Trust") and the terms of this Agreement, to manage the investment and reinvestment of the assets of the series of the Trust specified in Appendix A to this Agreement as it shall be amended by the Adviser and the Subadviser from time to time (the "Funds"). The Subadviser will be an independent contractor and will have no authority to act for or represent the Trust or Adviser in any way except as expressly authorized in this Agreement or another writing by the Trust and Adviser. 2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST a. Subject always to the direction and control of the Trustees of the Trust, the Subadviser will manage the investments and determine the composition of the assets of the Funds in accordance with the Funds' registration statement, as amended. In fulfilling its obligations to manage the investments and reinvestments of the assets of the Funds, the Subadviser will: i. obtain and evaluate pertinent economic, statistical, financial and other information affecting the economy generally and individual companies or industries the securities of which are included in the Funds or are under consideration for inclusion in the Funds; ii. formulate and implement a continuous investment program for each Fund consistent with the investment objectives and related investment policies for each such Fund as described in the Trust's registration statement, as amended; iii. take whatever steps are necessary to implement these investment programs by the purchase and sale of securities including the placing of orders for such purchases and sales; iv. regularly report to the Trustees of the Trust with respect to the implementation of these investment programs; v. provide assistance to the Trust's Custodian regarding the fair value of securities held by the Funds for which market quotations are not readily available for purposes of enabling the Trust's Custodian to calculate net asset value; and vi. vote proxies in accordance with the Proxy Voting Policy of the Trust. b. The Subadviser, at its expense, will furnish (i) all necessary investment and management facilities, including salaries of personnel required for it to execute its duties faithfully, and (ii) administrative facilities, including bookkeeping, clerical personnel and equipment necessary for the efficient conduct of the investment affairs of the Funds (excluding determination of net asset value and shareholder accounting services). c. The Subadviser will select brokers and dealers to effect all transactions subject to the following conditions: The Subadviser will place all orders with brokers, dealers, or issuers, and will negotiate brokerage commissions if applicable. The Subadviser is directed at all times to seek to execute brokerage transactions for the Funds in accordance with such policies or practices as may be established by the Trustees and described in the Trust's registration statement as amended. The Subadviser may pay a broker-dealer which provides research and brokerage services a higher spread or commission for a particular transaction than otherwise might have been charged by another broker-dealer, if the Subadviser determines that the higher spread or commission is reasonable in relation to the value of the brokerage and research services that such broker-dealer provides, viewed in terms of either the particular transaction or the Subadviser's overall responsibilities with respect to accounts managed by the Subadviser. The Subadviser may use for the benefit of the Subadviser's other clients, or make available to companies affiliated with the Subadviser or to its directors for the benefit of its clients, any such brokerage and research services that the Subadviser obtains from brokers or dealers. d. On occasions when the Subadviser deems the purchase or sale of a security to be in the best interest of the Fund as well as other clients of the Subadviser, the Subadviser to the extent permitted by applicable laws and regulations, may, but shall be under no obligation to, aggregate the securities to be purchased or sold to attempt to obtain a more favorable price or lower brokerage commissions and efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Subadviser in the manner the Subadviser considers to be the most equitable and consistent with its fiduciary obligations to the Fund and to its other clients. e. The Subadviser will maintain all accounts, books and records with respect to the Funds as are required of an investment adviser of a registered investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act") and Investment Advisers Act of 1940, as amended (the "Investment Advisers Act") and the rules thereunder. f. The Subadviser agrees to observe and comply with Rule 17j-1 under the Investment Company Act and its Code of Ethics (which shall comply in all material respects with Rule 17j-1, as the same may be amended from time to time). On a quarterly basis, the Subadviser will either (i) certify to the Adviser that the Subadviser and its Access Persons have complied with the Subadviser's Code of Ethics with respect to the Fund or (ii) identify any material violations which have occurred with respect to the Fund. In addition, the Subadviser will report at least annually to the Adviser concerning any other violations of the Subadviser's Code of Ethics which required significant remedial action and which were not previously reported. 3. COMPENSATION OF SUBADVISER The Adviser will pay the Subadviser with respect to each Fund the compensation specified in Appendix A to this Agreement. 4. LIABILITY OF SUBADVISER Neither the Subadviser nor any of its employees shall be liable to the Adviser or Trust for any loss suffered by the Adviser or Trust resulting from any error of judgment made in the good faith exercise of the Subadviser's investment discretion in connection with selecting Fund investments except for losses resulting from willful misfeasance, bad faith or gross negligence of, or from reckless disregard of, the duties of the Subadviser or any of its partners or employees; and neither the Subadviser nor any of its employees shall be liable to the Adviser or Trust for any loss suffered by the Adviser or Trust resulting from any other matters to which this Agreement relates (i.e., those - - other matters specified in Sections 2 and 8 of this Agreement), except for losses resulting from willful misfeasance, bad faith, or gross negligence in the performance of, or from disregard of, the duties of the Subadviser or any of its partners or employees. 5. SUPPLEMENTAL ARRANGEMENTS The Subadviser may enter into arrangements with other persons affiliated with the Subadviser to better enable it to fulfill its obligations under this Agreement for the provision of certain personnel and facilities to the 2 Subadviser. 6. CONFLICTS OF INTEREST It is understood that trustees, officers, agents and shareholders of the Trust are or may be interested in the Subadviser as trustees, officers, partners or otherwise; that directors, officers, agents and partners of the Subadviser are or may be interested in the Trust as trustees, officers, shareholders or otherwise; that the Subadviser may be interested in the Trust; and that the existence of any such dual interest shall not affect the validity hereof or of any transactions hereunder except as otherwise provided in the Agreement and Declaration of Trust of the Trust and the Certificate of Incorporation of the Subadviser, respectively, or by specific provision of applicable law. 7. REGULATION The Subadviser shall submit to all regulatory and administrative bodies having jurisdiction over the services provided pursuant to this Agreement any information, reports or other material which any such body by reason of this Agreement may request or require pursuant to applicable laws and regulations. 8. DURATION AND TERMINATION OF AGREEMENT This Agreement shall become effective with respect to each Fund on the later of (i) its execution, and (ii) the date of the meeting of the shareholders of the Fund, at which meeting this Agreement is approved by the vote of a majority of the outstanding voting securities (as defined in the Investment Company Act) of the Fund. The Agreement will continue in effect for a period more than two years from the date of its execution only so long as such continuance is specifically approved at least annually either by the Trustees of the Trust or by a majority of the outstanding voting securities of each of the Funds, provided that in either event such continuance shall also be approved by the vote of a majority of the Trustees of the Trust who are not interested persons (as defined in the Investment Company Act) of any party to this Agreement cast in person at a meeting called for the purpose of voting on such approval. The required shareholder approval of the Agreement or of any continuance of the Agreement shall be effective with respect to any Fund if a majority of the outstanding voting securities of the series (as defined in Rule 18f-2(h) under the Investment Company Act) of shares of that Fund votes to approve the Agreement or its continuance, notwithstanding that the Agreement or its continuance may not have been approved by a majority of the outstanding voting securities of (a) any other Fund affected by the Agreement or (b) all the series of the Trust. If the shareholders of any Fund fail to approve the New Sub-Advisory Agreement the Subadviser will continue to act as investment subadviser with respect to such Fund pending the required approval of the Agreement or its continuance or of any contract with the Subadviser or a different adviser or subadviser or other definitive action; provided, that the compensation received by the Subadviser in respect of such Fund during such period is in compliance with Rule 15a-4 under the Investment Company Act. This Agreement may be terminated at any time, without the payment of any penalty, by the Trustees of the Trust, by the vote of a majority of the outstanding voting securities of the Trust, or with respect to any Fund by the vote of a majority of the outstanding voting securities of such Fund, on sixty days' written notice to the Adviser and the Subadviser, or by the Adviser or Subadviser on sixty days' written notice to the Trust and the other party. This agreement will automatically terminate, without the payment of any penalty, in the event of its assignment (as defined in the Investment Company Act) or in the event the Advisory Agreement between the Adviser and the Trust terminates for any reason. 9. PROVISION OF CERTAIN INFORMATION BY SUBADVISER The Subadviser will promptly notify the Adviser in writing of the occurrence of any of the following 3 events: a. the Subadviser fails to be registered as an investment adviser under the Investment Advisers Act or under the laws of any jurisdiction in which the Subadviser is required to be registered as an investment adviser in order to perform its obligations under this Agreement; b. the Subadviser is served or otherwise receives notice of any action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, public board or body, involving the affairs of the Trust; and c. any change in actual control or management of the Subadviser or the portfolio manager of any Fund. 10. PROVISION OF CERTAIN INFORMATION BY THE ADVISER The Adviser shall furnish the Subadviser with copies of the Trust's Prospectus and Statement of Additional Information, and any reports made by the Trust to its shareholders, as soon as practicable after such documents become available. The Adviser shall furnish the Subadviser with any further documents, materials or information that the Subadviser may reasonably request to enable it to perform its duties pursuant to this Agreement. 11. SERVICES TO OTHER CLIENTS The Adviser understands, and has advised the Trust's Board of Trustees, that the Subadviser now acts, or may in the future act, as an investment adviser to fiduciary and other managed accounts and as investment adviser or subadviser to other investment companies. Further, the Adviser understands, and has advised the Trust's Board of Trustees that the Subadviser and its affiliates may give advice and take action for its accounts, including investment companies, which differs from advice given on the timing or nature of action taken for the Fund. The Subadviser is not obligated to initiate transaction for the Portfolio in any security which the Subadviser, its principals, affiliates or employees may purchase or sell for their own accounts or other clients. 12. AMENDMENTS TO THE AGREEMENT This Agreement may be amended by the parties only if such amendment is specifically approved by the vote of a majority of the outstanding voting securities of each of the Funds affected by the amendment and by the vote of a majority of the Trustees of the Trust who are not interested persons of any party to this Agreement cast in person at a meeting called for the purpose of voting on such approval. The required shareholder approval shall be effective with respect to any Fund if a majority of the outstanding voting securities of that Fund vote to approve the amendment, notwithstanding that the amendment may not have been approved by a majority of the outstanding voting securities of (a) any other Fund affected by the amendment or (b) all the series of the Trust. 13. ENTIRE AGREEMENT This Agreement contains the entire understanding and agreement of the parties. 14. HEADINGS The headings in the sections of this Agreement are inserted for convenience of reference only and shall not constitute a part hereof. 15. NOTICES All notices required to be given pursuant to this Agreement shall be delivered or mailed to the last known business address of the Trust or applicable party in person or by registered mail or a private mail or delivery service 4 providing the sender with notice of receipt. Notice shall be deemed given on the date delivered or mailed in accordance with this paragraph. 16. SEVERABILITY Should any portion of this Agreement for any reason be held to be void in law or in equity, the Agreement shall be construed, insofar as is possible, as if such portion had never been contained herein. 17. GOVERNING LAW The provisions of this Agreement shall be construed and interpreted in accordance with the laws of The Commonwealth of Massachusetts, or any of the applicable provisions of the Investment Company Act. To the extent that the laws of The Commonwealth of Massachusetts, or any of the provisions in this Agreement, conflict with applicable provisions of the Investment Company Act, the latter shall control. 18. LIMITATION OF LIABILITY The Amended and Restated Agreement and Declaration of Trust dated February 18, 1994, a copy of which, together with all amendments thereto (the "Declaration"), is on file in the office of the Secretary of The Commonwealth of Massachusetts, provides that the name "North American Funds" refers to the Trustees under the Declaration collectively as Trustees, but not as individuals or personally; and no Trustee, shareholder, officer, employee or agent of the Trust shall be held to any personal liability, nor shall resort be had to their private property, for the satisfaction of any obligation or claim, in connection with the affairs of the Trust or any portfolio thereof, but only the assets belonging to the Trust, or to the particular portfolio with which the obligee or claimant dealt, shall be liable. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal by their duly authorized officers as of the date first mentioned above. AMERICAN GENERAL ASSET MANAGEMENT CORP. by: /s/ ____________________________ AMERICAN GENERAL INVESTMENT MANAGEMENT, L.P. by: /s/ _______________________ 5 APPENDIX A ---------- The Subadviser shall serve as investment subadviser for the following Funds of the Trust. The Adviser will pay the Subadviser, as full compensation for all services provided under this Agreement, the fee computed separately for each such Fund at an annual rate as follows (the "Subadviser Percentage Fee"): 1. U.S. Government Securities Fund: .225% of the first $200,000,000, .15% between $200,000,000 and $500,000,000 and .10% on the excess over $500,000,000 of the average net assets of the Fund. 2. Municipal Bond Fund: .25% of the first $200,000,000, .20% between $200,000,000 and $500,000,000 and .15% on the excess over $500,000,000 of the average net assets of the Fund. 3. Strategic Income Fund: .35% of the first $200,000,000, .25% between $200,000,000 and $500,000,000 and .20% on the excess over $500,000,000 of the average net assets of the Fund. 4. Money Market Fund: .075% of the first $500,000,000 and .020% on the excess over $500,000,000 of the average net assets of the Fund. 5. Core Bond Fund: .25% of the first $200,000,000, .20% between $200,000,000 and $500,000,000 and .15% on the excess over $500,000,000 of the average net assets of the Fund. 6. High Yield Bond Fund: .450% of the first $200,000,000; .350% between $200,000,000 and $500,000,000 and .300% on the excess over $500,000,000 of the average net assets of the Fund. 7. Municipal Money Market Fund: .250% of the first $200,000,000; .200% between $200,000,000 and $500,000,000 and .150% on the excess over $500,000,000 of the average net assets of the Fund. 8. Stock Index Fund: .020% of the first $2 billion and .010% on the excess over $2 billion of the average net assets of the Fund. 9. Small Cap Index Fund: .030% of the first $150,000,000 and .020% on the excess over $150,000,000 of the average net assets of the Fund. 10. Socially Responsible Fund: .250% of the Fund's average daily assets. 11. Growth Lifestyle Fund: .100% of the Fund's average daily assets. 12. Moderate Growth Lifestyle Fund: .100% of the Fund's average daily assets. 13. Conservative Growth Lifestyle Fund: .100% of the Fund's average daily assets. The Subadviser Percentage Fee for each Fund shall be accrued for each calendar day and the sum of the daily fee accruals shall be paid monthly to the Subadviser. The daily fee accruals will be computed by multiplying the fraction of one over the number of calendar days in the year by the applicable annual rate described in the preceding paragraph, and multiplying this product by the net assets of the Fund as determined in accordance with the Trust's prospectus and statement of additional information as of the close of business on the previous business day on which the Trust was open for business. If this Agreement becomes effective or terminates before the end of any month, the fee (if any) for the period from the effective date to the end of such month or from the beginning of such month to the date of termination, as the case may be, shall be prorated according to the proportion which such period bears to the full month in which such effectiveness or termination occurs. 6 EX-99.(E)(2) 4 0004.txt DEALER AGREEMENT, FEBRUARY 1, 2001 EXHIBIT (e)(2) AMERICAN GENERAL FUNDS DISTRIBUTORS, INC. 286 Congress Street Boston, MA 02210 (800) 872-8037 NORTH AMERICAN FUNDS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DEALER AGREEMENT AGREEMENT dated as of February 1, 2001 by and among American General Funds Distributors, Inc. ("AGFD"), a Delaware corporation and _______________________ ("Selling Dealer"), each of whom is registered as a broker-dealer under the Securities and Exchange Act of 1934, as amended, and is a member of the National Association of Securities Dealers, Inc. ("NASD"). I. INTRODUCTION WHEREAS, AGFD has been appointed principal underwriter of the shares of one or more management investment companies registered under the Investment Company Act of 1940 (the "Act") engaged in a continuous offering of shares ("Fund" or "Funds") and has the rights as agent for the Funds to sell shares of the Funds; and WHEREAS, Selling Dealer wishes to participate in the distribution of the shares of the Funds; NOW THEREFORE, in consideration of the premises of the mutual covenants hereinafter contained, the parties hereto agree as follows: II. AGREEMENT TO SELL Subject to the terms of and conditions set forth in this Agreement, AGFD shall, acting as agent for the Funds and not as principal, sell shares of the Funds to Selling Dealer who shall, acting as principal (dealer) for its own account and not as broker or agent for, or employee of, AGFD or the Fund, resell such shares to the public. III. TERMS AND CONDITIONS All transactions in shares of the Funds shall be subject to the following terms and conditions: 1. Shares will be offered pursuant to the then current prospectus of a Fund. 2. Orders received from Selling Dealer will be accepted through AGFD only at the public offering price applicable to each order as set forth in the then current prospectus of a Fund. All orders from Selling Dealer will be confirmed by or on behalf of a Fund in writing. Procedures for processing orders shall be determined by AGFD and instructions relating thereto shall be forwarded to Selling Dealer from time to time. A Fund and AGFD each may accept or reject any order in their sole discretion. 3. AGFD will pay to Selling Dealer from its own assets, and not from Fund assets, such discounts or commission payments as specified in Schedule A hereto and in the circumstances set forth in the then current prospectus of a Fund. 1 4. If any shares of a Fund sold to Selling Dealer under the terms of this Agreement are tendered for redemption or repurchase within seven business days after the date of the confirmation of the original purchase by Selling Dealer, Selling Dealer shall forfeit its rights to any discount or commission with respect to such shares. AGFD shall notify Selling Dealer of any such redemption or repurchase within ten business days from the date on which the request for redemption or repurchase is delivered to AGFD or to a Fund, and Selling Dealer shall immediately refund to AGFD any discount or commission allowed or paid in connection with such sale. In the event of any such redemption or repurchase, AGFD shall refund to a Fund its share of the sales charge. 5. Selling Dealer shall purchase shares of a Fund only from the Fund through AGFD and from Selling Dealer's customers. It is expressly understood that Selling Dealer will not purchase shares subject to a periodic repurchase offer from its customers. If shares are purchased from a Fund, Selling Dealer agrees that all such purchases shall be made only to cover orders already received by Selling Dealer or for its own bona fide investment. If shares are purchased from customers, Selling Dealer agrees to pay such customers not less than the price to be paid by a Fund with respect to purchases accepted through AGFD at such time. 6. Selling Dealer shall sell shares only: (a) to customers at the public offering price which is the next determined net asset value per share after the order is received, in states where shares of the Fund may be legally sold by Selling Dealer and in accordance with the terms of the then current prospectus, registrations and permits of the Fund; and (b) to the Fund upon tender for redemption or repurchase, which redemption or repurchase shall be effected in the manner set forth in the then current prospectus of a Fund. In the event of such a tender, excluding those pursuant to Rule 23c-3 under the Act, if Selling Dealer acts as principal for its own account, it agrees to pay its customer not less than the price received from a Fund or AGFD acting for a Fund. If Selling Dealer acts as agent for its customer, it agrees not to charge the customer more than a fair commission for handling the transaction. 7. All sales of shares of a Fund by Selling Dealer shall be made at the public offering price as determined as set forth in the then current prospectus of a Fund, and the Selling Dealer shall not withhold orders from AGFD so as to profit as a result of such withholding. 8. AGFD will not forward to a Fund for acceptance any conditional order from Selling Dealer for the sale, repurchase or redemption of shares of the Fund. 9. Payment for shares ordered by Selling Dealer must be received by a Fund's transfer agent no later than three business days after the order from the Selling Dealer. If such payment is not so received, a Fund or AGFD as agent for a Fund reserves the right, without notice, to immediately cancel the sale, in which case Selling Dealer shall be held responsible for any loss, including loss of profit, suffered by AGFD or a Fund resulting from the failure of Selling Dealer to make payment as specified above. 10. Unless other arrangements for payment and delivery are made, shares of a Fund sold to Selling Dealer pursuant to this Agreement shall be available for delivery, against payment, at the office of State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, unless otherwise agreed to by AGFD. 11. No person is authorized to make any representations concerning the shares of a Fund except those contained in the then current prospectus of a Fund and in such other printed information subsequently issued by a Fund or AGFD as information supplemental to such prospectus. Any such supplemental materials shall not be modified by Selling Dealer without the prior written consent of AGFD. Moreover, Selling Dealer shall not make use of any advertisement or sales literature, which refers specifically to a Fund unless such material has been approved in writing by AGFD prior to the date of its first use by Selling Dealer. In 2 purchasing shares of a Fund from AGFD Selling Dealer shall rely solely on the representations contained in the then current prospectus of a Fund and supplemental information referred to above. 12. AGFD shall provide Selling Dealer upon request, without any expense to Selling Dealer, copies in reasonable numbers of the then current prospectus of a Fund, any information issued supplementing such prospectus and such other material as AGFD determines is necessary or desirable for use in connection with sales of the shares of a Fund. 13. A Fund and AGFD each reserve the right in their discretion, without notice, to suspend sales or withdraw the offering of the shares of a Fund entirely. 14. AGFD will, upon request, inform Selling Dealer as to the states in which shares of a Fund have been qualified for sale under, or are exempt from the requirements of, applicable state securities laws. AGFD assumes no responsibility or obligation, however, as to Selling Dealer's right to sell shares of a Fund in any jurisdiction. 15. Selling Dealer appoints a Fund's transfer agent as its agent to execute the purchase transaction of shares of a Fund in accordance with the terms and provisions of any account, program, plan, or service established or used by Selling Dealer's customers and to confirm each purchase to such customers on Selling Dealer's behalf. Selling Dealer guarantees the legal capacity of its customers purchasing shares of a Fund and any other person or entity in whose name shares are to be registered. 16. In the event of a tender pursuant to a Rule 23c-3 periodic repurchase offer conducted in accordance with procedures described in a Fund's prospectus, Selling Dealer may act as principal for its own account or as agent for its customer. Selling Dealer shall notify AGFD daily during the pendency of a repurchase offer of the number of shares tendered by its customers, or by itself acting as principal, for repurchase. Selling Dealer will be responsible for the receipt of tendered shares by its customers, and forwarding such tenders to a Fund or AGFD in a timely fashion, according to the terms of the repurchase offer, and shall indemnify and hold harmless AGFD from any claims relating to a customer's participation in a repurchase offer or failure to so participate. Selling Dealer agrees to cooperate reasonably with a Fund, AGFD or any affiliate of a Fund or AGFD in the conduct of repurchase offers. 17. Selling Dealer agrees that it will not sell any shares of a Fund subject to a periodic repurchase offer to any account over which it exercises discretionary authority. 18. Selling Dealer shall provide shareholder servicing, such as, but not limited to, responding to customer inquiries and providing account information. GENERAL PROVISIONS A. WAIVER Failure of any party to insist upon strict compliance with any of the terms and conditions of this Agreement shall not be construed as a waiver of any of the terms and conditions, but the same shall remain in full force and effect. No waiver of any of the provisions of this Agreement shall be deemed to be, or shall constitute, a waiver of any other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. B. BINDING EFFECT This Agreement shall be binding on and shall inure to the benefit of parties to it and respective successors and assigns; provided that Selling Dealer may assign this Agreement or any of the rights and obligations hereunder 3 only with the prior written consent of AGFD. AGFD may assign this Agreement without the consent of Selling Dealer. C. REGULATIONS All parties agree to observe and comply with the existing laws, rules and regulations of applicable local, state, and federal regulatory authorities and with those which may be enacted or adopted while this Agreement is in force regulating the business contemplated hereby in any jurisdiction in which the business described herein is to be transacted. D. CONFIDENTIALITY The parties hereto agree that all books, records, information, computer programs and data pertaining to the business of any other party which are exchanged or received pursuant to the registration or the carrying out of this Agreement shall be kept confidential and shall not be voluntarily disclosed to any other person, except as may be permitted hereunder or may be required by law. This provision shall not apply to information that has been lawfully obtained from other sources or independently developed by a party without reference to or reliance on information obtained from any other party hereto. AGFD agrees that it will not disclose "nonpublic personal information" as defined under Regulation S-P (Subtitle A of Title V of the Gramm-Leach-Bliley Act) except as required by law. E. DISPUTES All parties to this Agreement agree to abide by the NASD's Business Conduct Rules and agree that any dispute arising hereunder shall be submitted to arbitration held in Boston, Massachusetts in accordance with the Code of Arbitration Procedure of the NASD, or similar rules or codes, in effect at the time of submission of any such dispute. F. GOVERNING LAW This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Massachusetts. G. AMENDMENT OF AGREEMENT AGFD reserves the right to amend this Agreement at any time and Selling Dealer agrees that an order to purchase shares of a Fund placed after notice of any such amendment shall constitute Selling Dealer's consent to any such amendment. H. TERMINATION Each of the parties to this Agreement has the right to cancel this Agreement with or without cause on 30 days written notice to the other party. Each of the parties represents that it is a member in good standing of the NASD and agrees that termination or suspension of such membership at any time shall immediately terminate this Agreement. I. INDEMNIFICATION 4 Selling Dealer shall indemnify and hold AGFD harmless from and against any and all losses, damages, costs, charges, reasonable counsel fees, payments, expenses and liabilities arising out of or attributable to: a) Selling Dealer's refusal or failure to comply with the provisions of this Agreement or applicable law or with instructions properly given hereunder; b) Selling Dealer's performance of or failure to perform its obligations under this Agreement; or c) The bad faith, negligence or willful misconduct of Selling Dealer in the performance of its obligations under this Agreement. The indemnification obligations contained herein shall survive the termination of this Agreement. J. LIABILITY AGFD shall have full authority to take such action, as it may deem advisable in respect of all matters pertaining to the continuous offering. AGFD shall be under no liability to Selling Dealer except for lack of good faith, gross negligence, willful misconduct, and for obligations expressly assumed by AGFD in this Agreement. Nothing contained in this paragraph is intended to operate as, and the provisions of this paragraph shall not in any way whatsoever constitute, a waiver by Selling Dealer of compliance with any provision of the Securities and Exchange Act of 1934, or of the rules and regulations of the Securities and Exchange Commission issued under the Securities Act. K. PROSPECTUS If the Prospectus contains any provisions inconsistent with the terms of the Agreement, the Prospectus shall control. 5 L. NOTICES All notices or communications shall be sent to the address shown below, or to such other address as the party may request by giving written notice to this other party. For: For: American General Funds Distributors, Inc. Selling Dealer:_______________________________ Attention: Thomas J. Brown 286 Congress Street, 2/nd/ Floor Address:______________________________________ Boston, MA 02210 Tel: (800) 872-8037 City and Zip Code:____________________________ Tel:__________________________________________ Attention:____________________________________ Selling Dealer CRD #:_________________________
SIGNATURES American General Funds Distributors, Inc. Selling Dealer: By:_____________________________________ By:___________________________________________ Joseph T. Grause, Jr. President Title:________________________________________ ____________________________________ Back Office/Operations Contact Tel:________________________________
6 EX-99.(G)(3) 5 0005.txt CUSTODIAN AGREEMENT AMENDMENT JULY 1, 1996 EXHIBIT (g)(3) AMENDMENT TO CUSTODIAN CONTRACT Agreement made by and between State Street Bank and Trust Company (the "Custodian") and North American Funds (the "Fund"). WHEREAS, the Custodian and the Fund are parties to a custodian contract dated June 1, 1989 (the "Custodian Contract") governing the terms and conditions under which the Custodian maintains custody of the securities and other assets of the Fund; and WHEREAS, the Custodian and the Fund desire to amend the terms and conditions under which the Custodian maintains the Fund's securities and other non-cash property in the custody of certain foreign sub-custodians in conformity with the requirements of Rule 17f-5 under the Investment Company Act of 1940, as amended; NOW THEREFORE, in consideration of the premises and covenants contained herein, the Custodian and the Fund hereby amend the Custodian Contract by the addition of the following terms and provisions; 1. Notwithstanding any provisions to the contrary set forth in the Custodian Contract, the Custodian may hold securities and other non-cash property for all of its customers, including the Fund, with a foreign sub- custodian in a single account that is identified as belonging to the Custodian for the benefit of its customers, provided however, that (i) the records of the -------- ------- Custodian with respect to securities and other non-cash property of the Fund which are maintained in such account shall identify by book-entry those securities and other non-cash property belonging to the Fund and (ii) the Custodian shall require that securities and other non-cash property so held by the foreign sub-custodian be held separately from any assets of the foreign sub- custodian or of others. 2. Except as specifically superseded or modified herein, the terms and provisions of the Custodian Contract shall continue to apply with full force and effect. IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed as a sealed instrument in its name and behalf by its duly authorized representative this 1st day of July, 1996. NORTH AMERICAN FUNDS By: /s/ Thomas J. Brown ------------------------------ Title: Vice President ---------------------------- STATE STREET BANK AND TRUST COMPANY By: /s/ Michael E. Hagerty 7-08-96 ------------------------------- Title: Michael E. Hagerty ---------------------------- Vice President EX-99.(G)(4) 6 0006.txt CUSTODIAN AGREEMENT AMENDMENT DECEMBER 22, 2000 EXHIBIT (g)(4) AMENDMENT TO CUSTODIAN CONTRACT This Amendment to the Custodian Contract is made as of December 22, 2000 by and between North American Funds (formerly North American Security Trust, the "Fund") and State Street Bank and Trust Company (the "Custodian"). Capitalized terms used in this Amendment without definition shall have the respective meanings given to such terms in the Custodian Contract referred to below. WHEREAS, the Fund and the Custodian entered into a Custodian Contract dated as of June 1, 1989 (as amended and in effect from time to time, the "Contract"); and WHEREAS, the Fund is authorized to issue shares in separate series, with each such series representing interests in a separate portfolio of securities and other assets, and the Fund has made *[confirm with Jack] Small/Mid Cap Fund, International Small Cap Fund, International Equity Fund, Global Equity Fund, Growth Equity Fund, Emerging Growth Fund, Growth and Income Fund, Equity Income Trust, Balanced Fund, Strategic Income Fund, Investment Quality Bond Fund, U.S. Government Securities Fund, Tax - Sensitive Equity Fund, National Municipal Bond Fund, California Municipal Bond Fund and Money Market Fund subject to the Contract (each such series, together with all other series subsequently established by the Fund and made subject to the Contract in accordance with the terms thereof, shall be referred to as a "Portfolio", and, collectively, the "Portfolios"); and WHEREAS, the Fund and the Custodian desire to amend certain provisions of the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") and the adoption of Rule 17f-7 ("Rule 17f-7") promulgated under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Fund and the Custodian desire to amend and restate certain other provisions of the Contract relating to the custody of assets of each of the Portfolios held outside of the United States. NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter contained, the parties hereby agree to amend the Contract, pursuant to the terms thereof, as follows: I. Article 3 of the Contract is hereby deleted, and Articles 4 through 19 of the Contract are hereby renumbered, as of the effective date of this Amendment, as Articles 5 through 20, respectively. II. New Articles 3 and 4 of the Contract are hereby added, as of the effective date of this Amendment, as set forth below. 3. Provisions Relating to Rules 17f-5 and 17f-7 -------------------------------------------- 3.1. Definitions. Capitalized terms in this Amendment shall have the following ----------- meanings: "Country Risk" means all factors reasonably related to the systemic risk of holding Foreign Assets in a particular country including, but not limited to, such country's political environment, economic and financial infrastructure (including any Eligible Securities Depository operating in the country), prevailing or developing custody and settlement practices, and laws and regulations applicable to the safekeeping and recovery of Foreign Assets held in custody in that country. "Eligible Foreign Custodian" has the meaning set forth in section (a)(l) of Rule 17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as defined in Rule 17f-5), a bank holding company meeting the requirements of an Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the requirements of a custodian under Section 17(f) of the 1940 Act; the term does not include any Eligible Securities Depository. "Eligible Securities Depository" has the meaning set forth in section (b)(1) of Rule 17f-7. "Foreign Assets" mean: any of the Portfolios' investments (including foreign currencies) for which the primary market is outside the United States and such cash and cash equivalents as are reasonably necessary to effect the Portfolios' transactions in such investments. "Foreign Custody Manager" has the meaning set forth in section (a)(3) of Rule 17f-5. 3.2. The Custodian as Foreign Custody Manager. ---------------------------------------- 3.2.1 Delegation to the Custodian as Foreign Custody Manager. The Fund, ------------------------------------------------------ by resolution adopted by its Board of Trustees (the "Board"), hereby delegates to the Custodian, subject to Section (b) of Rule 17f-5, the responsibilities set forth in this Section 3.2 with respect to Foreign Assets of the Portfolios held outside the United States, and the Custodian hereby accepts such delegation as Foreign Custody Manager with respect to the Portfolios. 3.2.2 Countries Covered. The Foreign Custody Manager shall be ----------------- responsible for performing the delegated responsibilities defined below only with respect to the countries and custody arrangements for each such country listed on Schedule A to this Contract, which list of countries may be amended from time to time by the Fund with the agreement of the Foreign Custody Manager. The Foreign Custody Manager shall list on Schedule A the Eligible Foreign Custodians selected by the Foreign Custody Manager to maintain the assets of the Portfolios, which list of Eligible Foreign Custodians may be 2 amended from time to time in the sole discretion of the Foreign Custody Manager. The Foreign Custody Manager will provide amended versions of Schedule A in accordance with Section 3.2.5 hereof. Upon the receipt by the Foreign Custody Manager of Proper Instructions to open an account or to place or maintain Foreign Assets in a country listed on Schedule A, and the fulfillment by the Fund, on behalf of the Portfolios, of the applicable account opening requirements for such country, the Foreign Custody Manager shall be deemed to have been delegated by the Board on behalf of the Portfolios responsibility as Foreign Custody Manager with respect to that country and to have accepted such delegation. Execution of this Amendment by the Fund shall be deemed to be a Proper Instruction to open an account, or to place or maintain Foreign Assets, in each country listed on Schedule A in which the Custodian has previously placed or currently maintains Foreign Assets pursuant to the terms of the Contract. Following the receipt of Proper Instructions directing the Foreign Custody Manager to close the account of a Portfolio with the Eligible Foreign Custodian selected by the Foreign Custody Manager in a designated country, the delegation by the Board on behalf of the Portfolios to the Custodian as Foreign Custody Manager for that country shall be deemed to have been withdrawn and the Custodian shall immediately cease to be the Foreign Custody Manager of the Portfolios with respect to that country. The Foreign Custody Manager may withdraw its acceptance of delegated responsibilities with respect to a designated country upon written notice to the Fund. Thirty days (or such longer period to which the parties agree in writing) after receipt of any such notice by the Fund, the Custodian shall have no further responsibility in its capacity as Foreign Custody Manager to the Fund with respect to the country as to which the Custodian's acceptance of delegation is withdrawn. 3.2.3 Scope of Delegated Responsibilities: ----------------------------------- (a) Selection of Eligible Foreign Custodians. Subject to the ---------------------------------------- provisions of this Section 3.2, the Foreign Custody Manager may place and maintain the Foreign Assets in the care of the Eligible Foreign Custodian selected by the Foreign Custody Manager in each country listed on Schedule A, as amended from time to time. In performing its delegated responsibilities as Foreign Custody Manager to place or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign Custody Manager shall determine that the Foreign Assets will be subject to reasonable care, based on the standards applicable to custodians in the country in which the Foreign Assets will be held by that Eligible Foreign Custodian, after considering all factors relevant to the safekeeping of such assets, including, without limitation the factors specified in Rule 17f-5(c)(l). (b) Contracts With Eligible Foreign Custodians. The Foreign ------------------------------------------ Custody Manager shall determine that the contract governing the foreign custody 3 arrangements with each Eligible Foreign Custodian selected by the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2). (c) Monitoring. In each case in which the Foreign Custody ---------- Manager maintains Foreign Assets with an Eligible Foreign Custodian selected by the Foreign Custody Manager, the Foreign Custody Manager shall establish a system to monitor (i) the appropriateness of maintaining the Foreign Assets with such Eligible Foreign Custodian and (ii) the contract governing the custody arrangements established by the Foreign Custody Manager with the Eligible Foreign Custodian. In the event the Foreign Custody Manager determines that the custody arrangements with an Eligible Foreign Custodian it has selected are no longer appropriate, the Foreign Custody Manager shall notify the Board in accordance with Section 3.2.5 hereunder. 3.2.4 Guidelines for the Exercise of Delegated Authority. For purposes -------------------------------------------------- of this Section 3.2, the Board shall be deemed to have considered and determined to accept such Country Risk as is incurred by placing and maintaining the Foreign Assets in each country for which the Custodian is serving as Foreign Custody Manager of the Portfolios. 3.2.5 Reporting Requirements. The Foreign Custody Manager shall report ---------------------- the withdrawal of the Foreign Assets from an Eligible Foreign Custodian and the placement of such Foreign Assets with another Eligible Foreign Custodian by providing to the Board an amended Schedule A at the end of the calendar quarter in which an amendment to such Schedule has occurred. The Foreign Custody Manager shall make written reports notifying the Board of any other material change in the foreign custody arrangements of the Portfolios described in this Section 3.2 after the occurrence of the material change. 3.2.6 Standard of Care as Foreign Custody Manager of a Portfolio. In ---------------------------------------------------------- performing the responsibilities delegated to it, the Foreign Custody Manager agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of assets of management investment companies registered under the 1940 Act would exercise. 3.2.7 Representations with Respect to Rule 17f-5. The Foreign Custody ------------------------------------------ Manager represents to the Fund that it is a U.S. Bank as defined in section (a)(7) of Rule 17f-5. The Fund represents to the Custodian that the Board has determined that it is reasonable for the Board to rely on the Custodian to perform the responsibilities delegated pursuant to this Contract to the Custodian as the Foreign Custody Manager of the Portfolios. 3.2.8 Effective Date and Termination of the Custodian as Foreign ---------------------------------------------------------- Custody Manager. The Board's delegation to the Custodian as Foreign Custody - --------------- Manager of the Portfolios shall be effective as of the date hereof and shall remain in effect until terminated at any time, without penalty, by written notice from the terminating party to the non-terminating party. Termination will become effective thirty (30) days after receipt by the non-terminating party of such notice. The provisions of Section 3.2.2 4 hereof shall govern the delegation to and termination of the Custodian as Foreign Custody Manager of the Portfolios with respect to designated countries. 3.3 Eligible Securities Depositories. -------------------------------- 3.3.1 Analysis and Monitoring. The Custodian shall (a) provide the Fund ----------------------- (or its duly-authorized investment manager or investment adviser) with an analysis of the custody risks associated with maintaining assets with the Eligible Securities Depositories set forth on Schedule B hereto in accordance with section (a)(l)(i)(A) of Rule 17f-7, and (b) monitor such risks on a continuing basis, and promptly notify the Fund (or its duly-authorized investment manager or investment adviser) of any material change in such risks, in accordance with section (a)(l)(i)(B) of Rule 17f-7. 3.3.2 Standard of Care. The Custodian agrees to exercise reasonable ---------------- care, prudence and diligence in performing the duties set forth in Section 3.3.1. 4. Duties of the Custodian with Respect to Property of the Portfolios Held ----------------------------------------------------------------------- Outside the United States. ------------------------- 4.1 Definitions. Capitalized terms in this Article 4 shall have the following ----------- meanings: "Foreign Securities System" means an Eligible Securities Depository listed on Schedule B hereto. "Foreign Sub-Custodian" means a foreign banking institution serving as an Eligible Foreign Custodian. 4.2. Holding Securities. The Custodian shall identify on its books as belonging ------------------ to the Portfolios the foreign securities held by each Foreign Sub-Custodian or Foreign Securities System. The Custodian may hold foreign securities for all of its customers, including the Portfolios, with any Foreign Sub-Custodian in an account that is identified as belonging to the Custodian for the benefit of its customers, provided however, that (i) the records of the Custodian with respect to foreign securities of the Portfolios which are maintained in such account shall identify those securities as belonging to the Portfolios and (ii), to the extent permitted and customary in the market in which the account is maintained, the Custodian shall require that securities so held by the Foreign Sub- Custodian be held separately from any assets of such Foreign Sub-Custodian or of other customers of such Foreign Sub-Custodian. 4.3. Foreign Securities Systems. Foreign securities shall be maintained in a -------------------------- Foreign Securities System in a designated country through arrangements implemented by the Custodian or a Foreign Sub-Custodian, as applicable, in such country. 5 4.4. Transactions in Foreign Custody Account. --------------------------------------- 4.4.1. Delivery of Foreign Assets. The Custodian or a Foreign Sub- -------------------------- Custodian shall release and deliver foreign securities of the Portfolios held by the Custodian or such Foreign Sub-Custodian, or in a Foreign Securities System account, only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases: (i) upon the sale of such foreign securities for the Portfolio in accordance with commercially reasonable market practice in the country where such foreign securities are held or traded, including, without limitation: (A) delivery against expectation of receiving later payment; or (B) in the case of a sale effected through a Foreign Securities System, in accordance with the rules governing the operation of the Foreign Securities System; (ii) in connection with any repurchase agreement related to foreign securities; (iii) to the depository agent in connection with tender or other similar offers for foreign securities of the Portfolios; (iv) to the issuer thereof or its agent when such foreign securities are called, redeemed, retired or otherwise become payable; (v) to the issuer thereof, or its agent, for transfer into the name of the Custodian (or the name of the respective Foreign Sub- Custodian or of any nominee of the Custodian or such Foreign Sub- Custodian) or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; (vi) to brokers, clearing banks or other clearing agents for examination or trade execution in accordance with market custom; provided that in any such case the Foreign Sub-Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Foreign Sub-Custodian's own negligence or willful misconduct; (vii) for exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; (viii) in the case of warrants, rights or similar foreign securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities; 6 (ix) for delivery as security in connection with any borrowing by the Portfolios requiring a pledge of assets by the Portfolios; (x) in connection with trading in options and futures contracts, including delivery as original margin and variation margin; (xi) in connection with the lending of foreign securities; and (xii) for any other purpose, but only upon receipt of Proper Instructions specifying the foreign securities to be delivered and naming the person or persons to whom delivery of such securities shall be made. 4.4.2. Payment of Portfolio Monies. Upon receipt of Proper Instructions, --------------------------- which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out, or direct the respective Foreign Sub-Custodian or the respective Foreign Securities System to pay out, monies of a Portfolio in the following cases only: (i) upon the purchase of foreign securities for the Portfolio, unless otherwise directed by Proper Instructions, by (A) delivering money to the seller thereof or to a dealer therefor (or an agent for such seller or dealer) against expectation of receiving later delivery of such foreign securities; or (B) in the case of a purchase effected through a Foreign Securities System, in accordance with the rules governing the operation of such Foreign Securities System; (ii) in connection with the conversion, exchange or surrender of foreign securities of the Portfolio; (iii) for the payment of any expense or liability of the Portfolio, including but not limited to the following payments: interest, taxes, investment advisory fees, transfer agency fees, fees under this Contract, legal fees, accounting fees, and other operating expenses; (iv) for the purchase or sale of foreign exchange or foreign exchange contracts for the Portfolio, including transactions executed with or through the Custodian or its Foreign Sub-Custodians; (v) in connection with trading in options and futures contracts, including delivery as original margin and variation margin; (vi) for payment of part or all of the dividends received in respect of securities sold short; (vii) in connection with the borrowing or lending of foreign securities; and 7 (viii) for any other purpose, but only upon receipt of Proper Instructions specifying the amount of such payment and naming the person or persons to whom such payment is to be made. 4.4.3. Market Conditions. Notwithstanding any provision of this Contract ----------------- to the contrary, settlement and payment for Foreign Assets received for the account of the Portfolios and delivery of Foreign Assets maintained for the account of the Portfolios may be effected in accordance with the customary established securities trading or processing practices and procedures in the country or market in which the transaction occurs, including, without limitation, delivering Foreign Assets to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) with the expectation of receiving later payment for such Foreign Assets from such purchaser or dealer. The Custodian shall provide to the Board the information with respect to custody and settlement practices in countries in which the Custodian employs a Foreign Sub-Custodian described on Schedule C hereto at the time or times set forth on such Schedule. The Custodian may revise Schedule C from time to time, provided that no such revision shall result in the Board being provided with substantively less information than had been previously provided hereunder. 4.5. Registration of Foreign Securities. The foreign securities maintained in ---------------------------------- the custody of a Foreign Sub-Custodian (other than bearer securities) shall be registered in the name of the applicable Portfolio or in the name of the Custodian or in the name of any Foreign Sub-Custodian or in the name of any nominee of the foregoing, and the Fund on behalf of such Portfolio agrees to hold any such nominee harmless from any liability as a holder of record of such foreign securities. The Custodian or a Foreign Sub-Custodian shall not be obligated to accept securities on behalf of a Portfolio under the terms of this Contract unless the form of such securities and the manner in which they are delivered are in accordance with reasonable market practice. 4.6 Bank Accounts. The Custodian shall identify on its books as belonging to ------------- the Fund cash (including cash denominated in foreign currencies) deposited with the Custodian. Where the Custodian is unable to maintain, or market practice does not facilitate the maintenance of, cash on the books of the Custodian, a bank account or bank accounts shall be opened and maintained outside the United States on behalf of a Portfolio with a Foreign Sub-Custodian. All accounts referred to in this Section shall be subject only to draft or order by the Custodian (or, if applicable, such Foreign Sub-Custodian) acting pursuant to the terms of this Agreement to hold cash received by or from or for the account of the Portfolio. Cash maintained on the books of the Custodian (including its branches, subsidiaries and affiliates), regardless of currency denomination, is maintained in bank accounts established under, and subject to the laws of, The Commonwealth of Massachusetts. 8 4.7. Collection of Income. The Custodian shall use reasonable commercial -------------------- efforts to collect all income and other payments with respect to the Foreign Assets held hereunder to which the Portfolios shall be entitled and shall credit such income, as collected, to the applicable Portfolio. In the event that extraordinary measures are required to collect such income, the Fund and the Custodian shall consult as to such measures and as to the compensation and expenses of the Custodian relating to such measures. 4.8 Shareholder Rights. With respect to the foreign securities held pursuant ------------------ to this Article 4, the Custodian will use reasonable commercial efforts to facilitate the exercise of voting and other shareholder rights, subject always to the laws, regulations and practical constraints that may exist in the country where such securities are issued. The Fund acknowledges that local conditions, including lack of regulation, onerous procedural obligations, lack of notice and other factors may have the effect of severely limiting the ability of the Fund to exercise shareholder rights. 4.9. Communications Relating to Foreign Securities. The Custodian shall --------------------------------------------- transmit promptly to the Fund written information with respect to materials received by the Custodian via the Foreign Sub-Custodians from issuers of the foreign securities being held for the account of the Portfolios (including, without limitation, pendency of calls and maturities of foreign securities and expirations of rights in connection therewith). With respect to tender or exchange offers, the Custodian shall transmit promptly to the Fund written information with respect to materials so received by the Custodian from issuers of the foreign securities whose tender or exchange is sought or from the party (or its agents) making the tender or exchange offer. The Custodian shall not be liable for any untimely exercise of any tender, exchange or other right or power in connection with foreign securities or other property of the Portfolios at any time held by it unless (i) the Custodian or the respective Foreign Sub-Custodian is in actual possession of such foreign securities or property and (ii) the Custodian receives Proper Instructions with regard to the exercise of any such right or power, and both (i) and (ii) occur at least three business days prior to the date on which the Custodian is to take action to exercise such right or power. 4.10. Liability of Foreign Sub-Custodians. Each agreement pursuant to which the ----------------------------------- Custodian employs a Foreign Sub-Custodian shall, to the extent possible, require the Foreign Sub-Custodian to exercise reasonable care in the performance of its duties, and to indemnify, and hold harmless, the Custodian from and against any loss, damage, cost, expense, liability or claim arising out of or in connection with the Foreign Sub-Custodian's performance of such obligations. At the Fund's election, the Portfolios shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a Foreign Sub-Custodian as a consequence of any such loss, damage, cost, expense, liability or claim if and to the extent that the Portfolios have not been made whole for any such loss, damage, cost, expense, liability or claim. 4.11. Tax Law. The Custodian shall have no responsibility or liability for any ------- obligations now or hereafter imposed on the Fund, the Portfolios or the Custodian as custodian of the Portfolios by the tax law of the United States or of any state or political 9 subdivision thereof. It shall be the responsibility of the Fund to notify the Custodian of the obligations imposed on the Fund with respect to the Portfolios or the Custodian as custodian of the Portfolios by the tax law of countries other than those mentioned in the above sentence, including responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting. The sole responsibility of the Custodian with regard to such tax law shall be to use reasonable efforts to assist the Fund with respect to any claim for exemption or refund under the tax law of countries for which the Fund has provided such information. 4.12. Liability of Custodian. Except as may arise from the Custodian's own ---------------------- negligence or willful misconduct or the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be without liability to the Fund for any loss, liability, claim or expense resulting from or caused by anything which is part of Country Risk. The Custodian shall be liable for the acts or omissions of a Foreign Sub-Custodian to the same extent as set forth with respect to sub-custodians generally in the Contract and, regardless of whether assets are maintained in the custody of a Foreign Sub-Custodian or a Foreign Securities System, the Custodian shall not be liable for any loss, damage, cost, expense, liability or claim resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism, or any other loss where the Sub-Custodian has otherwise acted with reasonable care. III. Except as specifically superseded or modified herein, the terms and provisions of the Contract shall continue to apply with full force and effect. In the event of any conflict between the terms of the Contract prior to this Amendment and this Amendment, the terms of this Amendment shall prevail. If the Custodian is delegated the responsibilities of Foreign Custody Manager pursuant to the terms of Article 3 hereof, in the event of any conflict between the provisions of Articles 3 and 4 hereof, the provisions of Article 3 shall prevail. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 10 IN WITNESS WHEREOF, each of the parties has caused this Amendment to be executed in its name and behalf by its duly authorized representative as of the date first above written. Witnessed By: STATE STREET BANK and TRUST COMPANY /s/ Nelson H. Graves - ------------------------- Nelson H. Graves Vice President and Counsel By: /s/ Ronald E. Logue ------------------------------------ Name: Ronald E. Logue Title: Vice Chairman and Chief Operating Officer Witnessed By: NORTH AMERICAN FUNDS /s/ John I. Fitzgerald - ------------------------- Name: John I. Fitzgerald By: /s/ Thomas J. Brown Title: Vice President --------------------------------------- and Secretary Name: Thomas J. Brown Title: Treasurer and Vice President STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS Country Subcustodian Argentina Citibank, N.A. Australia Westpac Banking Corporation Austria Erste Bank der Osterreichischen Sparkassen AG Bahrain HSBC Bank Middle East (as delegate of The Hongkong and Shanghai Banking Corporation Limited) Bangladesh Standard Chartered Bank Belgium Fortis Bank nv-sa Bermuda The Bank of Bermuda Limited Bolivia Citibank, N.A. Botswana Barclays Bank of Botswana Limited Brazil Citibank, N.A. Bulgaria ING Bank N.V. Canada State Street Trust Company Canada Chile Citibank, N.A. People's Republic The Hongkong and Shanghai of China Banking Corporation Limited, Shanghai and Shenzhen branches Colombia Cititrust Colombia S.A. Sociedad Fiduciaria 10/12/00 1 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS Country Subcustodian Costa Rica Banco BCT S.A. Croatia Privredna Banka Zagreb d.d Cyprus The Cyprus Popular Bank Ltd. Czech Republic Ceskoslovenska Obchodni Banka, A.S. Denmark Den Danske Bank Ecuador Citibank, N.A. Egypt Egyptian British Bank S.A.E. (as delegate of The Hongkong and Shanghai Banking Corporation Limited) Estonia Hansabank Finland Merita Bank Plc. France BNP Paribas, S.A. Germany Dresdner Bank AG Ghana Barclays Bank of Ghana Limited Greece National Bank of Greece S.A. Hong Kong Standard Chartered Bank Hungary Citibank Rt. 10/12/00 2 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS Country Subcustodian Iceland Icebank Ltd. India Deutsche Bank AG The Hongkong and Shanghai Banking Corporation Limited Indonesia Standard Chartered Bank Ireland Bank of Ireland Israel Bank Hapoalim B.M. Italy BNP Paribas, Italian Branch Ivory Coast Societe Generale de Banques en Cote d'Ivoire Jamaica Scotiabank Jamaica Trust and Merchant Bank Ltd. Japan The Fuji Bank, Limited The Sumitomo Bank, Limited Jordan HSBC Bank Middle East (as delegate of The Hongkong and Shanghai Banking Corporation Limited) Kazakhstan HSBC Bank Kazakhstan Kenya Barclays Bank of Kenya Limited Republic of Korea The Hongkong and Shanghai Banking Corporation Limited 10/12/00 3 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS Country Subcustodian Latvia A/s Hansabanka Lebanon HSBC Bank Middle East (as delegate of The Hongkong and Shanghai Banking Corporation Limited) Lithuania Vilniaus Bankas AB Malaysia Standard Chartered Bank Malaysia Berhad Mauritius The Hongkong and Shanghai Banking Corporation Limited Mexico Citibank Mexico, S.A. Morocco Banque Commerciale du Maroc Namibia Standard Bank Namibia Limited Netherlands Fortis Bank (Nederland) N.V. New Zealand ANZ Banking Group (New Zealand) Limited Nigeria Stanbic Merchant Bank Nigeria Limited Norway Christiania Bank og Kreditkasse ASA Oman HSBC Bank Middle East (as delegate of The Hongkong and Shanghai Banking Corporation Limited) Pakistan Deutsche Bank AG Palestine HSBC Bank Middle East (as delegate of The Hongkong and Shanghai Banking Corporation Limited) 10/12/00 4 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS Country Subcustodian Panama BankBoston, N.A. Peru Citibank N.A. Philippines Standard Chartered Bank Poland Citibank (Poland) S.A. Portugal Banco Comercial Portugues Qatar HSBC Bank Middle East (as delegate of The Hongkong and Shanghai Banking Corporation Limited) Romania ING Bank N.V. Russia Credit Suisse First Boston AO - MOSCOW (as delegate of Credit Suisse First Boston - Zurich) Singapore The Development Bank of Singapore Limited Slovak Republic Ceskoslovenska Obchodni Banka, A.S. Slovenia Bank Austria Creditanstalt d.d. - Ljubljana South Africa Standard Bank of South Africa Limited Spain Banco Santander Central Hispano S.A. Sri Lanka The Hongkong and Shanghai Banking Corporation Limited Swaziland Standard Bank Swaziland Limited 5 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS Country Subcustodian Sweden Skandinaviska Enskilda Banken Switzerland UBS AG Taiwan - R.O.C. Central Trust of China Thailand Standard Chartered Bank Trinidad & Tobago Republic Bank Limited Tunisia Banque Internationale Arabe de Tunisie Turkey Citibank, N.A. Ukraine ING Bank Ukraine United Kingdom State Street Bank and Trust Company, London Branch Uruguay BankBoston, N.A. Venezuela Citibank, N.A Vietnam The Hongkong and Shanghai Banking Corporation Limited Zambia Barclays Bank of Zambia Limited Zimbabwe Barclays Bank of Zimbabwe Limited 6 STATE STREET SCHEDULE B GLOBAL CUSTODY NETWORK DEPOSITORIES OPERATING IN NETWORK MARKETS Country Depositories Argentina Caja de Valores S.A. Australia Austraclear Limited Reserve Bank Information and Transfer System Austria Oesterreichische Kontrollbank AG (Wertpapiersammelbank Division) Belgium Caisse Interprofessionnelle de Depots et de Virements de Titres, S.A. Banque Nationale de Belgique Brazil Companhia Brasileira de Liquidacao e Custodia Bulgaria Central Depository AD Bulgarian National Bank Canada Canadian Depository for Securities Limited Chile Deposito Central de Valores S.A. People's Republic Shanghai Securities Central Clearing & of China Registration Corporation Shenzhen Securities Central Clearing Co., Ltd. Colombia Deposito Centralizado de Valores Costa Rica Central de Valores S.A. STATE STREET SCHEDULE B GLOBAL CUSTODY NETWORK DEPOSITORIES OPERATING IN NETWORK MARKETS Country Depositories Croatia Ministry of Finance National Bank of Croatia Sredisnja Depozitarna Agencija d.d. Czech Republic Stredisko cennych papiru Czech National Bank Denmark Vaerdipapircentralen (Danish Securities Center) Egypt Misr for Clearing, Settlement, and Depository Estonia Eesti Vaartpaberite Keskdepositoorium Finland Finnish Central Securities Depository France Societe Interprofessionnelle pour la Compensation des Valeurs Mobilieres Germany Clearstream Banking AG, Frankfurt Greece Bank of Greece, System for Monitoring Transactions in Securities in Book-Entry Form Apothetirion Titlon AE - Central Securities Depository Hong Kong Central Clearing and Settlement System Central Moneymarkets Unit Hungary Kozponti Elszamolohaz es Ertektar (Budapest) Rt. (KELER) STATE STREET SCHEDULE B GLOBAL CUSTODY NETWORK DEPOSITORIES OPERATING IN NETWORK MARKETS Country Depositories India National Securities Depository Limited Central Depository Services India Limited Reserve Bank of India Indonesia Bank Indonesia PT Kustodian Sentral Efek Indonesia Ireland Central Bank of Ireland Securities Settlement Office Israel Tel Aviv Stock Exchange Clearing House Ltd. (TASE Clearinghouse) Italy Monte Titoli S.p.A. Banca d'Italia Ivory Coast Depositaire Central - Banque de Reglement Jamaica Jamaica Central Securities Depository Japan Japan Securities Depository Center (JASDEC) Bank of Japan Net System Kazakhstan Central Depository of Securities Kenya Central Bank of Kenya Republic of Korea Korea Securities Depository Latvia Latvian Central Depository STATE STREET SCHEDULE B GLOBAL CUSTODY NETWORK DEPOSITORIES OPERATING IN NETWORK MARKETS Country Depositories Lebanon Custodian and Clearing Center of Financial Instruments for Lebanon and the Middle East (Midclear) S.A.L. Banque du Liban Lithuania Central Securities Depository of Lithuania Malaysia Malaysian Central Depository Sdn. Bhd. Bank Negara Malaysia, Scripless Securities Trading and Safekeeping System Mauritius Central Depository and Settlement Co. Ltd. Bank of Mauritius Mexico S.D. INDEVAL (Instituto para el Deposito de Valores) Morocco Maroclear Netherlands Nederlands Centraal Instituut voor Giraal Effectenverkeer B.V. (NECIGEF) New Zealand New Zealand Central Securities Depository Limited Nigeria Central Securities Clearing System Limited Norway Verdipapirsentralen (Norwegian Central Securities Depository) Oman Muscat Depository & Securities Registration Company, SAOC STATE STREET SCHEDULE B GLOBAL CUSTODY NETWORK DEPOSITORIES OPERATING IN NETWORK MARKETS Country Depositories Pakistan Central Depository Company of Pakistan Limited State Bank of Pakistan Palestine Clearing Depository and Settlement, a department of the Palestine Stock Exchange Peru Caja de Valores y Liquidaciones, Institucion de Compensacion y Liquidacion de Valores S.A Philippines Philippine Central Depository, Inc. Registry of Scripless Securities (ROSS) of the Bureau of Treasury Poland National Depository of Securities (Krajowy Depozyt Papierow Wartosciowych SA) Central Treasury Bills Registrar Portugal Central de Valores Mobiliarios Qatar Central Clearing and Registration (CCR), a department of the Doha Securities Market Romania National Securities Clearing, Settlement and Depository Company Bucharest Stock Exchange Registry Division National Bank of Romania Singapore Central Depository (Pte) Limited Monetary Authority of Singapore STATE STREET SCHEDULE B GLOBAL CUSTODY NETWORK DEPOSITORIES OPERATING IN NETWORK MARKETS Country Depositories Slovak Republic Stredisko cennych papierov National Bank of Slovakia Slovenia Klirinsko Depotna Druzba d.d. South Africa Central Depository Limited Share Transactions Totally Electronic (STRATE) Ltd. Spain Servicio de Compensacion y Liquidacion de Valores, S.A. Banco de Espana, Central de Anotaciones en Cuenta Sri Lanka Central Depository System (Pvt) Limited Sweden Vardepapperscentralen VPC AB (Swedish Central Securities Depository) Switzerland SegaIntersettle AG (SIS) Taiwan - R.O.C. Taiwan Securities Central Depository Co., Ltd. Thailand Thailand Securities Depository Company Limited Tunisia Societe Tunisienne Interprofessionelle pour la Compensation et de Depots des Valeurs Mobilieres Turkey Takas ve Saklama Bankasi A.S. (TAKASBANK) Central Bank of Turkey STATE STREET SCHEDULE B GLOBAL CUSTODY NETWORK DEPOSITORIES OPERATING IN NETWORK MARKETS Country Depositories Ukraine National Bank of Ukraine United Kingdom Central Gilts Office and Central Moneymarkets Office Venezuela Banco Central de Venezuela Zambia LuSE Central Shares Depository Limited Bank of Zambia TRANSNATIONAL Euroclear Clearstream Banking AG SCHEDULE C MARKET INFORMATION Publication/Type of Information Brief Description - ------------------------------- ----------------- (Frequency) The Guide to Custody in World Markets An overview of safekeeping and - ------------------------------------- (annually) settlement practices and procedures in each market in which State Street Bank and Trust Company offers custodial services. Global Custody Network Review Information relating to the operating - ----------------------------- (annually) history and structure of depositories and subcustodians located in the markets in which State Street Bank and Trust Company offers custodial services, including transnational depositories. Global Legal Survey With respect to each market in which - ------------------- (annually) State Street Bank and Trust Company offers custodial services, opinions relating to whether local law restricts (i) access of a fund's independent public accountants to books and records of a Foreign Sub-Custodian or Foreign Securities System, (ii) the Fund's ability to recover in the event of bankruptcy or insolvency of a Foreign Sub-Custodian or Foreign Securities System, (iii) the Fund's ability to recover in the event of a loss by a Foreign Sub-Custodian or Foreign Securities System, and (iv) the ability of a foreign investor to convert cash and cash equivalents to U.S. dollars. Subcustodian Agreements Copies of the subcustodian contracts - ----------------------- (annually) State Street Bank and Trust Company has entered into with each subcustodian in the markets in which State Street Bank and Trust Company offers subcustody services to its US mutual fund clients. Network Bulletins (weekly): Developments of interest to investors in the markets in which State Street Bank and Trust Company offers custodial services. Foreign Custody Advisories (as With respect to markets in which State necessary): Street Bank and Trust Company offers custodial services which exhibit special custody risks, developments which may impact State Street's ability to deliver expected levels of service. EX-99.(G)(6) 7 0007.txt TRANSFER AND SHAREHOLDER SERVICES CONTRACT EXHIBIT (g)(6) TRANSFER AGENCY AND SERVICE AGREEMENT BETWEEN NORTH AMERICAN FUNDS AND STATE STREET BANK AND TRUST COMPANY TABLE OF CONTENTS
Page ---- 1. Terms of Appointment and Duties............................................................ 1 2. Third Party Administrators for Defined Contribution Plans ................................. 4 3. Fees and Expenses.......................................................................... 4 4. Representations and Warranties of the Transfer Agent....................................... 5 5. Representations and Warranties of the Fund................................................. 6 6. Wire Transfer Operating Guidelines/Articles 4A of the UCC.................................. 6 7. Data Access and Proprietary Information.................................................... 8 8. Indemnification............................................................................ 10 9. Standard of Care........................................................................... 11 10. Year 2000.................................................................................. 11 11. Confidentiality ........................................................................... 11 12. Covenants of the Fund and the Transfer Agent............................................... 12 13. Termination of Agreement................................................................... 12 14. Assignment and Third Party Beneficiaries................................................... 13 15. Subcontractors............................................................................. 14 16. Miscellaneous.............................................................................. 14 17. Additional Funds........................................................................... 16 18. Limitations of Liability of the Trustees and Shareholders.................................. 16
TRANSFER AGENCY AND SERVICE AGREEMENT -------- ------ --- ------- --------- AGREEMENT made as of the 29/th/ day of December 2000, by and between NORTH AMERICAN FUNDS, a Massachusetts business trust, having its principal office and place of business at 286 Congress Street, Boston, Massachusetts, 02210 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company having its principal office and place of business at 225 Franklin Street, Boston, Massachusetts 02110 (the "Transfer Agent"). WHEREAS, the Fund is authorized to issue shares in separate series, with each such series representing interests in a separate portfolio of securities and other assets; WHEREAS, the Fund currently offers shares in twenty four (24) portfolios, with applicable Institutional Class I & Class II Series, such series shall be named in the attached Schedule A which may be amended by the parties from time to time (each such series, together with all other series subsequently established by the Fund and made subject to this Agreement in accordance with Section 17, being ---------- herein referred to as a "Portfolio", and collectively as the "Portfolios"); and WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Transfer Agent as its transfer agent, dividend disbursing agent, custodian of certain retirement plans and agent in connection with certain other activities, and the Transfer Agent desires to accept such appointment. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. Terms of Appointment and Duties ------------------------------- 1.1 Transfer Agency Services. Subject to the terms and conditions set forth in this Agreement, the Fund, on behalf of the Portfolios, hereby employs and appoints the Transfer Agent to act as, and the Transfer Agent agrees to act as its transfer agent for the Fund's authorized and issued shares of its beneficial interest ("Shares"), dividend disbursing agent, custodian of certain retirement plans and agent in connection with any accumulation, open-account or similar plan provided to the shareholders of each of the respective Portfolios of the Fund ("Shareholders") and set out in the currently effective prospectus and statement of additional information ("prospectus") of the Fund on behalf of the applicable Portfolio, including without limitation any periodic investment plan or periodic withdrawal program. In accordance with procedures established from time to time by agreement between the Fund on behalf of each of the Portfolios, as applicable and the Transfer Agent, the Transfer Agent agrees that it will perform the following services: (a) Receive for acceptance, orders for the purchase of Shares, and promptly deliver payment and appropriate documentation thereof to the Custodian of the Fund authorized pursuant to the Declaration of Trust of the Fund (the "Custodian"); (b) Pursuant to purchase orders, issue the appropriate number of Shares and hold such Shares in the appropriate Shareholder account; (c) Receive for acceptance redemption requests and redemption directions and deliver the appropriate documentation thereof to the Custodian; (d) In respect to the transactions in items (a), (b) and (c) above, the Transfer Agent shall execute transactions directly with broker-dealers authorized by the Fund; (e) At the appropriate time as and when it receives monies paid to it by the Custodian with respect to any redemption, pay over or cause to be paid over in the appropriate manner such monies as instructed by the redeeming Shareholders; (f) Effect transfers of Shares by the registered owners thereof upon receipt of appropriate instructions; (g) Prepare and transmit payments for dividends and distributions declared by the Fund on behalf of the applicable Portfolio; (h) Issue replacement certificates for those certificates alleged to have been lost, stolen or destroyed upon receipt by the Transfer Agent of indemnification satisfactory to the Transfer Agent and protecting the Transfer Agent and the Fund, and the Transfer Agent at its option, may issue replacement certificates in place of mutilated stock certificates upon presentation thereof and without such indemnity; (i) Maintain records of account for and advise the Fund and its Shareholders as to the foregoing; and (j) Record the issuance of Shares of the Fund and maintain pursuant to SEC Rule 17Ad-10(e) a record of the total number of Shares of the Fund which are authorized, based upon data provided to it by the Fund, and issued and outstanding. The Transfer Agent shall also provide the Fund on a regular basis with the total number of Shares which are authorized and issued and outstanding and shall have no obligation, when recording the issuance of Shares, to monitor the issuance of such Shares or to take cognizance of any laws relating to the issue or sale of such Shares, which functions shall be the sole responsibility of the Fund. 1.2 Additional Services. In addition to, and neither in lieu nor in contravention of, the services set forth in the above paragraph, the Transfer Agent shall perform the following services: (a) Other Customary Services. Perform the customary services of a transfer agent, dividend disbursing agent, custodian of certain retirement plans and, as relevant, agent in connection with accumulation, open-account or similar plan (including without limitation any periodic investment plan or periodic withdrawal program), including but not limited to: maintaining all Shareholder accounts, preparing Shareholder meeting lists, mailing Shareholder proxies, Shareholder reports and prospectuses to current Shareholders, withholding taxes on U.S. resident and non-resident alien accounts, preparing and filing U.S. Treasury Department Forms 1099 and other appropriate forms required with respect to dividends and distributions by federal authorities for all Shareholders, preparing and mailing confirmation forms and statements of account to Shareholders for all purchases and redemptions of Shares and other confirmable transactions in Shareholder accounts, preparing and mailing activity statements for Shareholders, and providing Shareholder 2 account information; (b) Control Book (also known as "Super Sheet"). Maintain a daily record and produce a daily report for the Fund of all transactions and receipts and disbursements of money and securities and deliver a copy of such report for the Fund for each business day to the Fund no later than 9:00 AM Eastern Time, or such earlier time as the Fund may reasonably require, on the next business day; (c) "Blue Sky" Reporting. The Fund shall (i) identify to the Transfer Agent in writing those transactions and assets to be treated as exempt from blue sky reporting for each State and (ii) verify the establishment of transactions for each State on the system prior to activation and thereafter monitor the daily activity for each State. The responsibility of the Transfer Agent for the Fund's blue sky State registration status is solely limited to the initial establishment of transactions subject to blue sky compliance by the Fund and providing a system which will enable the Fund to monitor the total number of Shares sold in each State; (d) National Securities Clearing Corporation (the "NSCC"). (i) accept and effectuate the registration and maintenance of accounts through Networking and the purchase, redemption, transfer and exchange of shares in such accounts through Fund/SERV (Networking and Fund/SERV being programs operated by the NSCC on behalf of NSCC's participants, including the Fund), in accordance with, instructions transmitted to and received by the Transfer Agent by transmission from NSCC on behalf of broker-dealers and banks which have been established by, or in accordance with the instructions of authorized persons, as hereinafter defined on the dealer file maintained by the Transfer Agent; (ii) issue instructions to Fund's banks for the settlement of transactions between the Fund and NSCC (acting on behalf of its broker-dealer and bank participants); (iii) provide account and transaction information from the affected Fund's records on DST Systems, Inc. computer system TA2000 ("TA2000 System") in accordance with NSCC's Networking and Fund/SERV rules for those broker-dealers; and (iv) maintain Shareholder accounts on TA2000 System through Networking; (e) New Procedures. New procedures as to who shall provide certain of these services in Section 1 may be established in writing from time to --------- time by agreement between the Fund and the Transfer Agent. The Transfer Agent may at times perform only a portion of these services and the Fund or its agent may perform these services on the Fund's behalf; and (f) Additional Telephone Support Services. If the parties elect to have the Transfer Agent provide additional telephone support services under ---------- this Agreement, the parties will agree to such services, fees and sub-contracting as stated in Schedule 1.2(f) entitled "Telephone Support Services" attached hereto. 3 2. Third Party Administrators for Defined Contribution Plans --------------------------------------------------------- 2.1 The Fund may decide to make available to certain of its customers, a qualified plan program (the "Program") pursuant to which the customers ("Employers") may adopt certain plans of deferred compensation ("Plan or Plans") for the benefit of the individual Plan participant (the "Plan Participant"), such Plan(s) being qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended ("Code") and administered by third party administrators which may be plan administrators as defined in the Employee Retirement Income Security Act of 1974, as amended (the "TPA(s)"). 2.2 In accordance with the procedures established in the initial Schedule 2.1 entitled "Third Party Administrator Procedures", as may be amended by the Transfer Agent and the Fund from time to time ("Schedule 2.1"), the Transfer Agent shall: (a) Treat Shareholder accounts established by the Plans in the name of the Trustees, Plans or TPAs as the case may be as omnibus accounts; (b) Maintain omnibus accounts on its records in the name of the TPA or its designee as the Trustee for the benefit of the Plan; and (c) Perform all services under Section 1 as transfer agent of the Funds --------- and not as a record-keeper for the Plans. 2.3 Transactions identified under Section 2 of this Agreement shall be --------- deemed exception services ("Exception Services") when such transactions: (a) Require the Transfer Agent to use methods and procedures other than those usually employed by the Transfer Agent to perform services under Section 1 of this Agreement; --------- (b) Involve the provision of information to the Transfer Agent after the commencement of the nightly processing cycle of the TA2000 System; or (c) Require more manual intervention by the Transfer Agent, either in the entry of data or in the modification or amendment of reports generated by the TA2000 System than is usually required by non-retirement plan and pre-nightly transactions. 3. Fees and Expenses ----------------- 3.1 Fee Schedule. For the performance by the Transfer Agent pursuant to this Agreement, the Fund agrees to pay the Transfer Agent an annual maintenance fee for each Shareholder account as set forth in the attached fee schedule ("Schedule 3.1"). Such fees and out-of-pocket expenses and advances identified under Section 3.2 below may be changed ----------- from time to time subject to mutual written agreement between the Fund and the Transfer Agent. 3.2 Out-of-Pocket Expenses. In addition to the fee paid under Section 3.1 ----------- above, the Fund agrees to reimburse the Transfer Agent for out-of-pocket expenses, including but not limited to confirmation production, postage, forms, telephone, microfilm, microfiche, mailing and tabulating proxies, records storage, or advances incurred by the Transfer Agent for the items set out in Schedule 3.1 attached hereto. In addition, any other expenses incurred by the Transfer Agent at the request or with the consent of the Fund, will be reimbursed by the Fund. 3.3 Postage. Postage for mailing of dividends, proxies, Fund reports and other mailings to all shareholder accounts shall be advanced to the Transfer Agent by the Fund at least seven (7) days prior to the mailing date of such materials. 3.4 Invoices. The Fund agrees to pay all fees and reimbursable expenses within thirty (30) days following the receipt of the respective billing notice, except for any fees or expenses that are subject to good faith dispute. In the event of such a dispute, the Fund may only withhold that portion of the fee or expense subject to the good faith dispute. The Fund shall notify the Transfer Agent in writing within twenty-one (21) calendar days following the receipt of each billing notice if the Fund is disputing any amounts in good faith. If the Fund does not provide such notice of dispute within the required time, the billing notice will be deemed accepted by the Fund. The Fund shall settle such disputed amounts within five (5) days of the day on which the parties agree on the amount to be paid by payment of the agreed amount. If no agreement is reached, then such disputed amounts shall be settled as may be required by law or legal process. 3.5 Cost of Living Adjustment. Following the Initial Term, unless the parties shall otherwise agree and provided that the service mix and volumes remain consistent as previously provided in the Initial Term, the total fee for all services shall equal the fee that would be charged for the same services based on a fee rate (as reflected in a fee rate schedule) increased by the percentage increase for the twelve-month period of such previous calendar year of the Consumer Price Index for Urban Wage Earners and Clerical Workers, for the Boston area, as published bimonthly by the United States Department of Labor, Bureau of Labor Statistics, or, in the event that publication of such Index is terminated, any successor or substitute index, appropriately adjusted, acceptable to both parties. 3.6 Late Payments. If any undisputed amount in an invoice of the Transfer Agent (for fees or reimbursable expenses) is not paid when due, the Fund shall pay the Transfer Agent interest thereon (from the due date to the date of payment) at a per annum rate equal to one percent (1.0%) plus the Prime Rate (that is, the base rate on corporate loans posted by large domestic banks) published by The Wall Street Journal (or, in the event such rate is not so published, a reasonably equivalent published rate selected by the Fund) on the first day of publication during the month when such amount was due. Notwithstanding any other provision hereof, such interest rate shall be no greater than permitted under applicable provisions of Massachusetts law. 5 4. Representations and Warranties of the Transfer Agent ---------------------------------------------------- The Transfer Agent represents and warrants to the Fund that: 4.1 It is a trust company duly organized and existing and in good standing under the laws of The Commonwealth of Massachusetts. 4.2 It is duly qualified to carry on its business in The Commonwealth of Massachusetts. 4.3 It is empowered under applicable laws and by its Charter and By-Laws to enter into and perform this Agreement. 4.4 All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. 4.5 It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. 5. Representations and Warranties of the Fund ------------------------------------------ The Fund represents and warrants to the Transfer Agent that: 5.1 It is a business trust duly organized and existing and in good standing under the laws of The Commonwealth of Massachusetts. 5.2 It is empowered under applicable laws and by its Declaration of Trust and By-Laws to enter into and perform this Agreement. 5.3 All corporate proceedings required by said Declaration of Trust and By- Laws have been taken to authorize it to enter into and perform this Agreement. 5.4 It is an open-end and diversified management investment company registered under the Investment Company Act of 1940, as amended. 5.5 A registration statement under the Securities Act of 1933, as amended is currently effective and will remain effective, and appropriate state securities law filings have been made and will continue to be made, with respect to all Shares of the Fund being offered for sale. 6. Wire Transfer Operating Guidelines/Articles 4A of the Uniform -------------------------------------------------------------- Commercial Code --------------- 6.1 Obligation of Sender. The Transfer Agent is authorized to promptly debit the appropriate Fund account(s) upon the receipt of a payment order in compliance with the selected security procedure (the "Security Procedure") chosen for funds transfer and in the amount of money that the Transfer Agent has been instructed to transfer. The Transfer Agent shall execute payment orders in compliance with the Security Procedure and with the Fund instructions on the execution date provided that such payment order is received by 6 the customary deadline for processing such a request, unless the payment order specifies a later time. All payment orders and communications received after this the customary deadline will be deemed to have been received the next business day. 6.2 Security Procedure. The Fund acknowledges that the Security Procedure it has designated on the Fund Selection Form was selected by the Fund from security procedures offered by the Transfer Agent. The Fund shall restrict access to confidential information relating to the Security Procedure to authorized persons as communicated to the Transfer Agent in writing. The Fund must notify the Transfer Agent immediately if it has reason to believe unauthorized persons may have obtained access to such information or of any change in the Fund's authorized personnel. The Transfer Agent shall verify the authenticity of all Fund instructions according to the Security Procedure. 6.3 Account Numbers. The Transfer Agent shall process all payment orders on the basis of the account number contained in the payment order. In the event of a discrepancy between any name indicated on the payment order and the account number, the account number shall take precedence and govern. 6.4 Rejection. The Transfer Agent reserves the right to decline to process or delay the processing of a payment order which (a) is in excess of the collected balance in the account to be charged at the time of the Transfer Agent's receipt of such payment order; (b) if initiating such payment order would cause the Transfer Agent, in the Transfer Agent's sole judgement, to exceed any volume, aggregate dollar, network, time, credit or similar limits which are applicable to the Transfer Agent; or (c) if the Transfer Agent, in good faith, is unable to satisfy itself that the transaction has been properly authorized. 6.5 Cancellation Amendment. The Transfer Agent shall use reasonable efforts to act on all authorized requests to cancel or amend payment orders received in compliance with the Security Procedure provided that such requests are received in a timely manner affording the Transfer Agent reasonable opportunity to act. However, the Transfer Agent assumes no liability if the request for amendment or cancellation cannot be satisfied. 6.6 Errors. The Transfer Agent shall assume no responsibility for failure to detect any erroneous payment order provided that the Transfer Agent complies with the payment order instructions as received and the Transfer Agent complies with the Security Procedure. The Security Procedure is established for the purpose of authenticating payment orders only and not for the detection of errors in payment orders. 6.7 Interest. The Transfer Agent shall assume no responsibility for lost interest with respect to the refundable amount of any unauthorized payment order, unless the Transfer Agent is notified of the unauthorized payment order within thirty (30) days of notification by the Transfer Agent of the acceptance of such payment order. 6.8 ACH Credit Entries/Provisional Payments. When the Fund initiates or receives Automated Clearing House credit and debit entries pursuant to these guidelines and the rules of the National Automated Clearing House Association and the New England Clearing House Association, the Transfer Agent will act as an Originating Depository Financial Institution and/or Receiving Depository Financial Institution, as the case may be, with respect to such entries. Credits given by the Transfer Agent with respect to an ACH credit entry are provisional until the Transfer Agent receives final settlement for 7 such entry from the Federal Reserve Bank. If the Transfer Agent does not receive such final settlement, the Fund agrees that the Transfer Agent shall receive a refund of the amount credited to the Fund in connection with such entry, and the party making payment to the Fund via such entry shall not be deemed to have paid the amount of the entry. 6.9 Confirmation. Confirmation of Transfer Agent's execution of payment orders shall ordinarily be provided within twenty four (24) hours notice of which may be delivered through the Transfer Agent's proprietary information systems, or by facsimile or call-back. Fund must report any objections to the execution of an order within thirty (30) days. 7. Data Access and Proprietary Information --------------------------------------- 7.1 The Fund acknowledges that the databases, computer programs, screen formats, report formats, interactive design techniques, and documentation manuals furnished to the Fund by the Transfer Agent as part of the Fund's ability to access certain Fund-related data ("Customer Data") maintained by the Transfer Agent on databases under the control and ownership of the Transfer Agent or other third party ("Data Access Services") constitute copyrighted, trade secret, or other proprietary information (collectively, "Proprietary Information") of substantial value to the Transfer Agent or other third party. In no event shall Proprietary Information be deemed Customer Data. The Fund agrees to treat all Proprietary Information as proprietary to the Transfer Agent and further agrees that it shall not divulge any Proprietary Information to any person or organization except as may be provided hereunder. Without limiting the foregoing, the Fund agrees for itself and its employees and agents to: (a) Use such programs and databases (i) solely on the Fund's computers, or (ii) solely from equipment at the location agreed to between the Fund and the Transfer Agent and (iii) solely in accordance with the Transfer Agent's applicable user documentation; (b) Refrain from copying or duplicating in any way (other than in the normal course of performing processing on the Fund's computer(s)), the Proprietary Information; (c) Refrain from obtaining unauthorized access to any portion of the Proprietary Information, and if such access is inadvertently obtained, to inform in a timely manner of such fact and dispose of such information in accordance with the Transfer Agent's instructions; (d) Refrain from causing or allowing information transmitted from the Transfer Agent's computer to the Fund's terminal to be retransmitted to any other computer terminal or other device except as expressly permitted by the Transfer Agent (such permission not to be unreasonably withheld); (e) Allow the Fund to have access only to those authorized transactions as agreed to between the Fund and the Transfer Agent; and 8 (f) Honor all reasonable written requests made by the Transfer Agent to protect at the Transfer Agent's expense the rights of the Transfer Agent in Proprietary Information at common law, under federal copyright law and under other federal or state law. 7.2 Proprietary Information shall not include all or any portion of any of the foregoing items that: (i) are or become publicly available without breach of this Agreement; (ii) are released for general disclosure by a written release by the Transfer Agent; or (iii) are already in the possession of the receiving party at the time of receipt without obligation of confidentiality or breach of this Agreement. 7.3 The Fund acknowledges that its obligation to protect the Transfer Agent's Proprietary Information is essential to the business interest of the Transfer Agent and that the disclosure of such Proprietary Information in breach of this Agreement would cause the Transfer Agent immediate, substantial and irreparable harm, the value of which would be extremely difficult to determine. Accordingly, the parties agree that, in addition to any other remedies that may be available in law, equity, or otherwise for the disclosure or use of the Proprietary Information in breach of this Agreement, the Transfer Agent shall be entitled to seek and obtain a temporary restraining order, injunctive relief, or other equitable relief against the continuance of such breach. 7.4 If the Fund notifies the Transfer Agent that any of the Data Access Services do not operate in material compliance with the most recently issued user documentation for such services, the Transfer Agent shall endeavor in a timely manner to correct such failure. Organizations from which the Transfer Agent may obtain certain data included in the Data Access Services are solely responsible for the contents of such data and the Fund agrees to make no claim against the Transfer Agent arising out of the contents of such third-party data, including, but not limited to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS, AS AVAILABLE BASIS. THE TRANSFER AGENT EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 7.5 If the transactions available to the Fund include the ability to originate electronic instructions to the Transfer Agent in order to (i) effect the transfer or movement of cash or Shares or (ii) transmit Shareholder information or other information, then in such event the Transfer Agent shall be entitled to rely on the validity and authenticity of such instruction without undertaking any further inquiry as long as such instruction is undertaken in conformity with security procedures established by the Transfer Agent from time to time. 7.6 Each party shall take reasonable efforts to advise its employees of their obligations pursuant to this Section 7. The obligations of this --------- Section shall survive any earlier termination of this Agreement. 9 8. Indemnification --------------- 8.1 The Transfer Agent shall not be responsible for, and the Fund shall indemnify and hold the Transfer Agent harmless from and against, any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability arising out of or attributable to: (a) All actions of the Transfer Agent or its agents or subcontractors required to be taken pursuant to this Agreement (including the defense of any law suit in which the Transfer Agent or affiliate is a named party), provided that such actions are taken in good faith and without negligence or willful misconduct; (b) The Fund's lack of good faith, negligence or willful misconduct; (c) The reliance upon, and any subsequent use of or action taken or omitted, by the Transfer Agent, or its agents or subcontractors on: (i) any information, records, documents, data, stock certificates or services, which are received by the Transfer Agent or its agents or subcontractors by machine readable input, facsimile, CRT data entry, electronic instructions or other similar means authorized by the Fund, and which have been prepared, maintained or performed by the Fund or any other person or firm on behalf of the Fund including but not limited to any broker-dealer, TPA or previous transfer agent; (ii) any instructions or requests of the Fund or any of its officers; (iii) any instructions or opinions of legal counsel with respect to any matter arising in connection with the services to be performed by the Transfer Agent under this Agreement which are provided to the Transfer Agent after consultation with such legal counsel; or (iv) any paper or document, reasonably believed to be genuine, authentic, or signed by the proper person or persons; (d) The offer or sale of Shares in violation of federal or state securities laws or regulations requiring that such Shares be registered or in violation of any stop order or other determination or ruling by any federal or any state agency with respect to the offer or sale of such Shares; (e) The negotiation and processing of any checks including without limitation for deposit into the Fund's demand deposit account maintained by the Transfer Agent; or (f) Upon the Fund's request entering into any agreements required by the NSCC for the transmission of Fund or Shareholder data through the NSCC clearing systems. 8.2 In order that the indemnification provisions contained in this Section ------- 8 shall apply, upon the assertion of a claim for which the Fund may be - required to indemnify the Transfer Agent, the Transfer Agent shall promptly notify the Fund of such assertion, and shall keep the Fund advised with respect to all developments concerning such claim. The Fund shall have the option to participate with the Transfer Agent in the defense of such claim or to defend against said claim in its own name or in the name of the Transfer Agent. The Transfer Agent shall in no case confess any claim or make any compromise in any case in which the Fund may be required to indemnify the Transfer Agent except with the Fund's prior written consent. 9. Standard of Care ---------------- 10 The Transfer Agent shall at all times act in good faith and agrees to use its best efforts within reasonable limits to ensure the accuracy of all services performed under this Agreement, but assumes no responsibility and shall not be liable for loss or damage due to errors, including encoding and payment processing errors, unless said errors are caused by its negligence, bad faith, or willful misconduct or that of its employees or agents. The parties agree that any encoding or payment processing errors shall be governed by this standard of care and Section 4-209 of the Uniform Commercial Code is superseded by Section 9 of this Agreement. This standard of care also shall apply to --------- Exception Services, as defined in Section 2.3 herein, but such ----------- application shall take into consideration the manual processing involved in, and time sensitive nature of, Exception Services. 10. Year 2000 --------- The Transfer Agent has taken reasonable steps to ensure that its products (and those of its third-party suppliers) reflect the available technology to offer products that are Year 2000 ready, including, but not limited to, century recognition of dates, calculations that correctly compute same century and multi century formulas and date values, and interface values that reflect the date issues arising between now and the next one-hundred years, and if any changes are required, the Transfer Agent will make the changes to its products at a price to be agreed upon by the parties and in a commercially reasonable time frame and will require third-party suppliers to do likewise. 11. Confidentiality --------------- 11.1 The Transfer Agent and the Fund agree that they will not, at any time during the term of this Agreement or after its termination, reveal, divulge, or make known to any person, firm, corporation or other business organization, any customers' lists, trade secrets, cost figures and projections, profit figures and projections, or any other secret or confidential information whatsoever, whether of the Transfer Agent or of the Fund, used or gained by the Transfer Agent or the Fund during performance under this Agreement. The Fund and the Transfer Agent further covenant and agree to retain all such knowledge and information acquired during and after the term of this Agreement respecting such lists, trade secrets, or any secret or confidential information whatsoever in trust for the sole benefit of the Transfer Agent or the Fund and their successors and assigns. In the event of breach of the foregoing by either party, the remedies provided by Section 7.3 shall be available to the party whose confidential ----------- information is disclosed. The above prohibition of disclosure shall not apply to the extent that the Transfer Agent must disclose such data to its sub-contractor or Fund agent for purposes of providing services under this Agreement. The Transfer Agent agrees that it will not disclose nonpublic, personal information as defined under Regulation S-P, other than as permitted by Regulation S-P. 11 11.2 In the event that any requests or demands are made for the inspection of the Shareholder records of the Fund, other than request for records of Shareholders pursuant to standard subpoenas from state or federal government authorities (i.e., divorce and criminal actions), the Transfer Agent will endeavor to notify the Fund and to secure instructions from an authorized officer of the Fund as to such inspection. The Transfer Agent expressly reserves the right, however, to exhibit the Shareholder records to any person whenever it is advised by counsel that it may be held liable for the failure to exhibit the Shareholder records to such person or if required by law or court order. 12. Covenants of the Fund and the Transfer Agent -------------------------------------------- 12.1 The Fund shall promptly furnish to the Transfer Agent the following: (a) A certified copy of the resolution of the Board of Trustees of the Fund authorizing the appointment of the Transfer Agent and the execution and delivery of this Agreement; and (b) A copy of the Declaration of Trust and By-Laws of the Fund and all amendments thereto. 12.2 The Transfer Agent hereby agrees to establish and maintain facilities and procedures reasonably acceptable to the Fund for safekeeping of stock certificates, check forms and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such certificates, forms and devices. 12.3 The Transfer Agent shall keep records relating to the services to be performed hereunder, in the form and manner as it may deem advisable. To the extent required by Section 31 of the Investment Company Act of 1940, as amended, and the Rules thereunder, the Transfer Agent agrees that all such records prepared or maintained by the Transfer Agent relating to the services to be performed by the Transfer Agent hereunder are the property of the Fund and will be preserved, maintained and made available in accordance with such Section and Rules, and will be surrendered promptly to the Fund on and in accordance with its request. 13. Termination of Agreement ------------------------ 13.1 Term. The initial term of this Agreement (the "Initial Term") shall be three (3) years from the date first stated above unless terminated pursuant to the provisions of this Section 13. Unless a terminating ---------- party gives written notice to the other party one hundred and twenty (120) days before the expiration of the Initial Term or any Renewal Term, this Agreement will renew automatically from year to year (each such year-to-year renewal term a "Renewal Term"). One hundred and twenty (120) days before the expiration of the Initial Term or a Renewal Term the parties to this Agreement will agree upon a Fee Schedule for the upcoming Renewal Term. Otherwise, the fees shall be increased pursuant to Section 3.5 of this Agreement. ----------- 12 13.2 Early Termination. Notwithstanding anything contained in this Agreement to the contrary, should the Fund desire to move any of its services provided by the Transfer Agent hereunder to a successor service provider prior to the expiration of the then current Initial or Renewal Term, or without the required notice, the Transfer Agent shall make a good faith effort to facilitate the conversion on such prior date; however, there can be no guarantee or assurance that the Transfer Agent will be able to facilitate a conversion of services on such prior date. In connection with the foregoing, should services be converted to a successor service provider, or if the Fund is liquidated or its assets merged or purchased or the like with or by another entity which does not utilize the services of the Transfer Agent, the fees payable to the Transfer Agent shall be calculated as if the services had been performed by the Transfer Agent until the expiration of the then current Initial or Renewal Term and calculated at the asset and/or Shareholder account levels, as the case may be, on the date notice of termination was given to the Transfer Agent, and the payment of all fees to the Transfer Agent as set forth herein shall be accelerated to the business day immediately prior to the conversion or termination of services. 13.3 Expiration of Term. During the Initial Term or Renewal Term, whichever currently is in effect, should either party exercise its right to terminate, all out-of-pocket expenses or costs associated with the movement of records and material will be borne by the Fund. Additionally, the Transfer Agent reserves the right to charge for any other reasonable expenses associated with such termination. 13.4 Confidential Information. Upon termination of this Agreement, each party shall return to the other party all copies of confidential or proprietary materials or information received from such other party hereunder, other than materials or information required to be retained by such party under applicable laws or regulations. 13.5 Unpaid Invoices. The Transfer Agent may terminate this Agreement immediately upon an unpaid invoice payable by the Fund to the Transfer Agent being outstanding for more than ninety (90) days, except with respect to any amount subject to a good faith dispute within the meaning of Section 3.4 of this Agreement. ----------- 13.6 Bankruptcy. Either party hereto may terminate this Agreement by notice to the other party, effective at any time specified therein, in the event that (a) the other party ceases to carry on its business or (b) an action is commenced by or against the other party under Title 11 of the United States Code or a receiver, conservator or similar officer is appointed for the other party and such suit, conservatorship or receivership is not discharged within thirty (30) days. 14. Assignment and Third Party Beneficiaries ---------------------------------------- 14.1 Except as provided in Section 15.1 below neither this Agreement nor any ------------ rights or obligations hereunder may be assigned by either party without the written consent of the other party. Any attempt to do so in violation of this Section shall be void. Unless specifically stated to the contrary in any written consent to an assignment, no assignment will release or discharge the assignor from any duty or responsibility under this Agreement. 13 14.2 Except as explicitly stated elsewhere in this Agreement, nothing under this Agreement shall be construed to give any rights or benefits in this Agreement to anyone other than the Transfer Agent and the Fund, and the duties and responsibilities undertaken pursuant to this Agreement shall be for the sole and exclusive benefit of the Transfer Agent and the Fund. This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. 14.3 This Agreement does not constitute an agreement for a partnership or joint venture between the Transfer Agent and the Fund. Other than as provided in Section 15.1 and Schedule 1.2(f), neither party shall make ------------ any commitments with third parties that are binding on the other party without the other party's prior written consent. 15. Subcontractors -------------- 15.1 The Transfer Agent may, without further consent on the part of the Fund, subcontract for the performance hereof with (i) Boston Financial Data Services, Inc., a Massachusetts corporation ("Boston Financial") which is duly registered as a transfer agent pursuant to Section 17A(c)(2) of the Securities Exchange Act of 1934, as amended, (ii) a Boston Financial subsidiary duly registered as a transfer agent or (iii) a Boston Financial affiliate duly registered as a transfer agent; provided, however, that the Transfer Agent shall be fully responsible to the Fund for the acts and omissions of Boston Financial or its subsidiary or affiliate as it is for its own acts and omissions. 15.2 Nothing herein shall impose any duty upon the Transfer Agent in connection with or make the Transfer Agent liable for the actions or omissions to act of unaffiliated third parties such as by way of example and not limitation, Airborne Services, Federal Express, United Parcel Service, the U.S. Mails, the NSCC and telecommunication companies, provided, if the Transfer Agent selected such company, the Transfer Agent shall have exercised due care in selecting the same. 16. Miscellaneous ------------- 16.1 Amendment. This Agreement may be amended or modified by a written agreement executed by both parties and authorized or approved by a resolution of the Board of Trustees of the Fund. 16.2 Massachusetts Law to Apply. This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of The Commonwealth of Massachusetts. 16.3 Force Majeure. In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes. 14 16.4 Consequential Damages. Neither party to this Agreement shall be liable to the other party for special, indirect or consequential damages under any provision of this Agreement or for any special, indirect or consequential damages arising out of any act or failure to act hereunder. 16.5 Survival. All provisions regarding indemnification, warranty, liability, and limits thereon, and confidentiality and/or protections of proprietary rights and trade secrets shall survive the termination of this Agreement. 16.6 Severability. If any provision or provisions of this Agreement shall be held invalid, unlawful, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired. 16.7 Priorities Clause. In the event of any conflict, discrepancy or ambiguity between the terms and conditions contained in this Agreement and any Schedules or attachments hereto, the terms and conditions contained in this Agreement shall take precedence. 16.8 Waiver. No waiver by either party or any breach or default of any of the covenants or conditions herein contained and performed by the other party shall be construed as a waiver of any succeeding breach of the same or of any other covenant or condition. 16.9 Merger of Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject matter hereof whether oral or written. 16.10 Counterparts. This Agreement may be executed by the parties hereto on any number of counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 16.11. Reproduction of Documents. This Agreement and all schedules, exhibits, attachments and amendments hereto may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties hereto each agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction shall likewise be admissible in evidence. 15 16.12 Notices. All notices and other communications as required or permitted hereunder shall be in writing and sent by first class mail, postage prepaid, addressed as follows or to such other address or addresses of which the respective party shall have notified the other. (a) If to State Street Bank and Trust Company, to: State Street Bank and Trust Company c/o Boston Financial Data Services, Inc. 1250 Hancock Street, Suite 300N Quincy, Massachusetts 02169 Attention: Legal Department Facsimile: 617-483-5850 (b) If to the Fund, to: North American Funds 286 Congress Street Boston, Massachusetts 02210 Attention: Thomas J. Brown Facsimile: 617-210-4501 17. Additional Funds ---------------- In the event that the Fund establishes one or more series of Shares, in addition to those listed on the attached Schedule A, with respect to which it desires to have the Transfer Agent render services as transfer agent under the terms hereof, it shall so notify the Transfer Agent in writing, and if the Transfer Agent agrees in writing to provide such services, such series of Shares shall become a Portfolio hereunder. 18. Limitations of Liability of the Trustees and Shareholders --------------------------------------------------------- A copy of the Declaration of Trust of the Trust is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the Trustees of the Trust as Trustees and not individually and that the obligations of this instrument are not binding upon any of the Trustees or Shareholders individually but are binding only upon the assets and property of the Fund. 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf by and through their duly authorized officers, as of the day and year first above written. NORTH AMERICAN FUNDS BY:___________________________________ ATTEST: ________________________________ STATE STREET BANK AND TRUST COMPANY BY:___________________________________ Vice Chairman ATTEST: ________________________________ 17 SCHEDULE A LIST OF NORTH AMERICAN FUNDS North American Large Cap Growth Fund North American International Equity Fund North American Growth & Income Fund North American Balanced Fund North American Mid Cap Growth North American Small Cap Growth Fund North American Strategic Income Fund North American Core Bond Fund North American Municipal Bond Fund North American Money Market Fund North American Global Equity Fund North American International Small Cap Fund North American Mid Cap Value Fund North American Stock Index Fund North American Small Cap Index Fund North American Socially Responsible Fund North American High Yield Bond Fund North American Aggressive Growth Lifestyle Fund North American Moderate Growth Lifestyle Fund North American Conservative Growth Lifestyle Fund North American Municipal Money Market Fund North American Science & Technology Fund North American US Govt Securities Funds Josephthal Strategic Growth Fund NORTH AMERICAN FUNDS STATE STREET BANK AND TRUST COMPANY BY:_______________________________ BY:___________________________________ SCHEDULE 2.1 THIRD PARTY ADMINISTRATOR(S) PROCEDURES Dated ____________ 1. On each day on which both the New York Stock Exchange and the Fund are open for business (a "Business Day"), the TPA(s) shall receive, on behalf of and as agent of the Fund, Instructions (as hereinafter defined) from the Plan. Instructions shall mean as to each Fund (i) orders by the Plan for the purchases of Shares, and (ii) requests by the Plan for the redemption of Shares; in each case based on the Plan's receipt of purchase orders and redemption requests by Participants in proper form by the time required by the term of the Plan, but not later than the time of day at which the net asset value of a Fund is calculated, as described from time to time in that Fund's prospectus. Each Business Day on which the TPA receives Instructions shall be a "Trade Date". 2. The TPA(s) shall communicate the TPA(s)'s acceptance of such Instructions, to the applicable Plan. 3. On the next succeeding Business Day following the Trade Date on which it accepted Instructions for the purchase and redemption of Shares, (TD+1), the TPA(s) shall notify the Transfer Agent of the net amount of such purchases or redemptions, as the case may be, for each of the Plans. In the case of net purchases by any Plan, the TPA(s) shall instruct the Trustees of such Plan to transmit the aggregate purchase price for Shares by wire transfer to the Transfer Agent on (TD+1). In the case of net redemptions by any Plan, the TPA(s) shall instruct the Fund's custodian to transmit the aggregate redemption proceeds for Shares by wire transfer to the Trustees of such Plan on (TD+1). The times at which such notification and transmission shall occur on (TD+1) shall be as mutually agreed upon by each Fund, the TPA(s), and the Transfer Agent. 4. The TPA(s) shall maintain separate records for each Plan, which record shall reflect Shares purchased and redeemed, including the date and price for all transactions, and Share balances. The TPA(s) shall maintain on behalf of each of the Plans a single master account with the Transfer Agent and such account shall be in the name of that Plan, the TPA(s), or the nominee of either thereof as the record owner of Shares owned by such Plan. 5. The TPA(s) shall maintain records of all proceeds of redemptions of Shares and all other distributions not reinvested in Shares. 6. The TPA(s) shall prepare, and transmit to each of the Plans, periodic account statements showing the total number of Shares owned by that Plan as of the statement closing date, purchases and redemptions of Shares by the Plan during the period covered by the statement, and the dividends and other distributions paid to the Plan on Shares during the statement period (whether paid in cash or reinvested in Shares). 2 7. The TPA(s) shall, at the request and expense of each Fund, transmit to the Plans prospectuses, proxy materials, reports, and other information provided by each Fund for delivery to its shareholders. 8. The TPA(s) shall, at the request of each Fund, prepare and transmit to each Fund or any agent designated by it such periodic reports covering Shares of each Plan as each Fund shall reasonably conclude are necessary to enable the Fund to comply with state Blue Sky requirements. 9. The TPA(s) shall transmit to the Plans confirmation of purchase orders and redemption requests placed by the Plans; and 10. The TPA(s) shall, with respect to Shares, maintain account balance information for the Plan(s) and daily and monthly purchase summaries expressed in Shares and dollar amounts. 11. Plan sponsors may request, or the law may require, that prospectuses, proxy materials, periodic reports and other materials relating to each Fund be furnished to Participants in which event the Transfer Agent or each Fund shall mail or cause to be mailed such materials to Participants. With respect to any such mailing, the TPA(s) shall, at the request of the Transfer Agent or each Fund, provide at the TPA(s)'s expense a complete and accurate set of mailing labels with the name and address of each Participant having an interest through the Plans in Shares. NORTH AMERICAN FUNDS STATE STREET BANK AND TRUST COMPANY BY:________________________________ BY:__________________________________ 3 SCHEDULE 3.1 North American Funds Fees Effective August 1, 2000 through July 31, 2002 Fees are billable on a monthly basis at the rate 1/12 the annual fee. A charge is made for an account in the month that an account opens or closes. Account service fees are higher of: open account charges plus closed account charges or the fund minimum. Annual Account Service Fees - --------------------------- Complex Base Fee Class A, B, C Funds $60,000 Class I & II Funds $10,000 Minimum Per Fund Class Class A, B, C Funds $18,500 Class I & II Funds $5,000 Open Account Fee $15.00/per account Closed Accounts Fee $2.40/per account Activity Based Fees - ------------------- New Account Set-up $5.00 Manual Transactions $2.00/all transactions Check Writing Establishment $5.00 Check Processing $1.00 ACH Charges $0.35 Other Fees - ---------- Fiduciary Administration $10.00/account Fund Implementation Fee (Per Cusip) $1,500/fund Out Of Pocket Expenses - ---------------------- Out-of-pocket expenses include but are not limited to: confirmation statements, investor statements, postage, forms, audio response, telephone, records retention, federal wire, transcripts, microfilm, microfiche, Image workstation and expenses incurred at the specific direction of the fund. NORTH AMERICAN FUNDS STATE STREET BANK AND TRUST COMPANY BY:_________________________________ BY:__________________________________ EX-99.(G)(8) 8 0008.txt ADMINISTRATIVE AND SHAREHOLDER SERVICES AGREEMENT EXHIBIT (g)(8) ADMINISTRATIVE AND SHAREHOLDER SERVICES AGREEMENT This Agreement is entered into as of the 13/th/ day of June, 2000, by and among American General Asset Management Corp., a Delaware corporation ("AGAM"), and North American Funds, a Massachusetts business trust (the "Trust"). WHEREAS, the Trust is registered with the Securities and Exchange Commission (the "SEC") as an open-end management investment company under the Investment Company Act of 1940, as amended ("1940 Act"), and offers shares of beneficial interests ("Shares") in several series (each a "Fund" and collectively, the "Funds"), each Fund having its own investment objectives and investment policies and issuing Shares in several classes ("Classes"); WHEREAS, Institutional Class I Shares of the Funds are sold exclusively to (i) employee retirement benefit plans (each a "Plan" and collectively, the "Plans") for the benefit of their participants ("Participants") and (ii) the Aggressive Growth Lifestyle Fund, Moderate Growth Lifestyle Fund and Conservative Growth Lifestyle Fund series of the Trust (each a "Lifestyle Fund" and collectively the "Lifestyle Funds"); WHEREAS, AGAM desires to provide, or arrange, at its own expense, for the provision of certain administrative and shareholder services to the Plans and their Participants and the Lifestyle Funds and their shareholders in connection with their investments in Institutional Class I Shares of the Funds; WHEREAS, the services to be provided directly or indirectly by AGAM hereunder will benefit each Fund by relieving it of the expense it would incur if such services were to be provided by the Fund; and WHEREAS, the Trust desires that AGAM provide or arrange for the provision of such services. NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. TERMS OF APPOINTMENT; DUTIES OF THE PARTIES 1.01. Administrative and Shareholder Services. AGAM shall perform or --------------------------------------- arrange for the performance of the administrative and recordkeeping services (the "Administrative Services") described in Schedule A attached hereto, as such Schedule A may be amended from time to time with the mutual consent of the parties hereto, with respect to Institutional Class I Shares of the Funds purchased, held or redeemed by a Plan. AGAM shall perform or arrange for the performance of the shareholder services (the "Shareholder Services") described in Schedule B attached hereto, as such Schedule B may be amended from time to time with the mutual consent of the parties hereto, with respect to Institutional Class I Shares of the Funds purchased, held or redeemed by a Lifestyle Fund. AGAM and any person(s) with whom it contracts for the provision of such services shall perform the Administrative Services or Shareholder Services as an independent contractor and not as an employee or agent of the Trust or any Fund. Neither AGAM nor any person(s) with whom it contracts for the provision of such services shall not be or be held out to be an agent of the Trust or any Fund. AGAM shall perform, or arrange for the provision of the Administrative Services and the Shareholder Services in accordance with procedures established from time to time by the agreement of the Trust and AGAM, and subject to terms and conditions set forth in the Trust's current prospectus. 1.02. Equipment. AGAM shall maintain adequate offices, personnel, --------- computers and other equipment necessary to perform or arrange for the provision of the services contemplated by this Agreement. AGAM shall notify the Trust or its agent promptly in the event that AGAM becomes unable for any reason to perform or arrange for the provision of the services contemplated by, or any other of its obligations under, this Agreement. AGAM shall maintain or cause the maintenance of back-up files of the records required to be maintained hereunder and shall store such back-up files in a secure off-premises location, so that, in the event of a power failure or other interruption of whatever cause at the location of the records, AGAM's records are maintained intact and transactions can be processed at another location. 1.03. Disclosure to Plans. AGAM or its Agent shall take all steps ------------------- necessary to ensure that the arrangements provided for in this Agreement are properly disclosed to the Plans. 1.04. Confidentiality of Information. The parties hereto agree that all ------------------------------ books, records, information, computer programs and data pertaining to the business of any other party which are exchanged or received pursuant to the negotiation or the carrying out of this Agreement shall be kept confidential and shall not be voluntarily disclosed to any other person, except as may be permitted hereunder or may be required by law. This provision shall not apply to information lawfully in the possession of a party prior to the term hereof that has been lawfully obtained from other sources or independently developed by a party without reference to or reliance on information obtained from any other party hereto. This provision shall survive the termination of this Agreement. 1.05. Compliance with Law. Each of the parties shall at all times ------------------- comply with all applicable federal and state laws and regulations thereunder, including the rules of any self regulatory organization, in connection with the performance of each of the parties responsibilities under this Agreement. 1.06. No Impairment of Trust's Authority. No provision of this ---------------------------------- Agreement shall limit in any way the authority of the Trust to take such action as it deems appropriate in connection with matters relating to the operation of the Funds and the sale of Shares. 1.07. Authority of AGAM. AGAM acknowledges that it is not authorized by ----------------- the Trust or any Fund to register the transfer of Shares or to transfer record ownership of Shares, and that only the Trust or its agent is authorized to perform such activities. 2. COMPENSATION 2.01. Expenses. AGAM shall bear all expenses arising out of the -------- performance of the Administrative Services and the Shareholder Services. AGAM shall not receive (nor shall any agent of AGAM receive) from the Trust or any Fund (or from any affiliate of the Trust) any monetary compensation or reimbursement for such expenses. 2.02. Trust's and Fund Expenses. The Trust shall bear all the expenses ------------------------- of the Funds hereunder and shall not receive (nor shall any agent of the Trust receive) from AGAM any monetary compensation or reimbursement for such expenses. 2.03. Fees. In consideration of AGAM's performance or arrangement of ---- the performance of the Administrative Services and the Shareholder Services, the Trust, from the assets of each Fund, severally and not jointly, shall pay either to AGAM the fees (the "Fees") described in Schedule C attached hereto, as such Schedule C may be amended from time to time with the mutual consent of AGAM and the Trust. 2.04. Calculation and Payment of Fees. The Fees shall be calculated in ------------------------------- the manner described in Schedule C hereto and shall be due each calendar month from the Trust on behalf of each Fund for which AGAM performs or arranges for the provision of Administrative Services or Shareholder Services pursuant to this Agreement. The Trust shall make a payment of Fees for a calendar month within thirty (30) days after the last day of such month. AGAM shall have sixty (60) days following receipt of the payment to verify the amount of the payment and after such time the amount will be considered final. 3. REPRESENTATIONS AND WARRANTIES 3.01. AGAM Representations. AGAM represents and warrants to the Trust -------------------- and each Fund that: (a) it is a corporation duly organized and validly existing and in good standing under the laws of the State of Delaware; (b) it has full power and authority under applicable law to carry on its business, and is registered or licensed as required, in each jurisdiction where it conducts its business; (c) it maintains and knows of no reason why it cannot or will not, during the term hereof, maintain adequate offices, personnel, procedures, computers and other equipment necessary to perform the services contemplated by this Agreement; and (d) its entering into and performing this Agreement are duly authorized by any necessary corporate actions and will not violate any provision of applicable law or regulation or order of any court, governmental or regulatory body, or any agreement or instrument by which it is bound. 3.02. Trust's Representations. The Trust represents on its own behalf, ----------------------- and for each Fund, and warrants to AGAM that the entering into and the performing of this Agreement by the Trust are duly authorized and will not violate any provision of applicable law, regulation or order of any court, governmental or regulatory body, or any agreement or instrument by which the Trust and the Funds are bound. 4. INDEMNIFICATION 4.01. By The Trust. The Trust, on behalf of each Fund, shall indemnify ------------ and hold AGAM (including any affiliate of AGAM), and the directors, trustees, officers and employees of AGAM harmless from and against any and all losses, damages, costs, charges, reasonable counsel fees, payments, expenses and liabilities ("Losses") arising out of or attributable to: (a) the Trust's, its agent's, or the Fund's refusal or failure to comply with the provisions of this Agreement or applicable law; (b) the bad faith, negligence or willful misconduct of the Trust, its agent, or any Fund; or (c) the breach of any representation or warranty of the Trust on behalf of itself or a Fund hereunder, in each case except to the extent such Losses arise out of or are attributable to another party's breach of any provision of this Agreement or the bad faith, negligence or willful misconduct of another party in performing its obligations hereunder. 4.02. By AGAM. AGAM shall indemnify and hold the Trust, each affiliate ------- of the Trust, each Fund, and the trustees, officers and employees of the Trust and each harmless from and against any and all Losses arising out of or attributable to: (a) AGAM's or its agent's refusal or failure to comply with the provisions of this Agreement or applicable law or with instructions properly given hereunder; (b) AGAM's or its agent's performance of or failure to perform the Administrative Services and/or the Shareholder Services; (c) the bad faith, negligence or willful misconduct of AGAM or its agent; (d) AGAM's or its agent's furnishing to any Plan, Plan Participant, Plan sponsor, authorized Plan committee or Plan trustee any materially inaccurate, misleading or untimely information regarding any Fund or the Shares through no fault of the Trust, its agent, or any Fund; or (e) the breach of any representation or warranty of AGAM hereunder, in each case except to the extent such Losses arise out of or are attributable to another party's breach of any provision of this Agreement or the bad faith, negligence or willful misconduct of another party in performing its obligations hereunder. 4.03. Acts of God. In the event that any party is unable to perform its ----------- obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage beyond its reasonable control, or other causes beyond its reasonable control, such party shall not be liable to any other party for any damages resulting from such failure to perform or otherwise from such causes. 4.04. No Consequential Damages. No party to this agreement shall be ------------------------ liable to any other party for consequential damages under any provision of this Agreement. 4.05. Claim Procedure. In order that the indemnification provisions --------------- contained herein shall apply, upon the assertion of a claim or loss for which any party (the "Indemnitor") may be required to indemnify another party (the "Indemnitee"), the Indemnitee shall promptly notify the Indemnitor of such assertion or loss, and shall keep the Indemnitor advised with respect to all developments concerning any such claim. The Indemnitor shall have the option to participate at its expense with the Indemnitee in the defense of any such claim. In the event that there is more than one Indemnitor with respect to any such claim, the Indemnitors shall agree as to their exercise of this option. The Indemnitee shall in no case confess any claim or make any compromise in any case in which the Indemnitor may be required to indemnify it except with the Indemnitor's prior written consent. The obligations of the Trust and AGAM under this Section 4 shall survive the termination of this Agreement. 5. ACKNOWLEDGMENTS 5.01. Fees Solely for Non-Advisory, Non-Distribution Services. The ------------------------------------------------------- parties hereto acknowledge that the Fees are for administrative, recordkeeping and shareholder services only and do not constitute payment in any manner for investment advisory or distribution services or services of an underwriter or principal underwriter within the meaning of the 1933 Act or the 1940 Act. The parties acknowledge that affiliates of AGAM have provided and will continue to provide certain services to the Plans as agent of the Plans, which together with AGAM, may involve, among other things, preparing informational or promotional materials relating to their services that may refer to the Funds and responding to telephone inquiries from Plan Participants. The parties acknowledge that the provision of such services and any other actions of AGAM related to the Funds and not specifically authorized herein are outside the scope of this Agreement. 5.02. Supervision. The Trust and AGAM acknowledge that neither the ----------- Trust nor any Fund undertakes to supervise AGAM or an agent of AGAM in the performance of the Administrative Services or the Shareholder Services; that neither the Trust nor any Fund shall be responsible for the performance of the Administrative Services or the Shareholder Services by AGAM or its agent(s); that neither the Trust nor any Fund shall be responsible for the accuracy of the records maintained for the Plans; and that neither the Trust nor any Fund shall be responsible for the performance of other functions by AGAM or its agent(s) for the Plans, the Participants, the Lifestyle Funds and their shareholders. 5.03. Agents of AGAM. To the extent agents of AGAM perform services -------------- under this Agreement that are the responsibility of AGAM, AGAM shall be responsible for, and assume all liability for (including any obligation for indemnification as provided in Sections 4.02 or 4.03 hereof, as applicable), the actions and inaction of such agents as if such services had been provided by AGAM. 6. AMENDMENT AND TERMINATION OF AGREEMENT 6.01. Amendment. Except as otherwise provided herein, this Agreement --------- may be amended or modified only by a written instrument executed by all the parties affected thereby; provided that an amendment solely to add or remove any Fund may be made, and shall be valid and binding, by the addition or removal of the relevant to or from the signature page hereof without requiring the other parties' signatures and shall be effective as of the date of execution, unless any other party objects in writing within thirty (30) days after receiving notice of such amendment. 6.02. Termination Without Cause. This Agreement may be terminated by ------------------------- any party upon ninety (90) days written notice to each other party. 6.03. Termination by Trust for Cause. This Agreement may be terminated ------------------------------ by the Trust with respect to any Fund immediately upon notice to each other party in the event that (a) AGAM becomes unable for any reason to perform the services contemplated by this Agreement, or (b) the performance by AGAM of the services contemplated by this Agreement becomes in the Trust's reasonable judgment unlawful or becomes unacceptable to the Trust. 6.04. Termination Procedures. Upon termination of this Agreement, each ---------------------- party shall return to each other party all copies of confidential or proprietary materials or information received from such other party hereunder, other than materials or information required to be retained by such party under applicable laws or regulations. The provision shall survive the termination of this Agreement. 7. ASSIGNMENT AND DELEGATION 7.01. Assignment and Delegation. Except as otherwise provided herein, ------------------------- neither the Agreement nor any rights, duties or obligations hereunder may be assigned or delegated by any party without the written consent of the other parties. 7.02. Successors. This Agreement shall inure to the benefit of and be ---------- binding upon the parties and their respective permitted successors and assigns. 8. NOTICES Notices hereunder shall be in writing, shall be signed by an authorized officer, and shall be deemed to have been duly given if delivered personally, sent by certified mail (return receipt requested), or sent by facsimile machine in accordance with procedures established by agreement of the Trust and the Service Provider or AGAM, and if it is addressed to a party either sat its address below or at as changed addressed specified by it in a notice to the other parties hereto: Trust: NORTH AMERICAN FUNDS 286 Congress Street Boston, MA 02210 AGAM: AMERICAN GENERAL FUNDS DISTRIBUTORS, INC. 286 Congress Street Boston, MA 02210 9. MISCELLANEOUS 9.01. Massachusetts Law to Apply. This Agreement shall be construed and -------------------------- the provisions thereof interpreted under and in accordance with the laws of the State of Massachusetts, without regard to conflicts of laws principles. 9.02. Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties hereto and supersedes any prior agreement with respect to the subject matter hereof whether oral or written. All exhibits and schedules hereto, as amended from time to time, are incorporated herein and made a part hereof. References herein to exhibits and schedules refer to such exhibits and schedules as so amended. Nothing contained in this Agreement is intended to convey rights to any third parties, such as Plans, Plan trustees, Participants or Lifestyle Fund shareholders. 9.03. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be an original document and all of which together shall be deemed one and the same instrument. 9.04. Limitation of Liability of the Trust, Trustees and Shareholders. --------------------------------------------------------------- This Agreement is executed on behalf of the Trust by an officer of the Trust as an officer and not individually and that the obligations of this Agreement are not binding upon any of the Trustees, officers or shareholders of the Trust individually, but are binding only upon the assets and property of the relevant Fund. A copy of the Amended and Restated Agreement and Declaration of Trust of the Trust is on file with the Secretary of the State of Massachusetts. 9.05. Headings. The headings contained in this Agreement are for -------- purposes of convenience only and shall not affect the meaning or interpretation of this Agreement. 9.06. Severability. If any provision or portion of this Agreement shall ------------ be determined to be invalid or unenforceable for any reason, the remaining provisions and portions of the Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent by law. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf by and through their duly authorized officers, as of the day and year first above written. NORTH AMERICAN FUNDS By: /s/ John I. Fitzgerald ------------------------- Name: John I. Fitzgerald ------------------------- Title: Secretary ----------------------- AMERICAN GENERAL ASSET MANAGEMENT CORP. By: /s/ Joseph T. Grause, Jr. ------------------------- Name: Joseph T. Grause, Jr. ------------------------- Title: President ----------------------- Schedule A Administrative Services 1. AGAM, or its agent, shall maintain adequate records for each Plan reflecting Shares purchased and redeemed, including the date, price and number of Shares purchased, redeemed or exchanged; dividend reinvestment dates and amounts of dividends paid for at least the current year to date; records of distributions and dividend payments; Share transfers; investment allocation changes; and overall control records. Such records shall be preserved, maintained and made available in accordance with the provisions of applicable law and regulations, and copies or, if required, originals shall be surrendered promptly to the Trust on and in accordance with its request. Records surrendered hereunder shall be in machine-readable form, except to the extent that such records have been maintained only in paper form. 2. AGAM, or its agent, shall disburse or credit to the Plans, and maintain records of, all proceeds of Share redemptions and distributions not reinvested in Shares. 3. AGAM, or its agent, shall cause and oversee the timely and accurate transfer of funds in connection with Plan accounts with the Funds. 4. AGAM , or its agent, shall prepare and deliver periodic account statements to the Plans showing for each Plan the total number of Shares held as of the statement closing date, purchases and redemptions of Shares during the statement period, and dividends and other distributions paid during the statement period (whether paid in cash or reinvested in Shares), including dates and prices for all transactions. 5. Subject to the terms of the agreements with each Plan, and to the extent required by applicable law, AGAM, or its agent, shall deliver or cause the delivery of prospectuses, proxy materials (where pass-through voting is required), periodic reports to shareholders, and other materials provided to AGAM by the Trust on behalf of the Funds. 6. AGAM, or its agent, shall receive Instructions from the Service Provider or the trustee and/or custodian of the Plans and communicate Orders to the Trust or its agent as specified in the Agreement. 7. AGAM, or its agent, shall transmit Orders to the Trust or its agent and, in accordance with applicable law, send to the Plans confirmations related to the processing of Instructions and Orders. 8. AGAM, or its agent, shall maintain daily and monthly purchase summaries (expressed in both Share and dollar amounts) for each Plan. 9. AGAM, or its agent, shall use its best efforts to arrange for payment for net purchases of Shares attributable to all Orders executed on a given Business Day to be wired to the Trust or its agent by 12:00 PM (noon) eastern time the first Business Day following receipt of such orders by the Service Provider. The Trust agrees that it will use its best efforts to arrange for payment for net redemptions for Shares attributable to all orders executed prior to 4:00 PM on a given Business Day to be wired to the trustee and/or custodian of the Plans by 12:00 PM (noon) eastern time the first Business Day following receipt of such orders by the Transfer Agent. 10. AGAM, or its agent, shall transmit to the Trust or its agent, or to any Fund designated by the Trust, such occasional and periodic reports as the Trust shall reasonably request from time to time to enable it or such Fund to comply with applicable laws and regulations. 11. AGAM, or its agent, shall establish a voice response system and make customer service representatives accessible to respond to Plan or Participant inquiries regarding, among other things, Share prices, account balances, dividend amounts, dividend payment dates, and any information changes concerning a Plan or Participant. 12. AGAM, or its agent, shall provide average cost basis reporting to Plan Participants to assist them in preparing their income tax returns. 13. AGAM, or its agent, shall prepare and file with the appropriate governmental agencies such tax-related information, returns and reports as are required under applicable laws or regulations to be filed for reporting (a) dividends and other distributions, (b) amounts withheld on dividends and other distributions and payments, and (c) gross proceeds of sales transactions. 14. AGAM, or its agent, shall assist with the solicitation of proxies from Plan Participants, as requested from time to time by the Trust. 15. AGAM, or its agent, shall establish Internet access for Participants to view account balances and perform certain limited transactions as determined by the Service Provider and AGAM. 16. AGAM, or its agent, shall perform all testing and Plan compliance services, including consulting on proposed Plan amendments, determining Plan eligibility, calculating Plan service and vesting, and processing forfeitures. Schedule B Shareholder Services AGAM, or its agent, shall provide to shareholders of each Class of Shares of each Lifestyle Fund (other than Institutional Class I shareholders, who will receive the Administrative Services) in respect of such Shares, all of the services customarily provided by full-service brokerage firms to their customers, including, without limitation: 1. Maintenance of records; 2. Providing customers with periodic statements showing their Lifestyle Fund holdings; 3. Aggregating and processing customer purchase and redemption orders and providing sub-accounting services for shares held beneficially; 4. Processing dividend payments; 5. Forwarding shareholder communications such as proxies, shareholder reports, dividend and tax notices and updating prospectuses; 6. Receiving, tabulating and transmitting proxies executed by beneficial owners; 7. Responding to customer inquiries; and 8. Providing information on customers' investments. Schedule C Administrative and Shareholder Service Fees The Trust, on behalf of the Funds, will pay AGAM a monthly fee at an annualized rate of 0.25 percent (25 basis points) of the average daily net assets of each Fund (other than the Lifestyle Funds) attributable to Institutional Class I Shares. If AGAM begins or ceases to perform Administrative and Shareholder Services during the month, such fee shall be prorated according to the proportion which such portion of the month bears to the full month. EX-99.(I)(12) 9 0009.txt OPINION OF SULLIVAN & WORCESTER EXHIBIT (i)(12) [SULLIVAN & WORCESTER, LLP LETTERHEAD] February 20, 2001 North American Funds 286 Congress Street Boston, Massachusetts 02116 North American Funds -------------------- Ladies and Gentlemen: We have acted as counsel for North American Funds (the "Trust") in connection with the offer by the Trust of an unlimited number of shares of beneficial interest of the Trust (the "Shares") which have been classified into series portfolios (each a "Fund" and, together, the "Funds"). We have participated in the preparation of the Trust's Registration Statement (the "Registration Statement") on Form N-1A relating to the Shares to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended, on or about February 20, 2001. The Prospectus included in the Registration Statement as amended to date is herein referred to as the "Prospectus." We have examined and relied upon the originals, or copies certified or otherwise identified to our satisfaction, of such records, documents, certificates and other instruments, and have made such other investigations, as in our judgment are necessary or appropriate to enable us to render the opinion expressed below. We are of the following opinion: 1. The Trust is validly existing as an unincorporated voluntary association under Massachusetts law and has made all filings required to be made by a voluntary association under Chapter 182 of the Massachusetts General Laws. 2. Upon the issue of Shares for cash at a Fund's net asset value and receipt by the Trust of the authorized consideration therefor as set forth in the Prospectus, the Shares so issued will be validly issued, fully paid and nonassessable by the Trust. The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, holders of Shares could, under certain circumstances, be held personally liable for the obligations of the Trust. However, the Declaration of Trust of the Trust disclaims shareholder liability for acts, obligations or affairs of the Trust and requires that notice of such disclaimer be given in each agreement, obligation, or instrument entered into or executed by the Trust or the Trustees on behalf of the Trust. The Declaration of Trust provides for indemnification out of the Trust's property for all loss and expense of any shareholder held personally liable for the obligations of the Trust. Accordingly, the risk of a shareholder's incurring financial loss on account of shareholder liability is limited to circumstances in which the Trust itself would be unable to meet its obligations. We understand that this opinion is to be used in connection with the registration of the Shares for offering and sale pursuant to the Securities Act of 1933, as amended. We consent to the filing of this opinion with and as a part of the Registration Statement. Very truly yours, Sullivan & Worcester, LLP EX-99.(J) 10 0010.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT (j) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our reports dated December 27, 2000, relating to the financial statements and financial highlights which appear in the October 31, 2000 Annual Reports to Shareholders of North American Funds and Josephthal Strategic Growth Fund, which are also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Financial Highlights" and "Independent Accountants" in such Registration Statement. PricewaterhouseCoopers LLP Boston, Massachusetts February 20, 2001 EX-99.(M)(2) 11 0011.txt CLASS A AMENDMENT DECEMBER 16, 1997 EXHIBIT (m)(2) NORTH AMERICAN FUNDS -------------------- DISTRIBUTION PLAN ----------------- CLASS A SHARES -------------- AMENDMENT made this 16th day of December, 1997 to the Class A Share Distribution Plan (the "Plan"), adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940 by the North American Funds, a Massachusetts business trust (the "Fund"), with respect to the Class A shares of beneficial interest (the "Class A Shares") of the Fund's investment portfolios. In accordance with Section 6 of the Plan, the Plan shall be extended to the following additional investment portfolio established by the Fund: Emerging Growth Fund Tax-Sensitive Equity Fund The Amendment shall become effective with respect to the new portfolio in accordance with Section 6 of the Plan. EX-99.(M)(3) 12 0012.txt CLASS A AMENDMENT FEBRUARY 27, 2000 EXHIBIT (m)(3) NORTH AMERICAN FUND -------------------- DISTRIBUTION PLAN ----------------- CLASS A SHARES -------------- AMENDMENT made this 27th day of February, 2000 to the Class A Share Distribution Plan (the "Plan"), adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940 by the North American Funds, a Massachusetts business trust (the "Fund"), with respect to the Class A shares of beneficial interest (the "Class A Shares") of the Fund's investment portfolios. In accordance with Section 6 of the Plan, the Plan shall be extended to the following additional investment portfolios established by the Fund: Mid Cap Value Fund Moderate Growth LifeStyle Fund Stock Index Fund Conservative Growth LifeStyle Fund Small Cap Index Fund Municipal Money Market Fund Socially Responsible Fund Science & Technology Fund High Yield Bond Fund Josephthal Strategic Growth Fund Aggressive Growth LifeStyle Fund The Amendment shall become effective with respect to the new portfolio in accordance with Section 6 of the Plan. 1 EX-99.(M)(4) 13 0013.txt CLASS A AMENDMENT JUNE 13, 2000 EXHIIBIT (m)(4) NORTH AMERICAN FUNDS -------------------- DISTRIBUTION PLAN ----------------- CLASS A SHARES -------------- AMENDMENT made this 13th day of June, 2000 to the Class A Share Distribution Plan (the "Plan"), adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended, by the North American Funds, a Massachusetts business trust (the "Fund"), with respect to the Class A shares of beneficial interest (the "Class A Shares") of the Fund's investment portfolios. In accordance with Section 5 of the Plan, Section 1 of the Plan is hereby amended to add the following as the second paragraph of such Section: The amounts payable by the Aggressive Growth LifeStyle Fund, the Moderate Growth LifeStyle Fund and the Conservative Growth LifeStyle Fund (the "LifeStyle Funds") under this Plan to the Distributor or any other party will be reduced by any amounts paid with respect to the Institutional Class I Shares of each Portfolio in which a LifeStyle Fund invests (each an "Underlying Portfolio") pursuant to the Administrative and Shareholder Services Agreement (the "Services Agreement") between the Fund and American General Asset Management Corp. To the extent that any payments made by an Underlying Portfolio pursuant the Services Agreement should be deemed to be indirect financing of any activity primarily intended to result in the sale of shares of the Fund within the meaning of the Rule, then such payments shall be deemed authorized by this Plan. EX-99.(M)(6) 14 0014.txt CLASS B AMENDMENT DECEMBER 16, 1997 EXHIBIT (m)(6) NORTH AMERICAN FUNDS -------------------- DISTRIBUTION PLAN ----------------- CLASS B SHARES -------------- AMENDMENT made this 16th day of December, 1997 to the Class B Share Distribution Plan (the "Plan"), adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940 by the North American Funds, a Massachusetts business trust (the "Fund"), with respect to the Class B shares of beneficial interest (the "Class B Shares") of the Fund's investment portfolios. In accordance with Section 6 of the Plan, the Plan shall be extended to the following additional investment portfolio established by the Fund: Emerging Growth Fund Tax-Sensitive Equity Fund The Amendment shall become effective with respect to the new portfolio in accordance with Section 6 of the Plan. EX-99.(M)(7) 15 0015.txt CLASS B AMENDMENT FEBRUARY 27, 2000 Exhibit (M)(7) NORTH AMERICAN FUNDS -------------------- DISTRIBUTION PLAN ----------------- CLASS B SHARES -------------- AMENDMENT made this 27th day of February, 2000 to the Class B Share Distribution Plan (the "Plan"), adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940 by the North American Funds, a Massachusetts business trust (the "Fund"), with respect to the Class B shares of beneficial interest (the "Class B Shares") of the Fund's investment portfolios. In accordance with Section 6 of the Plan, the Plan shall be extended to the following additional investment portfolios established by the Fund: Mid Cap Value Fund Stock Index Fund Moderate Growth LifeStyle Fund Small Cap Index Fund Conservative Growth LifeStyle Fund Socially Responsible Fund Municipal Money Market Fund High Yield Bond Fund Science & Technology Fund Aggressive Growth LifeStyle Fund Josephthal Strategic Growth Fund The Amendment shall become effective with respect to the new portfolio in accordance with Section 6 of the Plan. EX-99.(M)(8) 16 0016.txt CLASS B AMENDMENT JUNE 13, 2000 Exhibit (M)(8) NORTH AMERICAN FUNDS -------------------- DISTRIBUTION PLAN ----------------- CLASS B SHARES -------------- AMENDMENT made this 13th day of June, 2000 to the Class B Share Distribution Plan (the "Plan"), adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended, by the North American Funds, a Massachusetts business trust (the "Fund"), with respect to the Class B shares of beneficial interest (the "Class B Shares") of the Fund's investment portfolios. In accordance with Section 5 of the Plan, Section 1 of the Plan is hereby amended to add the following as the second paragraph of such Section: The amounts payable by the Aggressive Growth LifeStyle Fund, the Moderate Growth LifeStyle Fund and the Conservative Growth LifeStyle Fund (the "LifeStyle Funds") under this Plan to the Distributor or any other party will be reduced by any amounts paid with respect to the Institutional Class I Shares of each Portfolio in which a LifeStyle Fund invests (each an "Underlying Portfolio") pursuant to the Administrative and Shareholder Services Agreement (the "Services Agreement") between the Fund and American General Asset Management Corp. To the extent that any payments made by an Underlying Portfolio pursuant the Services Agreement should be deemed to be indirect financing of any activity primarily intended to result in the sale of shares of the Fund within the meaning of the Rule, then such payments shall be deemed authorized by this Plan. EX-99.(M)(10) 17 0017.txt CLASS C AMENDMENT DECEMBER 16, 1997 EXHIBIT (m)(10) NORTH AMERICAN FUNDS -------------------- DISTRIBUTION PLAN ----------------- CLASS C SHARES -------------- AMENDMENT made this 16th day of December, 1997 to the Class C Share Distribution Plan (the "Plan"), adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940 by the North American Funds, a Massachusetts business trust (the "Fund"), with respect to the Class C shares of beneficial interest (the "Class C Shares") of the Fund's investment portfolios. In accordance with Section 6 of the Plan, the Plan shall be extended to the following additional investment portfolio established by the Fund: Emerging Growth Fund Tax-Sensitive Equity Fund The Amendment shall become effective with respect to the new portfolio in accordance with Section 6 of the Plan. EX-99.(M)(11) 18 0018.txt CLASS C AMENDMENT FEBRUARY 27, 2000 Exhibit (M)(11) NORTH AMERICAN FUNDS -------------------- DISTRIBUTION PLAN ----------------- CLASS C SHARES -------------- AMENDMENT made this 27th day of February, 2000 to the Class C Share Distribution Plan (the "Plan"), adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940 by the North American Funds, a Massachusetts business trust (the "Fund"), with respect to the Class C shares of beneficial interest (the "Class C Shares") of the Fund's investment portfolios. In accordance with Section 6 of the Plan, the Plan shall be extended to the following additional investment portfolios established by the Fund: Mid Cap Value Fund Stock Index Fund Moderate Growth LifeStyle Fund Small Cap Index Fund Conservative Growth LifeStyle Fund Socially Responsible Fund Municipal Money Market Fund High Yield Bond Fund Science & Technology Fund Aggressive Growth LifeStyle Fund Josephthal Strategic Growth Fund The Amendment shall become effective with respect to the new portfolio in accordance with Section 6 of the Plan. EX-99.(M)(12) 19 0019.txt CLASS C AMENDMENT JUNE 13, 2000 Exhibit (M)(12) NORTH AMERICAN FUNDS -------------------- DISTRIBUTION PLAN ----------------- CLASS C SHARES -------------- AMENDMENT made this 13th day of June, 2000 to the Class C Share Distribution Plan (the "Plan"), adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended, by the North American Funds, a Massachusetts business trust (the "Fund"), with respect to the Class C shares of beneficial interest (the "Class C Shares") of the Fund's investment portfolios. In accordance with Section 5 of the Plan, Section 1 of the Plan is hereby amended to add the following as the second paragraph of such Section: The amounts payable by the Aggressive Growth LifeStyle Fund, the Moderate Growth LifeStyle Fund and the Conservative Growth LifeStyle Fund (the "LifeStyle Funds") under this Plan to the Distributor or any other party will be reduced by any amounts paid with respect to the Institutional Class I Shares of each Portfolio in which a LifeStyle Fund invests (each an "Underlying Portfolio") pursuant to the Administrative and Shareholder Services Agreement (the "Services Agreement") between the Fund and American General Asset Management Corp. To the extent that any payments made by an Underlying Portfolio pursuant the Services Agreement should be deemed to be indirect financing of any activity primarily intended to result in the sale of shares of the Fund within the meaning of the Rule, then such payments shall be deemed authorized by this Plan. EX-99.(P)(2)(A) 20 0020.txt WELLINGTON CODE OF ETHICS Exhibit (p)(2)(a) Wellington Management Company, llp Wellington Trust Company, na Wellington Management International Wellington International Management Company Pte Ltd. Code of Ethics - ----------------- --------------------------------------------------------- Summary Wellington Management Company, llp and its affiliates have a fiduciary duty to investment company and investment counseling clients which requires each employee to act solely for the benefit of clients. Also, each employee has a duty to act in the best interest of the firm. In addition to the various laws and regulations covering the firm's activities, it is clearly in the firm's best interest as a professional investment advisory organization to avoid potential conflicts of interest or even the appearance of such conflicts with respect to the conduct of the firm's employees. Wellington Management's personal trading and conduct must recognize that the firm's clients always come first, that the firm must avoid any actual or potential abuse of our positions of trust and responsibility, and that the firm must never take inappropriate advantage of its positions. While it is not possible to anticipate all instances of potential conflict, the standard is clear. In light of the firm's professional and legal responsibilities, we believe it is appropriate to restate and periodically distribute the firm's Code of Ethics to all employees. It is Wellington Management's aim to be as flexible as possible in its internal procedures, while simultaneously protecting the organization and its clients from the damage that could arise from a situation involving a real or apparent conflict of interest. While it is not possible to specifically define and prescribe rules regarding all possible cases in which conflicts might arise, this Code of Ethics is designed to set forth the policy regarding employee conduct in those situations in which conflicts are most likely to develop. If an employee has any doubt as to the propriety of any activity, he or she should consult the President or Regulatory Affairs Department. The Code reflects the requirements of United States law, Rule 17j-1 of the Investment Company Act of 1940, as amended on October 29, 1999, as well as the recommendations issued by an industry study group in 1994, which were strongly supported by the SEC. The term "Employee" includes all employees and Partners. - -------------------- --------------------------------------------------------- Policy on Personal Essentially, this policy requires that all personal Securities securities transactions (including acquisitions or Transactions dispositions other than through a purchase or sale) by all Employees must be cleared prior to execution. The only exceptions to this policy of prior clearance are noted below. - -------------------- --------------------------------------------------------- Definition of The following transactions by Employees are considered "Personal Securities "personal" under applicable SEC rules and therefore Transactions" subject to this statement of policy: Code of Ethics Page 2 - -------------------- --------------------------------------------------------- 1 Transactions for an Employee's own account, including IRA's. 2 Transactions for an account in which an Employee has indirect beneficial ownership, unless the Employee has no direct or indirect influence or control over the account. Accounts involving family (including husband, wife, minor children or other dependent relatives), or accounts in which an Employee has a beneficial interest (such as a trust of which the Employee is an income or principal beneficiary) are included within the meaning of "indirect beneficial interest". If an Employee has a substantial measure of influence or control over an account, but neither the Employee nor the Employee's family has any direct or indirect beneficial interest (e.g., a trust for which the Employee is a trustee but not a direct or indirect beneficiary), the rules relating to personal securities transactions are not considered to be directly applicable. Therefore, prior clearance and subsequent reporting of such transactions are not required. In all transactions involving such an account an Employee should, however, conform to the spirit of these rules and avoid any activity which might appear to conflict with the investment company or counseling clients or with respect to the Employee's position within Wellington Management. In this regard, please note "Other Conflicts of Interest", found later in this Code of Ethics, which does apply to such situations. - -------------------- --------------------------------------------------------- Preclearance Except as specifically exempted in this section, all Required ---------------------------------------------------- Employees must clear personal securities transactions ----------------------------------------------------- prior to execution. This includes bonds, stocks ------------------ (including closed end funds), convertibles, preferreds, options on securities, warrants, rights, etc. for domestic and foreign securities, whether publicly traded or privately placed. The only exceptions to this requirement are automatic dividend reinvestment and stock purchase plan acquisitions, broad-based stock index and U.S. government securities futures and options on such futures, transactions in open-end mutual funds, U.S. Government securities, commercial paper, or non- volitional transactions. Non-volitional transactions include gifts to an Employee over which the Employee has no control of the timing or transactions which result from corporate action applicable to all similar security holders (such as splits, tender offers, mergers, stock dividends, etc.). Please note, however, that most of these transactions must be reported even though they do not have to be precleared. See the following section on reporting obligations. Clearance for transactions must be obtained by contacting the Director of Global Equity Trading or those personnel designated by him for this purpose. Requests for clearance and approval for transactions may be communicated orally or via Code of Ethics Page 3 - -------------------- --------------------------------------------------------- email. The Trading Department will maintain a log of all requests for approval as coded confidential records of the firm. Private placements (including both securities and partnership interests) are subject to special clearance by the Director of Regulatory Affairs, Director of Enterprise Risk Management or the General Counsel, and the clearance will remain in effect for a reasonable period thereafter, not to exceed 90 days. Clearance for personal securities transactions for publicly traded securities will be in effect for one trading day only. This "one trading day" policy is interpreted as follows: . If clearance is granted at a time when the principal market in which the security trades is open, clearance is effective for the remainder of that trading day until the opening of that market on the following day. . If clearance is granted at a time when the principal market in which the security trades is closed, clearance is effective for the next trading day until the opening of that market on the following day. - -------------------- --------------------------------------------------------- Filing of Reports Records of personal securities transactions by Employees will be maintained. All Employees are subject to the following reporting requirements: 1 Duplicate Brokerage All Employees must require their securities brokers to Confirmations send duplicate confirmations of their securities transactions to the Regulatory Affairs Department. Brokerage firms are accustomed to providing this service. Please contact Regulatory Affairs to obtain a form letter to request this service. Each employee must return to the Regulatory Affairs Department a completed form for each brokerage account that is used for personal securities transactions of the Employee. Employees should not send --- the completed forms to their brokers directly. The form must be completed and returned to the Regulatory Affairs Department prior to any transactions being placed with the broker. The Regulatory Affairs Department will process the request in order to assure delivery of the confirms directly to the Department and to preserve the confidentiality of this information. When possible, the transaction confirmation filing requirement will be satisfied by electronic filings from securities depositories. 2 Filing of Quarterly SEC rules require that a quarterly record of all personal Report of all securities transactions submitted by each person subject "Personal Securities to the Code's requirements and that this record be Transactions" available for inspection. To comply with these rules, every Employee must file a quarterly personal securities transaction report within 10 calendar days after the end of each calendar quarter. Reports are filed electronically utilizing the firm's proprietary Personal Securities Transaction Code of Ethics Page 4 - -------------------- --------------------------------------------------------- Reporting System (PSTRS) accessible to all Employees via the Wellington Management Intranet. At the end of each calendar quarter, Employees will be notified of the filing requirement. Employees are responsible for submitting the quarterly report within the deadline established in the notice. Transactions during the quarter indicated on brokerage confirmations or electronic filings are displayed on the Employee's reporting screen and must be affirmed if they are accurate. Holdings not acquired through a broker submitting confirmations must be entered manually. All Employees are required to submit a quarterly report, even if there were no reportable transactions during the quarter. Employees must also provide information on any new brokerage account established during the quarter including the name of the broker, dealer or bank and the date the account was established. IMPORTANT NOTE: The quarterly report must include the -------------- required information for all "personal securities transactions" as defined above, except transactions in open-end mutual funds, money market securities, U.S. Government securities, and futures and options on futures on U.S. government securities. Non-volitional transactions and those resulting from corporate actions must also be reported even though preclearance is not required and the nature of the transaction must be clearly specified in the report. 3 Certification of As part of the quarterly reporting process on PSTRS, Compliance Employees are required to confirm their compliance with the provisions of this Code of Ethics. 4 Filing of Personal Annually, all Employees must file a schedule indicating Holding Report their personal securities holdings as of December 31 of each year by the following January 30. SEC Rules require that this report include the title, number of shares and principal amount of each security held in an Employee's personal account, and the name of any broker, dealer or bank with whom the Employee maintains an account. "Securities" for purposes of this report are those which must be reported as indicated in the prior paragraph. Newly hired Employees are required to file a holding report within ten (10) days of joining the firm. Employees may indicate securities held in a brokerage account by attaching an account statement, but are not required to do so, since these statements contain additional information not required by the holding report. Code of Ethics Page 5 - -------------------- --------------------------------------------------------- 5 Review of Reports All reports filed in accordance with this section will be maintained and kept confidential by the Regulatory Affairs Department. Reports will be reviewed by the Director of Regulatory Affairs or personnel designated by her for this purpose. - -------------------- --------------------------------------------------------- Restrictions on While all personal securities transactions must be "Personal cleared prior to execution, the following guidelines Securities indicate which transactions will be prohibited, Transactions" discouraged, or subject to nearly automatic clearance. The clearance of personal securities transactions may also depend upon other circumstances, including the timing of the proposed transaction relative to transactions by our investment counseling or investment company clients; the nature of the securities and the parties involved in the transaction; and the percentage of securities involved in the transaction relative to ownership by clients. The word "clients" refers collectively to investment company clients and counseling clients. Employees are expected to be particularly sensitive to meeting the spirit as well as the letter of these restrictions. Please note that these restrictions apply in the case of debt securities to the specific issue and in the case of common stock, not only to the common stock, but to any equity-related security of the same issuer including preferred stock, options, warrants, and convertible bonds. Also, a gift or transfer from you (an Employee) to a third party shall be subject to these restrictions, unless the donee or transferee represents that he or she has no present intention of selling the donated security. 1 No Employee may engage in personal transactions involving any securities which are: . being bought or sold on behalf of clients until one trading day after such buying or selling is completed or canceled. In addition, no Portfolio Manager may engage in a personal transaction involving any security for 7 days prior to, and 7 days following, a transaction in the same security for a client account managed by that Portfolio Manager without a special exemption. See "Exemptive Procedures" below. Portfolio Managers include all designated portfolio managers and others who have direct authority to make investment decisions to buy or sell securities, such as investment team members and analysts involved in Research Equity portfolios. All Employees who are considered Portfolio Managers will be so notified by the Regulatory Affairs Department. . the subject of a new or changed action recommendation from a research analyst until 10 business days following the issuance of such recommendation; Code of Ethics Page 6 - -------------------- --------------------------------------------------------- . the subject of a reiterated but unchanged recommendation from a research analyst until 2 business days following reissuance of the recommendation . actively contemplated for transactions on behalf of clients, even though no buy or sell orders have been placed. This restriction applies from the moment that an Employee has been informed in any fashion that any Portfolio Manager intends to purchase or sell a specific security. This is a particularly sensitive area and one in which each Employee must exercise caution to avoid actions which, to his or her knowledge, are in conflict or in competition with the interests of clients. 2 The Code of Ethics strongly discourages short term trading by Employees. In addition, no Employee may take a "short term trading" profit in a security, which means the sale of a security at a gain (or closing of a short position at a gain) within 60 days of its purchase, without a special exemption. See "Exemptive Procedures". The 60 day prohibition does not apply to transactions resulting in a loss, nor to futures or options on futures on broad-based securities indexes or U.S. government securities. 3 No Employee engaged in equity or bond trading may engage in personal transactions involving any equity securities of any company whose primary business is that of a broker/dealer. 4 Subject to preclearance, Employees may engage in short sales, options, and margin transactions, but such transactions are strongly discouraged, particularly due to the 60 day short term profit-taking prohibition. Any Employee engaging in such transactions should also recognize the danger of being "frozen" or subject to a forced close out because of the general restrictions which apply to personal transactions as noted above. In specific case of hardship an exception may be granted by the Director of Regulatory Affairs or her designee upon approval of the Ethics Committee with respect to an otherwise "frozen" transaction. 5 No Employee may engage in personal transactions involving the purchase of any security on an initial public offering. This restriction also includes new issues resulting from spin-offs, municipal securities and thrift conversions, although in limited cases the purchase of such securities in an offering may be approved by Code of Ethics Page 7 - -------------------- --------------------------------------------------------- the Director of Regulatory Affairs or her designee upon determining that approval would not violate any policy reflected in this Code. This restriction does not apply to open-end mutual funds, U. S. government issues or money market investments. 6 Employees may not purchase securities in private placements unless approval of the Director of Regulatory Affairs, Director of Enterprise Risk Management or the General Counsel has been obtained. This approval will be based upon a determination that the investment opportunity need not be reserved for clients, that the Employee is not being offered the investment opportunity due to his or her employment with Wellington Management and other relevant factors on a case-by-case basis. If the Employee has portfolio management or securities analysis responsibilities and is granted approval to purchase a private placement, he or she must disclose the privately placed holding later if asked to evaluate the issuer of the security. An independent review of the Employee's analytical work or decision to purchase the security for a client account will then be performed by another investment professional with no personal interest in the transaction. Gifts and Other Employees should not seek, accept or offer any gifts or Sensitive Payments favors of more than minimal value or any preferential treatment in dealings with any client, broker/dealer, portfolio company, financial institution or any other organization with whom the firm transacts business. Occasional participation in lunches, dinners, cocktail parties, sporting activities or similar gatherings conducted for business purposes are not prohibited. However, for both the Employee's protection and that of the firm it is extremely important that even the appearance of a possible conflict of interest be avoided. Extreme caution is to be exercised in any instance in which business related travel and lodgings are paid for other than by Wellington Management, and prior approval must be obtained from the Regulatory Affairs Department. Any question as to the propriety of such situations should be discussed with the Regulatory Affairs Department and any incident in which an Employee is encouraged to violate these provisions should be reported immediately. An explanation of all extraordinary travel, lodging and related meals and entertainment is to be reported in a brief memorandum to the Director of Regulatory Affairs. Employees must not participate individually or on behalf of the firm, a subsidiary, or any client, directly or indirectly, in any of the following transactions: Code of Ethics Page 8 - -------------------- --------------------------------------------------------- 1 Use of the firm's funds for political purposes. 2 Payment or receipt of bribes, kickbacks, or payment or receipt of any other amount with an understanding that part or all of such amount will be refunded or delivered to a third party in violation of any law applicable to the transaction. 3 Payments to government officials or employees (other than disbursements in the ordinary course of business for such legal purposes as payment of taxes). 4 Payment of compensation or fees in a manner the purpose of which is to assist the recipient to evade taxes, federal or state law, or other valid charges or restrictions applicable to such payment. 5 Use of the funds or assets of the firm or any subsidiary for any other unlawful or improper purpose. - -------------------- --------------------------------------------------------- Other Conflicts of Employees should also be aware that areas other than Interest personal securities transactions or gifts and sensitive payments may involve conflicts of interest. The following should be regarded as examples of situations involving real or potential conflicts rather than a complete list of situations to avoid. "Inside Information" Specific reference is made to the firm's policy on the use of "inside information" which applies to personal securities transactions as well as to client transactions. Use of Information Information acquired in connection with employment by the organization may not be used in any way which might be contrary to or in competition with the interests of clients. Employees are reminded that certain clients have specifically required their relationship with us to be treated confidentially. Disclosure of Information regarding actual or contemplated investment Information decisions, research priorities or client interests should not be disclosed to persons outside our organization and in no way can be used for personal gain. Outside All outside relationships such as directorships or Activities trusteeships of any kind or membership in investment organizations (e.g., an investment club) must be cleared by the Director of Regulatory Affairs prior to the acceptance of such a position. As Code of Ethics Page 9 - -------------------- --------------------------------------------------------- a general matter, directorships in unaffiliated public companies or companies which may reasonably be expected to become public companies will not be authorized because of the potential for conflicts which may impede our freedom to act in the best interests of clients. Service with charitable organizations generally will be authorized, subject to considerations related to time required during working hours and use of proprietary information. Exemptive Procedure The Director of Regulatory Affairs, the Director of Enterprise Risk Management, the General Counsel or the Ethics Committee can grant exemptions from the personal trading restrictions in this Code upon determining that the transaction for which an exemption is requested would not result in a conflict of interest or violate any other policy embodied in this Code. Factors to be considered may include: the size and holding period of the Employee's position in the security, the market capitalization of the issuer, the liquidity of the security, the reason for the Employee's requested transaction, the amount and timing of client trading in the same or a related security, and other relevant factors. Any Employee wishing an exemption should submit a written request to the Director of Regulatory Affairs setting forth the pertinent facts and reasons why the employee believes that the exemption should be granted. Employees are cautioned that exemptions are intended to be exceptions, and repetitive exemptive applications by an Employee will not be well received. Records of the approval of exemptions and the reasons for granting exemptions will be maintained by the Regulatory Affairs Department. - -------------------- --------------------------------------------------------- Compliance with Adherence to the Code of Ethics is considered a basic The Code of Ethics condition of employment with our organization. The Ethics Committee monitors compliance with the Code and reviews violations of the Code to determine what action or sanctions are appropriate. Violations of the provisions regarding personal trading will presumptively be subject to being reversed in the case of a violative purchase, and to disgorgement of any profit realized from the position (net of transaction costs and capital gains taxes payable with respect to the transaction) by payment of the profit to any client disadvantaged by the transaction, or to a charitable organization, as determined by the Ethics Committee, unless the Employee establishes to the satisfaction of the Ethics Committee that under the particular circumstances disgorgement would be an unreasonable remedy for the violation. Code of Ethics Page 10 - -------------------- --------------------------------------------------------- Violations of the Code of Ethics may also adversely affect an Employee's career with Wellington Management with respect to such matters as compensation and advancement. Employees must recognize that a serious violation of the Code of Ethics or related policies may result, at a minimum, in immediate dismissal. Since many provisions of the Code of Ethics also reflect provisions of the U.S. securities laws, Employees should be aware that violations could also lead to regulatory enforcement action resulting in suspension or expulsion from the securities business, fines and penalties, and imprisonment. Again, Wellington Management would like to emphasize the importance of obtaining prior clearance of all personal securities transactions, avoiding prohibited transactions, filing all required reports promptly and avoiding other situations which might involve even an apparent conflict of interest. Questions regarding interpretation of this policy or questions related to specific situations should be directed to the Regulatory Affairs Department or Ethics Committee. Revised: March 1, 2000 EX-99.(P)(2)(B) 21 0021.txt FOUNDERS CODE OF ETHICS Exhibit (p)(2)(b) MELLON SECURITIES TRADING POLICY Questions Concerning the Securities Trading Policy? Contact Corporate Compliance, (412) 234-1661 AIM 151-4340, Mellon Bank, Pittsburgh, PA 15258-0001 Dear Colleague: At Mellon, we take great pride in our transformation over the years from a regional bank to a global financial services company. Our growth makes us better able to meet customers' changing needs, gives us greater stability during any unexpected economic downturn and affords us the opportunity to be the best performing financial services company. This diversity of our businesses also makes us a complex organization, which is why it's more important than ever that you clearly understand Mellon's Securities Trading Policy. Mellon has long maintained strict policies regarding securities transactions, all with the same clear-cut objective: to establish and demonstrate our compliance with the high standards with which we conduct our business. If you are new to Mellon, please take the time to fully understand the Policy and consult it whenever you are unsure about appropriate actions. If you have seen the Policy previously, I urge you to renew your understanding of the entire document and its implications for you. Only by strict adherence to the Policy can we ensure that our well-deserved reputation for integrity is preserved. Sincerely yours, Martin G. McGuinn Page 1
CONTENTS PAGE INTRODUCTION 1 CLASSIFICATION OF EMPLOYEES 2 -Insider Risk Employees -Investment Employees -Access Decision Makers -Other Employees -Consultants, Independent Contractors and Temporary Employees PERSONAL SECURITIES TRADING PRACTICES 3 SECTION ONE - APPLICABLE TO INSIDER RISK EMPLOYEES 3 Quick Reference - Insider Risk Employees 5 Standards of Conduct for Insider Risk Employees 6 Restrictions on Transactions in Mellon Securities 9 Restrictions on Transactions in Other Securities 11 Protecting Confidential Information 14 SECTION TWO - APPLICABLE TO INVESTMENT EMPLOYEES 17 Quick Reference - Investment Employees 19 Standards of Conduct for Investment Employees 20 Restrictions on Transactions in Mellon Securities 24 Restrictions on Transactions in Other Securities 26 Protecting Confidential Information 29 SECTION THREE - APPLICABLE TO OTHER EMPLOYEES 31 Quick Reference - Other Employees 33 Standards of Conduct for Other Employees 34 Restrictions on Transactions in Mellon Securities 35 Restrictions on Transactions in Other Securities 37 Protecting Confidential Information 39 GLOSSARY Definitions 43 Exhibit A - Sample Letter to Broker 49
Page 2 - ------------------------------------------------------------------------------- INTRODUCTION The Securities Trading Policy (the "Policy") is designed to - ------------ reinforce Mellon Financial Corporation's ("Mellon's") reputation for integrity by avoiding even the appearance of impropriety in the conduct of Mellon's business. The Policy sets forth procedures and limitations which govern the personal securities transactions of every Mellon Employee. Mellon and its employees are subject to certain laws and regulations governing personal securities trading. Mellon has developed this Policy to promote the highest standards of behavior and ensure compliance with applicable laws. Employees should be aware that they may be held personally liable for any improper or illegal acts committed during the course of their employment, and that "ignorance of the law" is not a defense. Employees may be subject to civil penalties such as fines, regulatory sanctions including suspensions, as well as criminal penalties. Employees outside the United States are also subject to applicable laws of foreign jurisdictions, which may differ substantially from US law and which may subject such employees to additional requirements. Such employees must comply with applicable requirements of pertinent foreign laws as well as with the provisions of the Policy. To the extent any particular portion of the Policy is inconsistent with foreign law, employees should consult the General Counsel or the Manager of Corporate Compliance. Any provision of this Policy may be waived or exempted at the discretion of the Manager of Corporate Compliance. Any such waiver or exemption will be evidenced in writing and maintained in the Audit and Risk Review Department. Employees must read the Policy and must comply with it. Failure to comply with the provisions of the Policy may result in the imposition of serious sanctions, including but not limited to disgorgement of profits, dismissal, substantial personal liability and referral to law enforcement agencies or other regulatory agencies. Employees should retain the Policy in their records for future reference. Any questions regarding the Policy should be referred to the Manager of Corporate Compliance or his/her designee. Page 3 - ------------------------------------------------------------------------------- CLASSIFICATION OF The Policy is applicable to all employees of Mellon and EMPLOYEES all of its subsidiaries which are more than 50% owned by Mellon. This includes all full-time, part-time, benefited and non-benefited, exempt and non-exempt, domestic and international employees. It does not include consultants and contract or temporary employees, nor employees of subsidiaries which are 50% or less owned by Mellon. Although the Policy provisions generally have worldwide applicability, some sections of the Policy may conflict with the laws or customs of the countries in which Mellon operations are located. The Policy may be amended for operations outside the United States only with the approval of the Manager of Corporate Compliance. Employees are engaged in a wide variety of activities for Mellon. In light of the nature of their activities and the impact of federal and state laws and the regulations thereunder, the Policy imposes different requirements and limitations on employees based on the nature of their activities for Mellon. To assist employees in complying with the requirements and limitations imposed on them in light of their activities, employees are classified into one of four categories: Insider Risk Employee, Investment Employee, Access Decision Maker and Other Employee. Appropriate requirements and limitations are specified in the Policy based upon an employee's classification. Business line management, in conjunction with the Manager of Corporate Compliance, will determine the classification of each employee based on the following guidelines. Employees should confirm their classification with their Preclearance Compliance Officer or the Manager of Corporate Compliance. INSIDER RISK You are considered to be an Insider Risk Employee if, in the Page 4 EMPLOYEE normal conduct of your Mellon responsibilities, you are likely to receive or be perceived to possess or receive, material nonpublic information concerning Mellon's commercial credit or corporate finance customers. This will typically include certain employees in the credit, lending and leasing businesses, certain members of the Audit and Risk Review, and Legal Departments, and all members of the Senior Management Committee who are not Investment Employees. INVESTMENT You are considered to be an Investment Employee if, in the EMPLOYEE normal conduct of your Mellon responsibilities, you are likely to receive or be perceived to possess or receive, material nonpublic information concerning Mellon's trading in securities for Mellon's account or for the accounts of others, and/or if you provide investment advice. This will typically include: . certain employees in fiduciary securities sales and trading, investment management and advisory services, investment research and various trust or fiduciary functions; . an employee of a Mellon entity registered under the Investment Advisers Act of 1940 who is also an "Access Person" as defined by Rule 17j-1 of the Investment Company Act of 1940 (see glossary); and . any member of Mellon's Senior Management Committee who, as part of his/her usual duties, has management responsibility for fiduciary activities or routinely has access to information about customers' securities Page 5 transactions. ACCESS DECISION A person designated as such by the Investment Ethics MAKER (ADM) Committee. Generally, this will be portfolio managers and research analysts who make recommendations or decisions regarding the purchase or sale of equity, convertible debt, and non-investment grade debt securities for mutual funds and other managed accounts. See further details in the Access Decision Maker edition of the Policy. OTHER You are considered to be an Other Employee if you are an EMPLOYEE employee of Mellon Financial Corporation or any of its direct or indirect subsidiaries who is not an Insider Risk Employee, Investment Employee, or an ADM. CONSULTANTS, Managers should inform consultants, independent contractors INDEPENDENT and temporary employees of the general provisions of the CONTRACTORS AND Policy (such as the prohibition on trading while in TEMPORARY possession of material nonpublic information), but generally EMPLOYEES they will not be required to preclear trades or report their personal securities holdings. If one of these persons would be considered an Insider Risk Employee, Investment Employee or Access Decision Maker if the person were a Mellon employee, the person's manager should advise the Manager of Corporate Compliance who will determine whether such individual should be subject to the preclearance and reporting requirements of the Policy. Page 6 PERSONAL SECURITIES TRADING PRACTICES SECTION ONE - APPLICABLE TO INSIDER RISK EMPLOYEES Page 7 CONTENTS PERSONAL SECURITIES TRADING PRACTICES
Page SECTION ONE - APPLICABLE TO INSIDER RISK EMPLOYEES Quick Reference - Insider Risk Employees 5 Standards of Conduct for Insider Risk Employees 6 --Conflict of Interest 6 --Material Nonpublic Information 6 --Brokers 6 --Personal Securities Transaction Reports 6 --Preclearance for Personal Securities Transactions 6 --Exemptions from Requirement to Preclear 7 --Gifting of Securities 8 --DRIPs, DPPs and AIPs 8 --Restricted List 8 --Confidential Treatment 9 Restrictions on Transactions in Mellon Securities 9 --Mellon 401(k) Plan 10 --Mellon Employee Stock Options 11 Restrictions on Transactions in Other Securities 11 --Prohibition on Investments in Securities of Financial 12 Services Organizations 13 Beneficial Ownership 13 Non-Mellon Employee Benefit Plans 13 Protecting Confidential Information 14 --Insider Trading and Tipping 15 --The "Chinese Wall" GLOSSARY Definitions 43 Exhibit A - Sample Letter to Broker 49
Page 8 QUICK REFERENCE - INSIDER RISK EMPLOYEES - ---------------------------------------- SOME THINGS 1. Duplicate Statements & Confirmations - Instruct your broker, YOU MUST DO trust account manager or other entity through which you have a securities trading account to send directly to MANAGER OF CORPORATE COMPLIANCE, MELLON BANK, PO BOX 3130, PITTSBURGH, PA 15230-3130: . Trade confirmations summarizing each transaction . Periodic statements Exhibit B of this Policy can be used to notify your broker. This applies to all accounts in which you have a beneficial interest. (See Glossary) 2. Preclearance - Before initiating a securities transaction, written preclearance must be obtained from the Manager of Corporate Compliance. This can be done by completing a Preclearance Request Form and: . delivering the request to the Manager of Corporate Compliance, AIM 151-4340, . faxing the request to (412) 234-1516, or . contacting the Manager of Corporate Compliance for other available notification options. Page 9 Preclearance Request Forms can be obtained from Corporate Compliance (412) 234-1661. If preclearance approval is received the trade must be executed before the end of the 3rd business day (with the date of approval being the 1st business day), at which time the preclearance approval will expire. 3. Special Approvals . Acquisition of securities in a Private Placement must be precleared by the employee's Department/Entity head and the Manager of Corporate Compliance. . Acquisition of securities through an allocation by the underwriter of an Initial Public Offering (IPO) is prohibited without the approval of the Manager of Corporate Compliance. Approval can be given only when the allocation is the result of a direct family relationship. Page 10 SOME THINGS Mellon Securities - The following transactions in Mellon YOU MUST securities are prohibited for all Mellon Employees: NOT DO . Short sales . Purchasing and selling or selling and purchasing within 60 days . Purchasing or selling during a blackout period . Margin purchases or options other than employee options. Non-Mellon Securities - New investments in financial services organizations are prohibited for certain employees only - see page 12. Other restrictions are detailed throughout Section One. Read the Policy! Page 11 EXEMPTIONS Preclearance is NOT required for: --- . Purchases or sales of municipal bonds, non-financial commodities (such as agricultural futures, metals, oil, gas, etc.), currency futures, financial futures, index futures, index securities, securities issued by investment companies, commercial paper; CDs; bankers' acceptances; repurchase agreements; and direct obligations of the government of the United States. . Transactions in any account over which the employee has no direct or indirect control over the investment decision making process. . Transactions that are non-volitional on the part of an employee (such as stock dividends). . Changes in elections under Mellon's 401(k) Retirement Savings Plan. . An exercise of an employee stock option administered by Human Resources. . Automatic reinvestment of dividends under a DRIP or Automatic Investment Plan. (Optional cash purchases under a DRIP or Direct Purchase Plan do require preclearance.) . Sales of securities pursuant to tender offers and sales or exercises of "Rights".(see page 8). - -------------------------------------------------------------------------------- QUESTIONS? (412) 234-1661 - -------------------------------------------------------------------------------- This page is for reference purposes only. Employees are reminded they must read the Policy and comply with its provisions. Page 12 STANDARDS OF Because of their particular responsibilities, Insider Risk CONDUCT FOR Employees are subject to preclearance and personal securities INSIDER RISK reporting requirements, as discussed below. EMPLOYEES Every Insider Risk Employee must follow these procedures or risk serious sanctions, including dismissal. If you have any questions about these procedures you should consult the Manager of Corporate Compliance. Interpretive issues that arise under these procedures shall be decided by, and are subject to the discretion of, the Manager of Corporate Compliance. CONFLICT OF No employee may engage in or recommend any securities INTEREST transaction that places, or appears to place, his or her own interests above those of any customer to whom financial services are rendered, including mutual funds and managed accounts, or above the interests of Mellon. MATERIAL No employee may engage in or recommend a securities transaction, NONPUBLIC for his or her own benefit or for the benefit of others, INFORMATION including Mellon or its customers, while in possession of material nonpublic information regarding such securities. No employee may communicate material nonpublic information to others unless it is properly within his or her job responsibilities to do so. BROKERS Trading Accounts - All Insider Risk Employees are encouraged to conduct their personal investing through a Mellon affiliate brokerage account. This will assist in the monitoring of account activity on an ongoing basis in order to ensure compliance with the Policy. Page 13 PERSONAL Trading Accounts - All Insider Risk Employees are required SECURITIES to instruct their broker, trust account manager or other entity TRANSACTIONS through which they have a securities trading account to submit REPORTS directly to the Manager of Corporate Compliance copies of all trade confirmations and statements relating to each account of which they are a beneficial owner regardless of what, if any, securities are maintained in such accounts. Thus, for example, even if the brokerage account contains only mutual funds or other exempt securities as that term is defined by the Policy and the account has the capability to have reportable securities traded in it, the Insider Risk Employee maintaining such an account must arrange for duplicate account statements and trade confirmations to be sent by the broker to the Manager of Corporate Compliance. An example of an instruction letter to a broker is contained in Exhibit A. PRECLEARANCE All Insider Risk Employees must notify the Manager of Corporate FOR PERSONAL Compliance in writing and receive preclearance before they SECURITIES engage in any purchase or sale of a security. Insider Risk TRANSACTIONS Employees should refer to the provisions under "Beneficial Ownership" below, which are applicable to these provisions. All requests for preclearance for a securities transaction shall be submitted by completing a Preclearance Request Form Page 14 which can be obtained from the Manager of Corporate Compliance. The Manager of Corporate Compliance will notify the Insider Risk Employee whether the request is approved or denied, without disclosing the reason for such approval or denial. Notifications may be given in writing or verbally by the Manager of Corporate Compliance to the Insider Risk Employee. A record of such notification will be maintained by the Manager of Corporate Compliance. However, it shall be the responsibility of the Insider Risk Employee to obtain a written record of the Manager of Corporate Compliance's notification within 24 hours of such notification. The Insider Risk Employee should retain a copy of this written record. As there could be many reasons for preclearance being granted or denied, Insider Risk Employees should not infer from the preclearance response anything regarding the security for which preclearance was requested. Although making a preclearance request does not obligate an Insider Risk Employee to do the transaction, it should be noted that: . preclearance requests should not be made for a transaction that the Insider Risk Employee does not intend to make. . preclearance authorization will expire at the end of the third business day after it is received. The day authorization is granted is considered the first Page 15 business day. . Insider Risk Employees should not discuss with anyone else, inside or outside Mellon, the response they received to a preclearance request. If the Insider Risk Employee is preclearing as beneficial owner of another's account, the response may be disclosed to the other owner. . Good Until Canceled/Stop Loss Orders ("Limit Orders") must be precleared, and security transactions receiving preclearance authorization must be executed before the preclearance expires. At the end of the three-day preclearance authorization period, any unexecuted Limit Order must be canceled or a new preclearance authorization must be obtained. EXEMPTIONS FROM Preclearance by Insider Risk Employees is not required for REQUIREMENT TO the following transactions: PRECLEAR . Purchases or sales of Exempt Securities (direct obligations of the government of the United States; high quality short-term debt instruments; bankers' acceptances; CDs; commercial paper; repurchase agreements; and securities issued by open-end investment companies); . Purchases or sales of municipal bonds, closed-end mutual funds; non-financial commodities (such as agricultural futures, metals, oil, gas, etc.), currency futures, financial futures, index futures and index securities; . Purchases or sales effected in any account over Page 16 which an employee has no direct or indirect control over the investment decision making process (e.g., discretionary trading accounts). Discretionary trading accounts may only be exempted from preclearance procedures, when the Manager of Corporate Compliance, after a thorough review, is satisfied that the account is truly discretionary; . Transactions that are non-volitional on the part of an employee (such as stock dividends); . The sale of Mellon stock received upon the exercise of an employee stock option if the sale is part of a "netting of shares" or "cashless exercise" administered by the Human Resources Department (for which the Human Resources Department will forward information to the Manager of Corporate Compliance); . Changes to elections in the Mellon 401(k) plan; . Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of securities, to the extent such rights were acquired from such issuer; . Sales of rights acquired from an issuer, as described above; and/or . Sales effected pursuant to a bona fide tender offer. GIFTING OF Insider Risk Employees desiring to make a bona fide gift of SECURITIES securities or who receive a bona fide gift, including an inheritance, of securities do not need to preclear Page 17 the transaction. However, Insider Risk Employees must report such bona fide gifts to the Manager of Corporate Compliance. The report must be made within 10 days of making or receiving the gift and must disclose the following information: the name of the person receiving (giving) the gift, the date of the transaction, and the name of the broker through which the transaction was effected. A bona fide gift is one where the donor does not receive anything of monetary value in return. An Insider Risk Employee who purchases a security with the intention of making a gift must preclear the purchase transaction. DRIPS, DPPS AND Certain companies with publicly traded securities establish: AIPS . Dividend Reinvestment Plans (DRIPs) - These permit shareholders to have their dividend payments channeled to the purchase of additional shares of such company's stock. An additional benefit offered to DRIP participants is the right to buy additional shares by sending in a check before the dividend reinvestment date ("optional cash purchases"). . Direct Purchase Plans (DPPs) - These allow purchasers to buy stock by sending a check directly to the issuer, without using a broker. . Automatic Investment Plans (AIPs) - These allow purchasers to set up a plan whereby a fixed amount of money is automatically deducted from their checking account each Page 18 month and used to purchase stock directly from the issuer. Participation in a DRIP, DPP or AIP is voluntary. Insider Risk Employees who enroll in a DRIP or AIP are not required to preclear enrollment, the periodic reinvestment of dividend payments into additional shares of company stock through a DRIP, or the periodic investments through an AIP. Insider Risk Employees must preclear all optional cash purchases through a DRIP and all purchases through a DPP. Insider Risk Employees must also preclear all sales through a DRIP, DPP or AIP. RESTRICTED LIST The Manager of Corporate Compliance will maintain a list (the "Restricted List") of companies whose securities are deemed appropriate for implementation of trading restrictions for Insider Risk Employees. The Restricted List will not be distributed outside of the office of Corporate Compliance. From time to time, such trading restrictions may be appropriate to protect Mellon and its Insider Risk Employees from potential violations, or the appearance of violations, of securities laws. The inclusion of a company on the Restricted List provides no indication of the advisability of an investment in the company's securities or the existence of material nonpublic information on the company. Nevertheless, the contents of the Restricted List will be treated as confidential information to avoid unwarranted inferences. To assist the Manager of Corporate Compliance in identifying Page 19 identifying companies that may be appropriate for inclusion on the Restricted List, the department/entity heads in which Insider Risk Employees are employed are required to inform the Manager of Corporate Compliance in writing of any companies they believe should be included on the Restricted List, based upon facts known or readily available to such department heads. Although the reasons for inclusion on the Restricted List may vary, they could typically include the following: . Mellon is involved as a lender, investor or adviser in a merger, acquisition or financial restructuring involving the company; . Mellon is involved as a selling shareholder in a public distribution of the company's securities; . Mellon is involved as an agent in the distribution of the company's securities; . Mellon has received material nonpublic information on the company; . Mellon is considering the exercise of significant creditors' rights against the company; or . The company is a Mellon borrower in Credit Recovery. Department heads of sections in which Insider Risk Employees are employed are also responsible for notifying the Manager of Corporate Compliance in writing of any change in circumstances making it appropriate to remove a company from the Restricted List. The Manager of Corporate Compliance will retain copies of the restricted lists for five years. CONFIDENTIAL The Manager of Corporate Compliance will use his or her best TREATMENT efforts to assure that all requests for preclearance, all personal securities transaction reports and all reports of securities holdings are treated as "Personal and Confidential." However, such documents will be available for inspection by appropriate regulatory agencies and by other parties within and outside Mellon as are necessary to evaluate compliance with or sanctions under this Policy. Page 20 RESTRICTIONS ON Employees who engage in transactions involving Mellon TRANSACTIONS IN securities should be aware of their unique responsibilities MELLON with respect to such transactions arising from the SECURITIES employment relationship and should be sensitive to even the appearance of impropriety. The following restrictions apply to all transactions in Mellon's publicly traded securities occurring in the employee's own account and in all other accounts over which the employee could be presumed to exercise influence or control (see provisions under "Beneficial Ownership" below for a more complete discussion of the accounts to which these restrictions apply). These restrictions are to be followed in addition to any restrictions that apply to particular officers or directors (such as restrictions under Section 16 of the Securities Exchange Act of 1934). . Short Sales - Short sales of Mellon securities by employees are prohibited. . Short Term Trading - Employees are prohibited from purchasing and selling, or from selling and purchasing, Mellon securities within any 60 calendar day period. . Margin Transactions - Purchases on margin of Mellon's publicly traded securities by employees is prohibited. Margining Mellon securities in connection with a cashless exercise of an employee stock option through the Human Resources Department is exempt from this restriction. Further, Mellon securities may be used to collateralize loans or the acquisition of securities other than those issued by Mellon. . Option Transactions - Option transactions involving Mellon's publicly traded securities are prohibited. Transactions under Mellon's Long-Term Incentive Plan or other employee option plans are exempt from this restriction. . Major Mellon Events - Employees who have knowledge of major Mellon events that have not yet been announced are prohibited from buying or selling Mellon's publicly traded securities before such public announcements, even if the employee believes the event does not constitute material nonpublic information. . Mellon Blackout Period - Employees are prohibited from Page 21 buying or selling Mellon's publicly traded securities during a blackout period. The blackout period begins the 16th day of the last month of each calendar quarter and ends 3 business days after Mellon Financial Corporation publicly announces the financial results for that quarter. Thus, the blackout periods begin on March 16, June 16, September 16 and December 16. The end of the blackout period is determined by counting business days only, and the day of the earnings announcement is day 1. The blackout period ends at the end of day 3, and employees can trade Mellon securities on day 4. MELLON 401(K) For purposes of the blackout period and the short term PLAN trading rule, employees' changing their existing account balance allocation to increase or decrease the amount allocated to Mellon Common Stock will be treated as a purchase or sale of Mellon Stock, respectively. This means: . Employees are prohibited from increasing or decreasing their existing account balance allocation to Mellon Common Stock during the blackout period. . Employees are prohibited from increasing their existing account balance allocation to Mellon Common Stock and then decreasing it within 60 days. Similarly, employees are prohibited from decreasing their existing account balance allocation to Mellon Common Stock and then increasing it within 60 days. However, changes to existing account Page 22 balance allocations in the 401(k) plan will not be compared to transactions in Mellon securities outside the 401(k) for purposes of the 60-day rule. (Note: this does not apply to members of the Executive Management Group, who should consult with the Legal Department.) Except for the above there are no other restrictions applicable to the 401(k) plan. This means, for example: . Employees are not required to preclear any elections or changes made in their 401(k) account. . There is no restriction on employees' changing their salary deferral contribution percentages with regard to either the blackout period or the 60-day rule. . The regular salary deferral contribution to Mellon Common Stock in the 401(k) that takes place with each pay will not be considered a purchase for the purposes of either the blackout or the 60-day rule. MELLON EMPLOYEE Receipt - Your receipt of an employee stock option from STOCK OPTIONS Mellon is not deemed to be a purchase of a security. Therefore, it is exempt from preclearance and reporting requirements, can take place during the blackout period and does not constitute a purchase for purposes of the 60-day prohibition. Exercises - The exercise of an employee stock option that results in your holding the shares is exempt from preclearance and reporting requirements, can take place during the blackout period and does not constitute Page 23 a purchase for purposes of the 60-day prohibition. "Cashless" Exercises - The exercise of an employee stock option which is part of a "cashless exercise" or "netting of shares" that is administered by the Human Resources Department or Chase Mellon Shareholder Services is exempt from the preclearance and reporting requirements and will not constitute a purchase or a sale for purposes of the 60-day prohibition. A "cashless exercise" or "netting of shares" transaction is permitted during the blackout period for ShareSuccess plan options only. They are not permitted during the blackout period for any other plan options. Sales - The sale of the Mellon securities that were received in the exercise of an employee stock option is treated like any other sale under the Policy (regardless of how little time has elapsed between the option exercise and the sale). Thus, such sales are subject to the preclearance and reporting requirements, are prohibited during the blackout period and constitute sales for purposes of the 60-day prohibition. Page 24 RESTRICTIONS ON Purchases or sales by an employee of the securities of TRANSACTIONS IN issuers with which Mellon does business, or other third OTHER party issuers, could result in liability on the part of such SECURITIES employee. Employees should be sensitive to even the appearance of impropriety in connection with their personal securities transactions. Employees should refer to "Beneficial Ownership" below, which is applicable to the following restrictions. The Mellon Code of Conduct contains certain restrictions on investments in parties that do business with Mellon. Employees should refer to the Code of Conduct and comply with such restrictions in addition to the restrictions and reporting requirements set forth below. The following restrictions apply to all securities transactions by employees: . Credit, Consulting or Advisory Relationship - Employees may not buy or sell securities of a company if they are considering granting, renewing, modifying or denying any credit facility to that company, acting as a benefits consultant to that company, or acting as an adviser to that company with respect to the company's own securities. In addition, lending employees who have assigned responsibilities in a specific industry group are not permitted to trade securities in that industry. This prohibition does not apply to transactions in open end mutual funds. . Customer Transactions - Trading for customers and Mellon accounts should always take precedence over employees' transactions for their own or related accounts. . Excessive Trading, Naked Options - Mellon discourages all employees from engaging in short-term or speculative trading, in trading naked options, in trading that could be deemed excessive or in trading that could interfere with an employee's job responsibilities. Page 25 . Front Running - Employees may not engage in "front running," that is, the purchase or sale of securities for their own accounts on the basis of their knowledge of Mellon's trading positions or plans. . Initial Public Offerings - Insider Risk Employees are prohibited from acquiring securities through an allocation by the underwriter of an Initial Public Offering (IPO) without the approval of the Manager of Corporate Compliance. Approval can be given only when the allocation comes through an employee of the issuer who is a direct family relation of the Insider Risk Employee. Due to NASD rules, this approval may not be available to employees of registered broker/dealers. . Material Nonpublic Information - Employees possessing material nonpublic information regarding any issuer of securities must refrain from purchasing or selling securities of that issuer until the information becomes public or is no longer considered material. . Private Placements - Insider Risk Employees are prohibited from acquiring any security in a private placement unless they obtain the prior written approval of the Manager of Corporate Compliance and the employee's department head. Approval must be given by both persons for the acquisition to be considered approved. After receipt of the necessary approvals and the acquisition, employees are required to disclose that investment if they participate in any subsequent consideration of credit for the issuer, or of an investment in the issuer for an advised account. Final decision to acquire such securities for an advised account will be subject to independent review. . Scalping - Employees may not engage in "scalping," that is, the purchase or sale of securities for their own or Mellon's accounts on the basis of knowledge of customers' trading positions or plans. . Short Term Trading - All Employees are discouraged from purchasing and selling, or from selling and purchasing, the same (or equivalent) securities within any 60 calendar day period. Page 26 PROHIBITION ON You are prohibited from acquiring any security issued by a INVESTMENTS IN financial services organization if you are: SECURITIES OF FINANCIAL . a member of the Mellon Senior Management Committee. SERVICES ORGANIZATIONS . employed in any of the following departments: - Corporate Strategy & Development - Legal (Pittsburgh only) - Finance (Pittsburgh only) . an employee specifically designated by the Manager of Corporate Compliance and informed that this prohibition is applicable to you. Financial Services Organizations - The term "security issued by a financial services organization" includes any security issued by: - Commercial Banks other than - Thrifts Mellon - Savings and Loan - Bank Holding Companies other Associations than Mellon - Broker/Dealers - Insurance Companies - Transfer Agents - Investment Advisory Companies - Other Depository - Shareholder Servicing Companies Institutions Page 27 The term "securities issued by a financial services organization" DOES NOT INCLUDE securities issued by mutual funds, variable annuities or insurance policies. Further, for purposes of determining whether a company is a financial services organization, subsidiaries and parent companies are treated as separate issuers. Effective Date - Securities of financial services organizations properly acquired before the employee's becoming subject to this prohibition may be maintained or disposed of at the owner's discretion consistent with this policy. Additional securities of a financial services organization acquired through the reinvestment of the dividends paid by such financial services organization through a dividend reinvestment program (DRIP), or through an automatic investment plan (AIP) are not subject to this prohibition, provided the employee's election to participate in the DRIP or AIP predates the date of the employee's becoming subject to this prohibition. Optional cash purchases through a DRIP or direct purchase plan (DPP) are subject to this prohibition. Securities acquired in any account over which an employee has no direct or indirect control over the investment decision Page 28 making process (e.g., discretionary trading accounts) are not subject to this prohibition. Within 30 days of becoming subject to this prohibition, all holdings of securities of financial services organizations must be disclosed in writing to the Manager of Corporate Compliance. BENEFICIAL The provisions of the Policy apply to transactions in the OWNERSHIP employee's own name and to all other accounts over which the employee could be presumed to exercise influence or control, including: . accounts of a spouse, minor children or relatives to whom substantial support is contributed; . accounts of any other member of the employee's household (e.g., a relative living in the same home); . trust or other accounts for which the employee acts as trustee or otherwise exercises any type of guidance or influence; . corporate accounts controlled, directly or indirectly, by the employee; . arrangements similar to trust accounts that are established for bona fide financial purposes and benefit the employee; and . any other account for which the employee is the beneficial owner (see Glossary for a more complete legal definition of "beneficial owner"). Page 29 NON-MELLON The provisions discussed above do not apply to transactions EMPLOYEE BENEFIT done under a bona fide employee benefit plan administered by PLANS an organization not affiliated with Mellon and by an employee of that organization who shares beneficial interest with a Mellon employee, and in the securities of the employing organization. This means if a Mellon employee's spouse is employed at a non-Mellon company, the Mellon employee is not required to obtain approval for transactions in the employer's securities done by the spouse as part of the spouse's employee benefit plan. The Securities Trading Policy does not apply in such a situation. Rather, the other organization is relied upon to provide adequate supervision with respect to conflicts of interest and compliance with securities laws. Page 30 PROTECTING As an employee you may receive information about Mellon, its CONFIDENTIAL customers and other parties that, for various reasons, INFORMATION should be treated as confidential. All employees are expected to strictly comply with measures necessary to preserve the confidentiality of information. Employees should refer to the Mellon Code of Conduct. INSIDER TRADING Federal securities laws generally prohibit the trading of AND TIPPING securities while in possession of "material nonpublic" information regarding the issuer of those securities (insider trading). LEGAL Any person who passes along material nonpublic information PROHIBITIONS upon which a trade is based (tipping) may also be liable. Page 31 Information is "material" if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to buy, sell or hold securities. Obviously, information that would affect the market price of a security would be material. Examples of information that might be material include: . a proposal or agreement for a merger, acquisition or divestiture, or for the sale or purchase of substantial assets; . tender offers, which are often material for the party making the tender offer as well as for the issuer of the securities for which the tender offer is made; . dividend declarations or changes; . extraordinary borrowings or liquidity problems; . defaults under agreements or actions by creditors, customers or suppliers relating to a company's credit standing; . earnings and other financial information, such as large or unusual write-offs, write-downs, profits or losses; . pending discoveries or developments, such as new products, sources of materials, patents, processes, inventions or discoveries of mineral deposits; . a proposal or agreement concerning a financial restructuring; . a proposal to issue or redeem securities, or a development with respect to a pending issuance or redemption of securities; Page 32 . a significant expansion or contraction of operations; . information about major contracts or increases or decreases in orders; . the institution of, or a development in, litigation or a regulatory proceeding; . developments regarding a company's senior management; . information about a company received from a director of that company; and . information regarding a company's possible noncompliance with environmental protection laws. This list is not exhaustive. All relevant circumstances must be considered when determining whether an item of information is material. "Nonpublic" - Information about a company is nonpublic if it is not generally available to the investing public. Information received under circumstances indicating that it is not yet in general circulation and which may be attributable, directly or indirectly, to the company or its insiders is likely to be deemed nonpublic information. If you obtain material non-public information you may not trade related securities until you can refer to some public source to show that the information is generally available (that is, available from sources other than inside sources) and that enough time has passed to allow wide dissemination of the information. While information appearing in widely Page 33 accessible sources--such as in newspapers or on the internet--becomes public very soon after publication, information appearing in less accessible sources--such as regulatory filings, may take up to several days to be deemed public. Similarly, highly complex information might take longer to become public than would information that is easily understood by the average investor. MELLON'S POLICY Employees who possess material nonpublic information about a company--whether that company is Mellon, another Mellon entity, a Mellon customer or supplier, or other company--may not trade in that company's securities, either for their own accounts or for any account over which they exercise investment discretion. In addition, employees may not recommend trading in those securities and may not pass the information along to others, except to employees who need to know the information in order to perform their job responsibilities with Mellon. These prohibitions remain in effect until the information has become public. Employees who have investment responsibilities should take appropriate steps to avoid receiving material nonpublic information. Receiving such information could create severe limitations on their ability to carry out their responsibilities to Mellon's fiduciary customers. Employees managing the work of consultants and temporary employees who have access to the types of confidential information described in this Policy are responsible for ensuring that consultants and temporary employees are Page 34 aware of Mellon's policy and the consequences of noncompliance. Questions regarding Mellon's policy on material nonpublic information, or specific information that might be subject to it, should be referred to the General Counsel. RESTRICTIONS ON As a diversified financial services organization, Mellon THE faces unique challenges in complying with the prohibitions FLOW OF on insider trading and tipping of material non-public INFORMATION information, and misuse of confidential information. This is WITHIN because one Mellon unit might have material nonpublic MELLON information about a company while other Mellon units may (THE "CHINESE have a desire, or even a fiduciary duty, to buy or sell that WALL) company's securities or recommend such purchases or sales to customers. To engage in such broad-ranging financial services activities without violating laws or breaching Mellon's fiduciary duties, Mellon has established a "Chinese Wall" policy applicable to all employees. The "Chinese Wall" separates the Mellon units or individuals that are likely to receive material nonpublic information (Potential Insider Functions) from the Mellon units or individuals that either trade in securities--for Mellon's account or for the accounts of others--or provide investment advice (Investment Functions). Employees should refer to CPP 903-2(C) The Chinese Wall. have a desire, or even a fiduciary duty, to buy or sell that company's securities or recommend such purchases or sales to customers. To engage in such broad-ranging financial services activities without violating laws or breaching Mellon's fiduciary duties, Mellon has established a "Chinese Wall" policy applicable to all employees. The "Chinese Wall" separates the Mellon units or individuals that are likely to receive material nonpublic information (Potential Insider Functions) from the Mellon units or individuals that either trade in securities--for Mellon's account or for the accounts of others--or provide investment advice (Investment Functions). Employees should refer to CPP 903-2(C) The Chinese Wall. Page 35 PERSONAL SECURITIES TRADING PRACTICES SECTION TWO - APPLICABLE TO INVESTMENT EMPLOYEES Page 38 CONTENTS Page PERSONAL SECURITIES TRADING PRACTICES SECTION TWO - APPLICABLE TO INVESTMENT EMPLOYEES Quick Reference - Investment Employees ....................... 19 Standards of Conduct for Investment Employees ................ 20 --Conflict of Interest ..................................... 20 --Material Nonpublic Information ........................... 20 --Brokers .................................................. 20 --Personal Securities Transaction Reports .................. 20 --Preclearance for Personal Securities Transactions ........ 21 --Blackout Policy .......................................... 22 --Exemptions from Requirement to Preclear .................. 22 --Gifting of Securities .................................... 22 --DRIPs, DPPs and AIPs ..................................... 23 --Statement of Securities Accounts and Holdings ............ 23 --Restricted List .......................................... 24 --Confidential Treatment ................................... 24 Restrictions on Transactions in Mellon Securities ............ 24 --Mellon 401(k) Plan ....................................... 25 --Mellon Employee Stock Options ............................ 26 Restrictions on Transactions in Other Securities ............. 26 --Prohibition on Investments in Securities of Financial Services Organizations ......................... 27 Beneficial Ownership ......................................... 28 Non-Mellon Employee Benefit Plans ............................ 28 Protecting Confidential Information .......................... 29 --Insider Trading and Tipping .............................. 29 --The "Chinese Wall" ....................................... 30 Special Procedures for Access Decision Makers ................ 30 GLOSSARY Definitions .................................................. 43 Exhibit A - Sample Letter to Broker .......................... 49 Page 37 QUICK REFERENCE - INVESTMENT EMPLOYEES - ----------------------------------------------------------------------------- SOME THINGS 1. Statement of Accounts and Holdings - Provide to your YOU MUST DO Preclearance Compliance Officer a statement of all securities accounts and holdings within 10 days of becoming an Investment Employee, and again annually on request. 2. Duplicate Statements & Confirmations - Instruct your broker, trust account manager or other entity through which you have a securities trading account to send directly to Compliance: . Trade confirmations summarizing each transaction . Periodic statements Exhibit A can be used to notify your broker. Contact your designated Preclearance Compliance Officer for the correct address. This applies to all accounts in which you have a beneficial interest. 3. Preclearance - Before initiating a securities transaction, written preclearance must be obtained from the designated Preclearance Compliance Officer. This can be accomplished by completing a Preclearance Request Form and: . delivering or faxing the request to the designated Preclearance Compliance Officer, or . contacting the designated Preclearance Compliance Officer for other available notification options. Preclearance Request Forms can be obtained from the designated Preclearance Compliance Officer. If preclearance approval is received the trade must be communicated to the broker on the same day, and executed before the end of the next business day, at which time the preclearance approval will expire. 4. Special Approvals . Acquisition of securities in a Private Placement must be precleared by the employee's Department/Entity head, the Manager of Corporate Compliance and the designated Preclearance Compliance Officer. . Acquisition of securities through an allocation by the underwriter of an Initial Public Offering (IPO) is prohibited without the approval of the Manager of Corporate Compliance. Approval can be given only when the allocation is the result of a direct family relationship. Page 38 SOME THINGS Mellon Securities - The following transactions in Mellon YOU MUST NOT securities are prohibited for all Mellon Employees: DO . Short sales . Purchasing and selling or selling and purchasing within 60 days . Purchasing or selling during a blackout period . Margin purchases or options other than employee options. Non-Mellon Securities . Purchasing and selling or selling and purchasing within 60 days is discouraged, and any profits must be disgorged. . New investments in financial services organizations are prohibited for certain employees only - see page 27. Other restrictions are detailed throughout Section Two. Read the Policy! Page 39 EXEMPTIONS Preclearance is NOT required for: . Purchases or sales of high quality short-term debt instruments, non-financial commodities (such as agricultural futures, metals, oil, gas, etc.), currency futures, financial futures, index futures, index securities, open-end mutual funds, non-affiliated closed-end investment companies, commercial paper; CDs; bankers' acceptances; repurchase agreements; and direct obligations of the government of the United States.) . Transactions in any account over which the employee has no direct or indirect control over the investment decision making process. . Transactions that are non-volitional on the part of an employee (such as stock dividends). . Changes in elections under Mellon's 401(k) Retirement Savings Plan. . An exercise of an employee stock option administered by Human Resources. . Automatic reinvestment of dividends under a DRIP or Automatic Investment Plan. (Optional cash purchases under a DRIP or Direct Purchase Plan do require preclearance. . Sales of securities pursuant to tender offers and sales or exercises of "Rights".(see page 22). - ----------------------------------------------------------------------------- QUESTIONS? Contact your designated Preclearance Compliance Officer. If you don't know who that is, call 412-234-1661 - ----------------------------------------------------------------------------- This page is for reference purposes only. Employees are reminded they must read the Policy and comply with its provisions. Page 40 STANDARDS OF Because of their particular responsibilities, Investment CONDUCT FOR Employees are subject to preclearance and personal securities INVESTMENT reporting requirements, as discussed below. EMPLOYEES Every Investment Employee must follow these procedures or risk serious sanctions, including dismissal. If you have any questions about these procedures you should consult the Manager of Corporate Compliance. Interpretive issues that arise under these procedures shall be decided by, and are subject to the discretion of, the Manager of Corporate Compliance. CONFLICT OF No employee may engage in or recommend any securities INTEREST transaction that places, or appears to place, his or her own interests above those of any customer to whom financial services are rendered, including mutual funds and managed accounts, or above the interests of Mellon. MATERIAL No employee may divulge the current portfolio positions, or NONPUBLIC current or anticipated portfolio transactions, programs or INFORMATION studies, of Mellon or any Mellon customer to anyone unless it is properly within his or her job responsibilities to do so. No employee may engage in or recommend a securities transaction, for his or her own benefit or for the benefit of others, including Mellon or its customers, while in possession of material nonpublic information regarding such securities. No employee may communicate material nonpublic information to others unless it is properly within his or her job responsibilities to do so. Page 41 BROKERS Trading Accounts - All Investment Employees are encouraged to conduct their personal investing through a Mellon affiliate brokerage account. This will assist in the monitoring of account activity on an ongoing basis in order to ensure compliance with the Policy. PERSONAL Statements & Confirmations - All Investment Employees are SECURITIES required to instruct their broker, trust account manager or TRANSACTIONS other entity through which they have a securities trading REPORTS account to submit directly to the Manager of Corporate Compliance or designated Preclearance Compliance Officer copies of all trade confirmations and statements relating to each account of which they are a beneficial owner regardless of what, if any, securities are maintained in such accounts. Thus, for example, even if the brokerage account contains only mutual funds or other exempt securities as that term is defined by the Policy and the account has the capability to have reportable securities traded in it, the Investment Employee maintaining such an account must arrange for duplicate account statements and trade confirmations to be sent by the broker to the Manager of Corporate Compliance or designated Preclearance Compliance Officer. Exhibit A is an example of an instruction letter to a broker. Other securities transactions which were not completed through a brokerage account, such as gifts, inheritances, spin-offs from securities held outside brokerage accounts, or other transfers must be reported to the designated Preclearance Compliance Officer within 10 days. Page 42 PRECLEARANCE All Investment Employees must notify the designated FOR PERSONAL Preclearance Compliance Officer in writing and receive SECURITIES preclearance before they engage in any purchase or sale of TRANSACTIONS a security for their own accounts. Investment Employees should refer to the provisions under "Beneficial Ownership" below, which are applicable to these provisions. All requests for preclearance for a securities transaction shall be submitted by completing a Preclearance Request Form which can be obtained from the designated Preclearance Compliance Officer. The designated Preclearance Compliance Officer will notify the Investment Employee whether the request is approved or denied, without disclosing the reason for such approval or denial. Notifications may be given in writing or verbally by the designated Preclearance Compliance Officer to the Investment Employee. A record of such notification will be maintained by the designated Preclearance Compliance Officer. However, it shall be the responsibility of the Investment Employee to obtain a written record of the designated Preclearance Compliance Officer's notification within 48 hours of such notification. The Investment Employee should retain a copy of this written record. As there could be many reasons for preclearance being granted or denied, Investment Employees should not infer from the preclearance response anything regarding the security for which preclearance was requested. Page 43 Although making a preclearance request does not obligate an Investment Employee to do the transaction, it should be noted that: . Preclearance requests should not be made for a transaction that the Investment Employee does not intend to make. . The order for a transaction must be placed with the broker on the same day that preclearance authorization is received. The broker must execute the trade close of business on the next business day, at which time the preclearance authorization will expire. . Investment Employees should not discuss with anyone else, inside or outside Mellon, the response they received to a preclearance request. If the Investment Employee is preclearing as beneficial owner of another's account, the response may be disclosed to the other owner. . Good Until Canceled/Stop Loss Orders ("Limit Orders") must be precleared, and security transactions receiving preclearance authorization must be executed before the preclearance expires. At the end of the preclearance authorization period, any unexecuted Limit Order must be canceled or a new preclearance authorization must be obtained. BLACKOUT Except as described below, Investment Employees will not POLICY generally be given clearance to execute a transaction in any security that is on the restricted list maintained by their Preclearance Compliance Officer, or for which there is a pending buy or sell order for an affiliated account. This provision does not apply to transactions effected or contemplated by index funds. Exceptions - Regardless of any restrictions above, Investment Employees will generally be given clearance to execute the following transactions: . Purchase or sale of up to $50,000 of securities of the top 200 issuers on the Russell list of largest publicly traded companies. . Purchase or sale of up to the greater of 100 shares or $10,000 of securities ranked 201 to 500 on the Russell list of largest publicly traded companies. The Investment Employee is limited to two such trades in the securities of any one issuer in any calendar month. Page 44 EXEMPTIONS Preclearance is not required for the following transactions: FROM REQUIREMENT TO . Purchases or sales of Exempt Securities (direct PRECLEAR obligations of the government of the United States; high quality short-term debt instruments; bankers' acceptances; CDs; commercial paper; repurchase agreements; and securities issued by open-end investment companies); . Purchases or sales of non-affiliated closed-end investment companies; non-financial commodities (such as agricultural futures, metals, oil, gas, etc.), currency futures, financial futures, index futures and index securities; . Purchases or sales effected in any account over which an employee has no direct or indirect control over the investment decision making process (e.g., discretionary trading accounts). Discretionary trading accounts may only be maintained, without being subject to preclearance procedures, when the Manager of Corporate Compliance, after a thorough review, is satisfied that the account is truly discretionary; . Transactions that are non-volitional on the part of an employee (such as stock dividends); . The sale of Mellon stock received upon the exercise of an employee stock option if the sale is part of a "netting of shares" or "cashless exercise" administered by the Human Resources Department (for which the Human Resources Department will forward information to the Manager of Corporate Compliance); . Changes to elections in the Mellon 401(k) plan; . Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of securities, to the extent such rights were acquired from such issuer; . Sales of rights acquired from an issuer, as described above; and/or . Sales effected pursuant to a bona fide tender offer. Page 45 GIFTING OF Investment Employees desiring to make a bona fide gift of SECURITIES securities or who receive a bona fide gift of securities do not need to preclear the transaction. However, Investment Employees must report such bona fide gifts to the Manager of Corporate Compliance. The report must be made within 10 days of making or receiving the gift and must disclose the following information: the name of the person receiving (giving) the gift, the date of the transaction, and the name of the broker through which the transaction was effected. A bona fide gift is one where the donor does not receive anything of monetary value in return. An Investment Employee who purchases a security with the intention of making a gift must preclear the purchase transaction. DRIPS, DPPS Certain companies with publicly traded securities establish: AND AIPS . Dividend Reinvestment Plans (DRIPs) - These permit shareholders to have their dividend payments channeled to the purchase of additional shares of such company's stock. An additional benefit offered to DRIP participants is the right to buy additional shares by sending in a check before the dividend reinvestment date ("optional cash purchases"). . Direct Purchase Plans (DPPs) - These allow purchasers to buy stock by sending a check directly to the issuer, without using a broker. . Automatic Investment Plans (AIPs) - These allow purchasers to set up a plan whereby a fixed amount of money is automatically deducted from their checking account each month and used to purchase stock directly from the issuer. Participation in a DRIP, DPP or AIP is voluntary. Investment Employees who enroll in a DRIP or AIP are not required to preclear enrollment, the periodic reinvestment of dividend payments into additional shares of company stock through a DRIP, or the periodic investments through an AIP. Investment Employees must preclear all optional cash purchases through a DRIP and all purchases through a DPP. Investment Employees must also preclear all sales through a DRIP, DPP or AIP. Page 46 STATEMENT OF Within ten days of receiving this Policy and on an annual SECURITIES basis thereafter, all Investment Employees must submit to ACCOUNTS AND the Manager of Corporate Compliance: HOLDINGS . a listing of all securities trading accounts in which the employee has a beneficial interest. . a statement of all securities in which they presently have any direct or indirect beneficial ownership other than Exempt Securities, as defined in the Glossary. The annual report must be completed upon the request of Corporate Compliance, and the information submitted must be current within 30 days of the date the report is submitted. The annual statement of securities holdings contains an acknowledgment that the Investment Employee has read and complied with this Policy. RESTRICTED Each Preclearance Compliance Officer will maintain a list LIST (the "Restricted List") of companies whose securities are deemed appropriate for implementation of trading restrictions for Investment Employees in their area. From time to time, such trading restrictions may be appropriate to protect Mellon and its Investment Employees from potential violations, or the appearance of violations, of securities laws. The inclusion of a company on the Restricted List provides no indication of the advisability of an investment in the company's securities or the existence of material nonpublic information on the company. Nevertheless, the contents of the Restricted List will be treated as confidential information in order to avoid unwarranted inferences. The Preclearance Compliance Officer will retain copies of the restricted lists for five years. Page 47 CONFIDENTIAL The Manager of Corporate Compliance and/or Preclearance TREATMENT Compliance Officer will use his or her best efforts to assure that all requests for preclearance, all personal securities transaction reports and all reports of securities holdings are treated as "Personal and Confidential." However, such documents will be available for inspection by appropriate regulatory agencies, and by other parties within and outside Mellon as are necessary to evaluate compliance with or sanctions under this Policy. Documents received from Investment Employees are also available for inspection by the boards of directors of 40-Act entities and by the boards of directors (or trustees or managing general partners, as applicable) of the investment companies managed or administered by 40-Act entities. Page 48 RESTRICTIONS Investment Employees who engage in transactions involving ON TRANSACTIONS Mellon securities should be aware of their unique IN MELLON responsibilities with respect to such transactions arising SECURITIES from the employment relationship and should be sensitive to even the appearance of impropriety. The following restrictions apply to all transactions in Mellon's publicly traded securities occurring in the employee's own account and in all other accounts over which the employee could be presumed to exercise influence or control (see provisions under "Beneficial Ownership" below for a more complete discussion of the accounts to which these restrictions apply). These restrictions are to be followed in addition to any restrictions that apply to particular officers or directors (such as restrictions under Section 16 of the Securities Exchange Act of 1934). . Short Sales - Short sales of Mellon securities by employees are prohibited. . Short Term Trading - Investment Employees are prohibited from purchasing and selling, or from selling and purchasing Mellon securities within any 60 calendar day period. In addition to any other sanction, any profits realized on such short term trades must be disgorged in accordance with procedures established by senior management. . Margin Transactions - Purchases on margin of Mellon's publicly traded securities by employees is prohibited. Margining Mellon securities in connection with a cashless exercise of an employee stock option through the Human Resources Department is exempt from this restriction. Further, Mellon securities may be used to collateralize loans or the acquisition of securities other than those issued by Mellon. . Option Transactions - Option transactions involving Mellon's publicly traded securities are prohibited. Transactions under Mellon's Long-Term Incentive Plan or other employee option plans are exempt from this restriction. . Major Mellon Events - Employees who have knowledge of major Mellon events that have not yet been announced are prohibited from buying or selling Mellon's publicly traded securities before such public announcements, even if the employee believes the event does not constitute material nonpublic information. . Mellon Blackout Period - Employees are prohibited from buying or selling Mellon's publicly traded securities during a blackout period. The blackout period begins the 16th day of the last month of each calendar quarter and ends 3 business days after Mellon Financial Corporation publicly announces the financial results for that quarter. Thus, the blackout periods begin on March 16, June 16, September 16 and December 16. The end of the blackout period is determined by counting business days only, and the day of the earnings announcement is day 1. The blackout period ends at the end of day 3, and employees can trade Mellon securities on day 4. Page 49 MELLON 401(K) For purposes of the blackout period and the short term PLAN trading rule, employees' changing their existing account balance allocation to increase or decrease the amount allocated to Mellon Common Stock will be treated as a purchase or sale of Mellon Stock, respectively. This means: . Employees are prohibited from increasing or decreasing their existing account balance allocation to Mellon Common Stock during the blackout period. . Employees are prohibited from increasing their existing account balance allocation to Mellon Common Stock and then decreasing it within 60 days. Similarly, employees are prohibited from decreasing their existing account balance allocation to Mellon Common Stock and then increasing it within 60 days. However: - with respect to Investment Employees, any profits realized on short term changes in the 401(k) will not have to be disgorged. - changes to existing account balance allocations in the 401(k) plan will not be compared to transactions in Mellon securities outside the 401(k) for purposes of the 60-day rule. (Note: this does not apply to members of the Executive Management Group, who should consult with the Legal Department.) Except for the above there are no other restrictions applicable to the 401(k) plan. This means, for example: . Employees are not required to preclear any elections or changes made in their 401(k) account. . There is no restriction on employees' changing their salary deferral contribution percentages with regard to either the blackout period or the 60-day rule. . The regular salary deferral contribution to Mellon Common Stock in the 401(k) that takes place with each pay will not be considered a purchase for the purposes of either the blackout or the 60-day rule. Page 50 MELLON Receipt - Your receipt of an employee stock option from EMPLOYEE STOCK Mellon is not deemed to be a purchase of a security. OPTIONS Therefore, it is exempt from preclearance and reporting requirements, can take place during the blackout period and does not constitute a purchase for purposes of the 60-day prohibition. Exercises - The exercise of an employee stock option that results in your holding the shares is exempt from preclearance and reporting requirements, can take place during the blackout period and does not constitute a purchase for purposes of the 60-day prohibition. "Cashless" Exercises - The exercise of an employee stock option which is part of a "cashless exercise" or "netting of shares" that is administered by the Human Resources Department or Chase Mellon Shareholder Services is exempt from the preclearance and reporting requirements and will not constitute a purchase or a sale for purposes of the 60-day prohibition. A "cashless exercise" or "netting of shares" transaction is permitted during the blackout period for ShareSuccess plan options only. They are not permitted during the blackout period for any other plan options. Sales - The sale of the Mellon securities that were received in the exercise of an employee stock option is treated like any other sale under the Policy (regardless of how little time has elapsed between the option exercise and the sale). Thus, such sales are subject to the preclearance and reporting requirements, are prohibited during the blackout period and constitute sales for purposes of the 60-day prohibition. Page 51 RESTRICTIONS Purchases or sales by an employee of the securities of ON issuers with which Mellon does business, or other third TRANSACTIONS party issuers, could result in liability on the part of such IN OTHER employee. Employees should be sensitive to even the SECURITIES appearance of impropriety in connection with their personal securities transactions. Employees should refer to "Beneficial Ownership" below, which is applicable to the following restrictions. The Mellon Code of Conduct contains certain restrictions on investments in parties that do business with Mellon. Employees should refer to the Code of Conduct and comply with such restrictions in addition to the restrictions and reporting requirements set forth below. The following restrictions apply to all securities transactions by employees: . Customer Transactions - Trading for customers and Mellon accounts should always take precedence over employees' transactions for their own or related accounts. . Excessive Trading, Naked Options - Mellon discourages all employees from engaging in short-term or speculative trading, in trading naked options, in trading that could be deemed excessive or in trading that could interfere with an employee's job responsibilities. . Front Running - Employees may not engage in "front running," that is, the purchase or sale of securities for their own accounts on the basis of their knowledge of Mellon's trading Page 52 positions or plans. . Initial Public Offerings - Investment Employees are prohibited from acquiring securities through an allocation by the underwriter of an Initial Public Offering (IPO) without the approval of the Manager of Corporate Compliance. Approval can be given only when the allocation comes through an employee of the issuer who is a direct family relation of the Investment Employee. Due to NASD rules, this approval may not be available to employees of registered broker/dealers. . Material Nonpublic Information - Employees possessing material nonpublic information regarding any issuer of securities must refrain from purchasing or selling securities of that issuer until the information becomes public or is no longer considered material. . Private Placements - Investment Employees are prohibited from acquiring any security in a private placement unless they obtain the prior written approval of the Manager of Corporate Compliance, the designated Preclearance Compliance Officer and the Investment Employee's department head. Approval must be given by all three persons for the acquisition to be considered approved. After receipt of the necessary approvals and the acquisition, Investment Employees are required to disclose that investment if they participate in any subsequent consideration of credit for the issuer, or of an investment in the issuer for an advised account. Final decision to acquire such securities for an advised account will be subject to independent review. Page 53 . Scalping - Employees may not engage in "scalping," that is, the purchase or sale of securities for their own or Mellon's accounts on the basis of knowledge of customers' trading positions or plans. . Short Term Trading - All Employees are discouraged from purchasing and selling, or from selling and purchasing, the same (or equivalent) securities within any 60 calendar day period. With respect to Investment Employees, any profits realized on such short term trades must be disgorged in accordance with procedures established by senior management. Exception: securities may be sold pursuant to a bona fide tender offer without disgorgement under the 60-day rule. Page 54 PROHIBITION ON You are prohibited from acquiring any security issued by a INVESTMENTS IN financial services organization if you are: SECURITIES OF FINANCIAL . a member of the Mellon Senior Management Committee. SERVICES ORGANIZATIONS . employed in any of the following departments: - Corporate Strategy & Development - Legal (Pittsburgh only) - Finance (Pittsburgh only) . an employee specifically designated by the Manager of Corporate Compliance and informed that this prohibition is applicable to you. Financial Services Organizations - The term "security issued by a financial services organization" includes any security issued by: - Commercial Banks other - Thrifts than Mellon - Savings and Loan Page 55 - Bank Holding Companies Associations other than Mellon - Broker/Dealers - Insurance Companies - Transfer Agents - Investment Advisory - Other Depository Companies Institutions - Shareholder Servicing Companies The term "securities issued by a financial services organization" DOES NOT INCLUDE securities issued by mutual funds, variable annuities or insurance policies. Further, for purposes of determining whether a company is a financial services organization, subsidiaries and parent companies are treated as separate issuers. Effective Date - Securities of financial services organizations properly acquired before the employee's becoming subject to this prohibition may be maintained or disposed of at the owner's discretion consistent with this policy. Additional securities of a financial services organization acquired through the reinvestment of the dividends paid by such financial services organization through a dividend reinvestment program (DRIP), or through an automatic investment plan (AIP) are not subject to this prohibition, provided the employee's election to participate in the DRIP or AIP predates the date of the employee's becoming subject to this prohibition. Optional cash purchases through a DRIP or direct purchase plan (DPP) are subject to this prohibition. Securities acquired in any account over which an employee has no direct or indirect control over the investment decision making Page 56 process (e.g. discretionary trading accounts) are not subject to this prohibition. Within 30 days of becoming subject to this prohibition, all holdings of securities of financial services organizations must be disclosed in writing to the Manager of Corporate Compliance. BENEFICIAL The provisions of the Policy apply to transactions in the OWNERSHIP employee's own name and to all other accounts over which the employee could be presumed to exercise influence or control, including: . accounts of a spouse, minor children or relatives to whom substantial support is contributed; . accounts of any other member of the employee's household (e.g., a relative living in the same home); . trust or other accounts for which the employee acts as trustee or otherwise exercises any type of guidance or influence; . corporate accounts controlled, directly or indirectly, by the employee; . arrangements similar to trust accounts that are established for bona fide financial purposes and benefit the employee; and . any other account for which the employee is the beneficial owner (see Glossary for a more complete legal definition of "beneficial owner"). Page 57 NON-MELLON The provisions discussed above do not apply to transactions EMPLOYEE done under a bona fide employee benefit plan administered by BENEFIT PLANS an organization not affiliated with Mellon and by an employee of that organization who shares beneficial interest with a Mellon employee, and in the securities of the employing organization. This means if a Mellon employee's spouse is employed at a non-Mellon company, the Mellon employee is not required to obtain approval for transactions in the employer's securities done by the spouse as part of the spouse's employee benefit plan. The Securities Trading Policy does not apply in such a situation. Rather, the other organization is relied upon to provide adequate supervision with respect to conflicts of interest and compliance with securities laws. Page 58 - ----------------------------------------------------------------------------- PROTECTING As an employee you may receive information about Mellon, its CONFIDENTIAL customers and other parties that, for various reasons, INFORMATION should be treated as confidential. All employees are expected to strictly comply with measures necessary to preserve the confidentiality of information. Employees should refer to the Mellon Code of Conduct. INSIDER Federal securities laws generally prohibit the trading of TRADING AND securities while in possession of "material nonpublic" TIPPING information regarding the issuer of those securities LEGAL (insider trading). Any person who passes along material PROHIBITIONS nonpublic information upon which a trade is based (tipping) may also be liable. Information is "material" if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to buy, sell or hold securities. Obviously, information that would affect the market price of a security Page 59 would be material. Examples of information that might be material include: . a proposal or agreement for a merger, acquisition or divestiture, or for the sale or purchase of substantial assets; . tender offers, which are often material for the party making the tender offer as well as for the issuer of the securities for which the tender offer is made; . dividend declarations or changes; . extraordinary borrowings or liquidity problems; . defaults under agreements or actions by creditors, customers or suppliers relating to a company's credit standing; . earnings and other financial information, such as large or unusual write-offs, write-downs, profits or losses; . pending discoveries or developments, such as new products, sources of materials, patents, processes, inventions or discoveries of mineral deposits; . a proposal or agreement concerning a financial restructuring; . a proposal to issue or redeem securities, or a development with respect to a pending issuance or redemption of securities; . a significant expansion or contraction of operations; . information about major contracts or increases or decreases in orders; . the institution of, or a development in, litigation or a regulatory proceeding; . developments regarding a company's senior management; Page 60 . information about a company received from a director of that company; and . information regarding a company's possible noncompliance with environmental protection laws. This list is not exhaustive. All relevant circumstances must be considered when determining whether an item of information is material. "Nonpublic" - Information about a company is nonpublic if it is not generally available to the investing public. Information received under circumstances indicating that it is not yet in general circulation and which may be attributable, directly or indirectly, to the company or its insiders is likely to be deemed nonpublic information. If you obtain material non-public information you may not trade related securities until you can refer to some public source to show that the information is generally available (that is, available from sources other than inside sources) and that enough time has passed to allow wide dissemination of the information. While information appearing in widely accessible sources--such as in newspapers or on the internet--becomes public very soon after publication, information appearing in less accessible sources--such as regulatory filings, may take up to several days to be deemed public. Similarly, highly complex information might take longer to become public than would information that is easily understood by the average investor. MELLON'S Employees who possess material nonpublic information Page 61 POLICY about a company--whether that company is Mellon, another Mellon entity, a Mellon customer or supplier, or other company--may not trade in that company's securities, either for their own accounts or for any account over which they exercise investment discretion. In addition, employees may not recommend trading in those securities and may not pass the information along to others, except to employees who need to know the information in order to perform their job responsibilities with Mellon. These prohibitions remain in effect until the information has become public. Employees who have investment responsibilities should take appropriate steps to avoid receiving material nonpublic information. Receiving such information could create severe limitations on their ability to carry out their responsibilities to Mellon's fiduciary customers. Employees managing the work of consultants and temporary employees who have access to the types of confidential information described in this Policy are responsible for ensuring that consultants and temporary employees are aware of Mellon's policy and the consequences of noncompliance. Questions regarding Mellon's policy on material nonpublic information, or specific information that might be subject to it, should be referred to the General Counsel. Page 62 RESTRICTIONS As a diversified financial services organization, Mellon ON THE FLOW OF faces unique challenges in complying with the prohibitions INFORMATION on insider trading and tipping of material non-public WITHIN MELLON information, and misuse of confidential information. This is (THE "CHINESE because one Mellon unit might have material nonpublic WALL") information about a company while other Mellon units may have a desire, or even a fiduciary duty, to buy or sell that company's securities or recommend such purchases or sales to customers. To engage in such broad-ranging financial services activities without violating laws or breaching Mellon's fiduciary duties, Mellon has established a "Chinese Wall" policy applicable to all employees. The "Chinese Wall" separates the Mellon units or individuals that are likely to receive material nonpublic information (Potential Insider Functions) from the Mellon units or individuals that either trade in securities--for Mellon's account or for the accounts of others--or provide investment advice (Investment Functions). Employees should refer to CPP 903-2(C) The Chinese Wall. Page 63 - ----------------------------------------------------------------------------- SPECIAL Certain Portfolio Managers and Research Analysts in the PROCEDURES FOR fiduciary businesses have been designated as Access Decision ACCESS Makers and are subject to additional procedures which are DECISION MAKERS discussed in a separate edition of the Securities Trading Policy. If you have reason to believe that you may be an Access Decision Maker, contact your supervisor, designated Preclearance Compliance Officer or the Manager of Corporate Compliance. Page 64 PERSONAL SECURITIES TRADING PRACTICES SECTION THREE - APPLICABLE TO OTHER EMPLOYEES Page 65 CONTENTS Page PERSONAL SECURITIES TRADING PRACTICES SECTION THREE - APPLICABLE TO OTHER EMPLOYEES Quick Reference - Other Employees........................... 33 Standards of Conduct........................................ 34 --Conflict of Interest................................. 34 --Material Nonpublic Information....................... 34 --Brokers.............................................. 34 --Personal Securities Transaction Reports.............. 34 --Brokerage Account Statements......................... 34 --Confidential Treatment............................... 34 Restrictions on Transactions in Mellon Securities........... 35 --Mellon 401(k) Plan................................... 36 --Mellon Employee Stock Options........................ 36 Restrictions on Transactions in Other Securities............ 37 --Prohibition on Investments in Securities of.......... 38 Financial Services Organizations Beneficial Ownership........................................ 39 Non-Mellon Employee Benefit Plans........................... 39 Protecting Confidential Information......................... 39 --Insider Trading and Tipping.......................... 39 --The "Chinese Wall"................................... 41 GLOSSARY Definitions................................................. 43 Exhibit A - Sample Letter to Broker......................... 49 Page 66 QUICK REFERENCE - OTHER EMPLOYEES - ----------------------------------------------------------------------- SOME THINGS YOU . If you buy or sell Mellon Financial Corporation MUST DO securities you must provide a report of the trade and a copy of the broker confirmation within 10 days of transaction to the Manager of Corporate Compliance, AIM 151-4340. This does not apply to the exercise of employee stock options, or changes in elections under Mellon's 401(k) Retirement Savings Plan. . If you want to purchase any security in a Private Placement you must first obtain the approval of your Department/Entity head and the Manager of Corporate Compliance. Contact the Manager of Corporate Compliance at 412-234-0810. . Acquisition of securities through an allocation by the underwriter of an Initial Public Offering (IPO) is prohibited without the approval of the Manager of Corporate Compliance. Approval can be given only when the allocation is the result of a direct family relationship. . For Employees who are subject to the prohibition on new investments in financial services organizations (certain employees only - see page 38), broker must send directly to MANAGER OF CORPORATE COMPLIANCE, MELLON BANK, PO BOX 3130, PITTSBURGH, PA 15230-3130: . Broker trade confirmations summarizing each transaction . Periodic statements Exhibit A can be used to notify your broker of all accounts for which your broker will be responsible for sending duplicate confirmations and statements. Page 67 - ----------------------------------------------------------------------- SOME THINGS YOU Mellon Securities - The following transactions in Mellon MUST NOT DO securities are prohibited for all Mellon employees: . Short sales . Purchasing and selling or selling and purchasing within 60 days . Purchasing or selling during a blackout period . Margin purchases or options other than employee options. Non-Mellon Securities . New investments in financial services organizations (certain employees only - see page 38.) Other restrictions are detailed throughout Section Three. Read the Policy! =============== - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- QUESTIONS? (412) 234-1661 - -------------------------------------------------------------------------------- This page is for reference purposes only. Employees are reminded they must read the Policy and comply with its provisions. Page 68 - ----------------------------------------------------------------------------- STANDARDS OF Every Other Employee must follow these procedures or risk CONDUCT FOR serious sanctions, including dismissal. If you have any OTHER EMPLOYEES questions about these procedures you should consult the Manager of Corporate Compliance. Interpretive issues that arise under these procedures shall be decided by, and are subject to the discretion of, the Manager of Corporate Compliance. CONFLICT OF No employee may engage in or recommend any securities INTEREST transaction that places, or appears to place, his or her own interests above those of any customer to whom financial services are rendered, including mutual funds and managed accounts, or above the interests of Mellon. MATERIAL No employee may engage in or recommend a securities NONPUBLIC transaction, for his or her own benefit or for the benefit INFORMATION of others, including Mellon or its customers, while in possession of material nonpublic information regarding such securities. No employee may communicate material nonpublic information to others unless it is properly within his or her job responsibilities to do so. BROKERS Trading Accounts - All employees are encouraged to conduct their personal investing through a Mellon affiliate brokerage account. PERSONAL Other Employees must report in writing to the Manager of SECURITIES Corporate Compliance within ten calendar days whenever they Page 69 TRANSACTIONS purchase or sell Mellon securities. Purchases and sales include REPORTS optional cash purchases under Mellon's Dividend Reinvestment and Common Stock Purchase Plan (the "Mellon DRIP"). It should be noted that the reinvestment of dividends under the DRIP, changes in elections under Mellon's 401(k) Retirement Savings Plan, the receipt of stock under Mellon's Restricted Stock Award Plan, and the receipt or exercise of options under Mellon's employee stock option plans are not considered purchases or sales for the purpose of this reporting requirement. BROKERAGE Certain Other Employees are subject to the restriction on ACCOUNT investments in financial services organizations and are STATEMENTS required to instruct their brokers to send statements directly to Corporate Compliance. See page 38. An example of an instruction letter to a broker is contained in Exhibit A. CONFIDENTIAL The Manager of Corporate Compliance will use his or her TREATMENT best efforts to assure that all personal securities transaction reports and all reports of securities holdings are treated as "Personal and Confidential." However, such documents will be available for inspection by appropriate regulatory agencies and by other parties within and outside Mellon as are necessary to evaluate compliance with or sanctions under this Policy. Page 70 RESTRICTIONS Employees who engage in transactions involving Mellon securities ON should be aware of their unique responsibilities with respect to TRANSACTIONS such transactions arising from the employment relationship and IN MELLON should be sensitive to even the appearance of impropriety. SECURITIES The following restrictions apply to all transactions in Mellon's publicly traded securities occurring in the employee's own account and in all other accounts over which the employee could be expected to exercise influence or control (see provisions under "Beneficial Ownership" below for a more complete discussion of the accounts to which these restrictions apply). These restrictions are to be followed in addition to any restrictions that apply to particular officers or directors (such as restrictions under Section 16 of the Securities Exchange Act of 1934). o Short Sales - Short sales of Mellon securities by employees are prohibited. . Short Term Trading - Employees are prohibited from purchasing and selling, or from selling and purchasing Mellon securities within any 60 calendar day period. . Margin Transactions - Purchases on margin of Mellon's publicly traded securities by employees is prohibited. Margining Mellon securities in connection with a cashless exercise of an employee stock option through the Human Resources Department is exempt from this restriction. Further, Mellon securities may be used to collateralize loans or the acquisition of securities other than those issued by Mellon. Page 71 . Option Transactions - Option transactions involving Mellon's publicly traded securities are prohibited. Transactions under Mellon's Long-Term Incentive Plan or other employee option plans are exempt from this restriction. . Major Mellon Events - Employees who have knowledge of major Mellon events that have not yet been announced are prohibited from buying or selling Mellon's publicly traded securities before such public announcements, even if the employee believes the event does not constitute material nonpublic information. . Mellon Blackout Period - Employees are prohibited from buying or selling Mellon's publicly traded securities during a blackout period. The blackout period begins the 16th day of the last month of each calendar quarter and ends 3 business days after Mellon Financial Corporation publicly announces the financial results for that quarter. Thus, the blackout periods begin on March 16, June 16, September 16 and December 16. The end of the blackout period is determined by counting business days only, and the day of the earnings announcement is day 1. The blackout period ends at the end of day 3, and employees can trade Mellon securities on day 4. Page 72 MELLON 401(K) For purposes of the blackout period and the short term trading PLAN rule, employees' changing their existing account balance allocation to increase or decrease the amount allocated to Mellon Common Stock will be treated as a purchase or sale of Mellon Stock, respectively. This means: . Employees are prohibited from increasing or decreasing their existing account balance allocation to Mellon Common Stock during the blackout period. . Employees are prohibited from increasing their existing account balance allocation to Mellon Common Stock and then decreasing it within 60 days. Similarly, employees are prohibited from decreasing their existing account balance allocation to Mellon Common Stock and then increasing it within 60 days. However, changes to existing account balance allocations in the 401(k) plan will not be compared to transactions in Mellon securities outside the 401(k) for purposes of the 60-day rule. (Note: this does not apply to members of the Executive Management Group, who should consult with the Legal Department.) Except for the above there are no other restrictions applicable to the 401(k) plan. This means, for example: . There is no restriction on employees' changing their salary deferral contribution percentages with regard to either the blackout period or the 60-day rule. . The regular salary deferral contribution to Mellon Common Stock in the 401(k) that takes place with each pay will not be considered a purchase for the purposes of either the blackout or the 60-day rule. Page 73 MELLON Receipt - Your receipt of an employee stock option from EMPLOYEE STOCK Mellon is not deemed to be a purchase of a security. OPTIONS Therefore, it is exempt from reporting requirements, can take place during the blackout period and does not constitute a purchase for purposes of the 60-day prohibition. Exercises - The exercise of an employee stock option that results in your holding the shares is exempt from reporting requirements, can take place during the blackout period and does not constitute a purchase for purposes of the 60-day prohibition. "Cashless" Exercises - The exercise of an employee stock option which is part of a "cashless exercise" or "netting of shares" that is administered by the Human Resources Department or Chase Mellon Shareholder Services is exempt from the preclearance and reporting requirements and will not constitute a purchase or a sale for purposes of the 60-day prohibition. A "cashless exercise" or "netting of shares" transaction is permitted during the blackout period for ShareSuccess plan options only. They are not permitted during the blackout period for any other plan options. Sales - The sale of the Mellon securities that were received in the exercise of an employee stock option is treated like any other sale under the Policy (regardless of how little time has elapsed between the option exercise and the sale). Thus, such sales are subject to the reporting requirements, are prohibited during the blackout period and constitute sales for purposes of the 60-day prohibition. Page 74 RESTRICTIONS Purchases or sales by an employee of the securities of issuers ON with which Mellon does business, or other third party issuers, TRANSACTIONS could result in liability on the part of such employee. IN Employees should be sensitive to even the appearance of OTHERSECURITIES impropriety in connection with their personal securities transactions. Employees should refer to "Beneficial Ownership" below, which is applicable to the following restrictions. The Mellon Code of Conduct contains certain restrictions on investments in parties that do business with Mellon. Employees should refer to the Code of Conduct and comply with such restrictions in addition to the restrictions and reporting requirements set forth below. The following restrictions apply to all securities transactions by employees: . Credit, Consulting or Advisory Relationship - Employees may not buy or sell securities of a company if they are considering granting, renewing, modifying or denying any credit facility to that company, acting as a benefits consultant to that company, or acting as an adviser to that company with respect to the company's own securities. In addition, lending employees who have assigned responsibilities in a specific industry group are not permitted to trade securities in that industry. This prohibition does not apply to transactions in open end mutual funds. . Customer Transactions - Trading for customers and Mellon accounts should always take precedence over employees' transactions for their own or related accounts. Page 75 . Excessive Trading, Naked Options - Mellon discourages all employees from engaging in short-term or speculative trading, in trading naked options, in trading that could be deemed excessive or in trading that could interfere with an employee's job responsibilities. . Front Running - Employees may not engage in "front running," that is, the purchase or sale of securities for their own accounts on the basis of their knowledge of Mellon's trading positions or plans. . Initial Public Offerings - Other Employees are prohibited from acquiring securities through an allocation by the underwriter of an Initial Public Offering (IPO) without the approval of the Manager of Corporate Compliance. Approval can be given only when the allocation comes through an employee of the issuer who is a direct family relation of the Other Employee. Due to NASD rules, this approval may not be available to employees of registered broker/dealers. . Material Nonpublic Information - Employees possessing material nonpublic information regarding any issuer of securities must refrain from purchasing or selling securities of that issuer until the information becomes public or is no longer considered material. . Private Placements - Other Employees are prohibited from acquiring any security in a private placement unless they obtain the prior written approval of the Manager of Corporate Compliance and the employee's department head. Appr oval must be given by both persons for the acquisition to be considered approved. After receipt of the necessary approvals and the acquisition, employees are required to disclose that investment if they participate in any subsequent consideration of credit for the issuer, or of an investment in the issuer for an advised account. Final decision to acquire such securities for an advised account will be subject to independent review. . Scalping - Employees may not engage in "scalping," that is, the purchase or sale of securities for their own or Mellon's accounts on the basis of knowledge of customers' trading positions or plans. . Short Term Trading - Employees are discouraged from purchasing and selling, or from selling and purchasing, the same (or equivalent) securities within any 60 calendar day period. Page 76 PROHIBITION ON You are prohibited from acquiring any security issued by a INVESTMENTS IN financial services organization if you are: SECURITIES OF FINANCIAL . a member of the Mellon Senior Management Committee. SERVICES ORGANIZATIONS . employed in any of the following departments: - Corporate Strategy & Development - Legal (Pittsburgh only) - Finance (Pittsburgh only) . an employee specifically designated by the Manager of Corporate Compliance and informed that this prohibition is applicable to you. Brokerage Accounts - All employees subject to this restriction on investments in financial services organizations are required to instruct their brokers to submit directly to the Manager of Corporate Compliance copies of all trade confirmations and statements relating to each account of which they are a beneficial owner regardless of what, if any, securities are maintained in such accounts. Thus, for example, even if the brokerage account has no reportable securities traded in it, the employee maintaining such an account must arrange for duplicate account statements and trade confirmations to be sent by the broker to the Manager of Corporate Compliance. An example of an instruction letter to a broker is contained in Exhibit A. Financial Services Organizations - The term "security issued by a financial services organization" includes any security issued by: - Commercial Banks other - Thrifts than Mellon - Savings and Loan - Bank Holding Companies Associations other than Mellon - Broker/Dealers - Insurance Companies - Transfer Agents - Investment Advisory - Other Depository Companies Institutions - Shareholder Servicing Companies Page 77 The term "securities issued by a financial services organization" DOES NOT INCLUDE securities issued by mutual funds, variable annuities or insurance policies. Further, for purposes of determining whether a company is a financial services organization, subsidiaries and parent companies are treated as separate issuers. Effective Date - Securities of financial services organizations properly acquired before the employee's becoming subject to this prohibition may be maintained or disposed of at the owner's discretion consistent with this policy. Additional securities of a financial services organization acquired through the reinvestment of the dividends paid by such financial services organization through a dividend reinvestment program (DRIP), or through an automatic investment plan (AIP) are not subject to this prohibition, provided the employee's election to participate in the DRIP or AIP predates the date of the employee's becoming subject to this prohibition. Optional cash purchases through a DRIP or direct purchase plan (DPP) are subject to this prohibition. Securities acquired in any account over which an employee has no direct or indirect control over the investment decision making process (e.g. discretionary trading accounts) are not subject to this prohibition. Within 30 days of becoming subject to this prohibition, all holdings of securities of financial services organizations must be disclosed in writing to the Manager of Corporate Compliance. BENEFICIAL The provisions of the Policy apply to transactions in the OWNERSHIP employee's own name and to all other accounts over which the employee could be presumed to exercise influence or control, including: . accounts of a spouse, minor children or relatives to whom substantial support is contributed; Page 78 . accounts of any other member of the employee's household (e.g., a relative living in the same home); . trust or other accounts for which the employee acts as trustee or otherwise exercises any type of guidance or influence; . corporate accounts controlled, directly or indirectly, by the employee; . arrangements similar to trust accounts that are established for bona fide financial purposes and benefit the employee; and . any other account for which the employee is the beneficial owner (see Glossary for a more complete legal definition of "beneficial owner"). NON-MELLON The provisions discussed above do not apply to transactions EMPLOYEE done under a bona fide employee benefit plan administered by an BENEFIT PLANS organization not affiliated with Mellon and by an employee of that organization who shares beneficial interest with a Mellon employee, and in the securities of the employing organization. This means if a Mellon employee's spouse is employed at a non- Mellon company, the Mellon employee is not required to obtain approval for transactions in the employer's securities done by the spouse as part of the spouse's employee benefit plan. The Securities Trading Policy does not apply in such a situation. Rather, the other organization is relied upon to provide adequate supervision with respect to conflicts of interest and compliance with securities laws. Page 79 PROTECTING As an employee you may receive information about Mellon, CONFIDENTIAL its customers and other parties that, for various reasons, INFORMATION should be treated as confidential. All employees are expected to strictly comply with measures necessary to preserve the confidentiality of information. Employees should refer to the Mellon Code of Conduct. INSIDER Federal securities laws generally prohibit the trading of TRADING AND securities while in possession of "material nonpublic" TIPPING information regarding the issuer of those securities (insider trading). Any person who passes along material LEGAL PROHIBITIONS nonpublic information upon which a trade is based (tipping) may also be liable. Information is "material" if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to buy, sell or hold securities. Obviously, information that would affect the market price of a security would be material. Examples of information that might be material include: . a proposal or agreement for a merger, acquisition or divestiture, or for the sale or purchase of substantial assets; . tender offers, which are often material for the party making the tender offer as well as for the issuer of the securities for which the tender offer is made; . dividend declarations or changes; . extraordinary borrowings or liquidity problems; . defaults under agreements or actions by creditors, customers or suppliers relating to a company's credit standing; Page 80 . earnings and other financial information, such as large or unusual write-offs, write-downs, profits or losses; . pending discoveries or developments, such as new products, sources of materials, patents, processes, inventions or discoveries of mineral deposits; . a proposal or agreement concerning a financial restructuring; . a proposal to issue or redeem securities, or a development with respect to a pending issuance or redemption of securities; . a significant expansion or contraction of operations; . information about major contracts or increases or decreases in orders; . the institution of, or a development in, litigation or a regulatory proceeding; . developments regarding a company's senior management; . information about a company received from a director of that company; and . information regarding a company's possible noncompliance with environmental protection laws. This list is not exhaustive. All relevant circumstances must be considered when determining whether an item of information is material. "Nonpublic" - Information about a company is nonpublic if it is not generally available to the investing public. Information received under circumstances indicating that it is not yet in general circulation and which may be attributable, directly or indirectly, to the company or its insiders is likely to be deemed nonpublic information. Page 81 If you obtain material non-public information you may not trade related securities until you can refer to some public source to show that the information is generally available (that is, available from sources other than inside sources) and that enough time has passed to allow wide dissemination of the information. While information appearing in widely accessible sources--such as in newspapers or on the internet--becomes public very soon after publication, information appearing in less accessible sources--such as regulatory filings, may take up to several days to be deemed public. Similarly, highly complex information might take longer to become public than would information that is easily understood by the average investor. MELLON'S POLICY Employees who possess material nonpublic information about a company--whether that company is Mellon, another Mellon entity, a Mellon customer or supplier, or other company--may not trade in that company's securities, either for their own accounts or for any account over which they exercise investment discretion. In addition, employees may not recommend trading in those securities and may not pass the information along to others, except to employees who need to know the information in order to perform their job responsibilities with Mellon. These prohibitions remain in effect until the information has become public. Employees who have investment responsibilities should take appropriate steps to avoid receiving material nonpublic information. Receiving such information could create severe limitations on their ability to carry out their responsibilities to Mellon's fiduciary customers. Employees managing the work of consultants and temporary employees who have access to the types of confidential information described in this Policy are responsible for ensuring that consultants and temporary employees are aware of Mellon's policy and the consequences of noncompliance. Questions regarding Mellon's policy on material nonpublic information, or specific information that might be subject to it, should be referred to the General Counsel. Page 82 RESTRICTIONS As a diversified financial services organization, Mellon faces ON THE FLOW OF unique challenges in complying with the prohibitions on INFORMATION insider trading and tipping of material non-public WITHIN MELLON information, and misuse of confidential information. This is (THE "CHINESE because one Mellon unit might have material nonpublic WALL") information about a company while other Mellon units may have a desire, or even a fiduciary duty, to buy or sell that company's securities or recommend such purchases or sales to customers. To engage in such broad-ranging financial services activities without violating laws or breaching Mellon's fiduciary duties, Mellon has established a "Chinese Wall" policy applicable to all employees. The "Chinese Wall" separates the Mellon units or individuals that are likely to receive material nonpublic information (Potential Insider Functions) from the Mellon units or individuals that either trade in securities--for Mellon's account or for the accounts of others--or provide investment advice (Investment Functions). Employees should refer to CPP 903-2(C) The Chinese Wall. Page 83 GLOSSARY DEFINITIONS . 40-ACT ENTITY - A Mellon entity registered under the Investment Company Act and/or the Investment Advisers Act of 1940 . ACCESS DECISION MAKER - A person designated as such by the Investment Ethics Committee. Generally, this will be portfolio managers and research analysts who make recommendations or decisions regarding the purchase or sale of equity, convertible debt, and non-investment grade debt securities for investment companies and other managed accounts. See further details in the ACCESS Decision Maker edition of the policy. . ACCESS PERSON - As defined by Rule 17j-1 under the Investment Company Act of 1940, "access person" means: (A) With respect to a registered investment company or an investment adviser thereof, any director, officer, general partner, or advisory person (see definition below), of such investment company or investment adviser; (B) With respect to a principal underwriter, any director, officer, or general partner of such principal underwriter who in the ordinary course of his business makes, participates in or obtains information regarding the purchase or sale of securities for the registered investment company for which the principal underwriter so acts, or whose functions or duties as part of the ordinary course of his business relate to the making of any recommendations to such investment company regarding the purchase or sale of securities. (C) Notwithstanding the provisions of paragraph (A) hereinabove, where the investment adviser is primarily engaged in a business or businesses other than advising registered investment companies or other advisory clients, the term "access person" shall mean: any director, officer, general partner, or advisory person of the investment adviser who, with respect to any registered investment company, makes any recommendations, participates in the determination of which recommendation shall be made, or whose principal function or duties relate to the determination of which recommendation will be made, to any such investment company; or who, in connection with his duties, obtains any information concerning securities recommendations being made by such investment adviser to any registered investment company. (D) An investment adviser is "primarily engaged in a business or businesses other than advising registered investment companies or other advisory clients" when, for each of its most recent three fiscal years or for the period of time since its organization, whichever is less, the investment adviser derived, on an unconsolidated basis, more than 50 percent of (i) its total sales and revenues, and (ii) its income (or loss) before income taxes and extraordinary items, from such other business or businesses. Page 84 . ADVISORY PERSON of a registered investment company or an investment adviser thereof means: (A) Any employee of such company or investment adviser (or any company in a control relationship to such investment company or investment adviser) who, in connection with his regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security by a registered investment company, or whose functions relate to the making of any recommendation with respect to such purchases or sales; and (B) Any natural person in a control relationship to such company or investment adviser who obtains information concerning recommendations made to such company with regard to the purchase or sale of a security. . APPROVAL - written consent or written notice of non- objection. . BENEFICIAL OWNERSHIP - The definition that follows conforms to interpretations of the Securities and Exchange Commission on this matter. Because a determination of beneficial ownership requires a detailed analysis of personal financial circumstances that are subject to change, Corporate Compliance ordinarily will not advise employees on this definition. It is the responsibility of each employee to read the definition and based on that definition, determine whether he/she is the beneficial owner of an account. If the employee determines that he/she is not a beneficial owner of an account and Corporate Compliance becomes aware of the existence of the account, the employee will be responsible for justifying his/her determination. Page 85 Securities owned of record or held in the employee's name are generally considered to be beneficially owned by the employee. Securities held in the name of any other person are deemed to be beneficially owned by the employee if by reason of any contract, understanding, relationship, agreement or other arrangement, the employee obtains therefrom benefits substantially equivalent to those of ownership, including the power to vote, or to direct the disposition of, such securities. Beneficial ownership includes securities held by others for the employee's benefit (regardless of record ownership), e.g., securities held for the employee or members of the employee's immediate family, defined below, by agents, custodians, brokers, trustees, executors or other administrators; securities owned by the employee, but which have not been transferred into the employee's name on the books of the company; securities which the employee has pledged; or securities owned by a corporation that should be regarded as the employee's personal holding corporation. As a natural person, beneficial ownership is deemed to include securities held in the name or for the benefit of the employee's immediate family, which includes the employee's spouse, the employee's minor children and stepchildren and the employee's relatives or the relatives of the employee's spouse who are sharing the employee's home, unless because of countervailing circumstances, the employee does not enjoy benefits substantially equivalent to those of ownership. Benefits substantially equivalent to ownership include, for example, application of the income derived from such securities to maintain a common home, meeting expenses that such person otherwise would meet from other sources, and the ability to exercise a controlling influence over the purchase, sale or voting of such securities. An employee is also deemed the beneficial owner of securities held in the name of some other person, even though the employee does not obtain benefits of ownership, if the employee can vest or revest title in himself at once, or at some future time. Page 86 In addition, a person will be deemed the beneficial owner of a security if he has the right to acquire beneficial ownership of such security at any time (within 60 days) including but not limited to any right to acquire: (1) through the exercise of any option, warrant or right; (2) through the conversion of a security; or (3) pursuant to the power to revoke a trust, nondiscretionary account or similar arrangement. With respect to ownership of securities held in trust, beneficial ownership includes ownership of securities as a trustee in instances where either the employee as trustee or a member of the employee's "immediate family" has a vested interest in the income or corpus of the trust, the ownership by the employee of a vested beneficial interest in the trust and the ownership of securities as a settlor of a trust in which the employee as the settlor has the power to revoke the trust without obtaining the consent of the beneficiaries. Certain exemptions to these trust beneficial ownership rules exist, including an exemption for instances where beneficial ownership is imposed solely by reason of the employee being settlor or beneficiary of the securities held in trust and the ownership, acquisition and disposition of such securities by the trust is made without the employee's prior approval as settlor or beneficiary. "Immediate family" of an employee as trustee means the employee's son or daughter (including any legally adopted children) or any descendant of either, the employee's stepson or stepdaughter, the employee's father or mother or any ancestor of either, the employee's stepfather or stepmother and the employee's spouse. To the extent that stockholders of a company use it as a personal trading or investment medium and the company has no other substantial business, stockholders are regarded as beneficial owners, to the extent of their respective interests, of the stock thus invested or traded in. A general partner in a partnership is considered to have indirect beneficial ownership in the securities held by the partnership to the extent of his pro rata interest in the partnership. Indirect beneficial ownership is not, however, considered to exist solely by reason of an indirect interest in portfolio securities held by any holding company registered under the Public Utility Holding Company Act of 1935, a pension or retirement plan holding securities of an issuer whose employees generally are beneficiaries of the plan and a business trust with over 25 beneficiaries. Page 87 Any person who, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement or device with the purpose or effect of divesting such person of beneficial ownership as part of a plan or scheme to evade the reporting requirements of the Securities Exchange Act of 1934 shall be deemed the beneficial owner of such security. The final determination of beneficial ownership is a question to be determined in light of the facts of a particular case. Thus, while the employee may include security holdings of other members of his family, the employee may nonetheless disclaim beneficial ownership of such securities. . "CHINESE WALL" POLICY - procedures designed to restrict the flow of information within Mellon from units or individuals who are likely to receive material nonpublic information to units or individuals who trade in securities or provide investment advice. . DIRECT FAMILY RELATION - employee's husband, wife, father, mother, brother, sister, daughter or son. Includes the preceding plus, where appropriate, the following prefixes/suffix: grand-, step-, foster-, half- and -in-law. . DISCRETIONARY TRADING ACCOUNT - an account over which the employee has no direct or indirect control over the investment decision making process. Page 88 . EMPLOYEE - any employee of Mellon Financial Corporation or its more-than-50%-owned direct or indirect subsidiaries; includes all full-time, part-time, benefited and non- benefited, exempt and non-exempt, domestic and international employees; does not include consultants and contract or temporary employees. . EXEMPT SECURITIES - Exempt Securities are defined as: - direct obligations of the government of the United States; - high quality short-term debt instruments; - bankers' acceptances; - bank certificates of deposit and time deposits; - commercial paper; - repurchase agreements; - securities issued by open-end investment companies; . FAMILY RELATION - see direct family relation. . GENERAL COUNSEL - General Counsel of Mellon Financial Corporation or any person to whom relevant authority is delegated by the General Counsel. . INDEX FUND - an investment company or managed portfolio which contains securities of an index in proportions designed to replicate the return of the index. . INITIAL PUBLIC OFFERING (IPO) - the first offering of a company's securities to the public through an allocation by the underwriter. Page 89 . INVESTMENT CLUB - is a membership organization where investors make joint decisions on which securities to buy or sell. The securities are generally held in the name of the investment club. Since each member of an investment club participates in the investment decision making process, Insider Risk Employees, Investment Employees and Access Decision Makers belonging to such investment clubs must preclear and report the securities transactions contemplated by such investment clubs. In contrast, a private investment company is an organization where the investor invests his/her money, but has no direct control over the way his/her money is invested. Insider Risk Employees, Investment Employees and Access Decision Makers investing in such a private investment company are not required to preclear any of the securities transactions made by the private investment company. Insider Risk Employees, Investment Employees and Access Decision Makers are required to report their investment in a private investment company to the Manager of Corporate Compliance and certify to the Manager of Corporate Compliance that they have no direct control over the way their money is invested. . INVESTMENT COMPANY - a company that issues securities that represent an undivided interest in the net assets held by the company. Mutual funds are investment companies that issue and sell redeemable securities representing an undivided interest in the net assets of the company. . INVESTMENT ETHICS COMMITTEE is composed of investment, legal, compliance, and audit management representatives of Mellon and its affiliates. The members of the Investment Ethics Committee are: President and Chief Investment Officer of The Dreyfus Corporation (Committee Chair) General Counsel, Mellon Financial Corporation Chief Risk Management Officer, Mellon Trust Manager of Corporate Compliance, Mellon Financial Corporation Corporate Chief Auditor, Mellon Financial Corporation Chief Investment Officer, Mellon Private Asset Management Executive Officer of a Mellon investment adviser (rotating membership) The Committee has oversight of issues related to personal securities trading and investment activity by Access Decision Makers. Page 90 . MANAGER OF CORPORATE COMPLIANCE - the employee within the Audit and Risk Review Department of Mellon Financial Corporation who is responsible for administering the Securities Trading Policy, or any person to whom relevant authority is delegated by the Manager of Corporate Compliance. . MELLON - Mellon Financial Corporation and all of its direct and indirect subsidiaries. . OPTION - a security which gives the investor the right, but not the obligation, to buy or sell a specific security at a specified price within a specified time. For purposes of compliance with the Policy, any Mellon employee who buys/sells an option, is deemed to have purchased/sold the underlying security when the option was purchased/sold. Four combinations are possible as described below. Call Options If a Mellon employee buys a call option, the employee is considered to have purchased the underlying security on the date the option was purchased. If a Mellon employee sells a call option, the employee is considered to have sold the underlying security on the date the option was sold. Put Options If a Mellon employee buys a put option, the employee is considered to have sold the underlying security on the date the option was purchased. If a Mellon employee sells a put option, the employee is considered to have bought the underlying security on the date the option was sold. Page 91 Below is a table describing the above: ------------------------------------------------ Transaction Type ------------------------------------------------ --------------------------------------------------------- Option Buy Sale Type --------------------------------------------------------- --------------------------------------------------------- Put Sale of Underlying Purchase of Security Underlying Security --------------------------------------------------------- --------------------------------------------------------- Call Purchase of Underlying Sale of Underlying Security Security --------------------------------------------------------- . PRECLEARANCE COMPLIANCE OFFICER - a person designated by the Manager of Corporate Compliance and/or the Investment Ethics Committee to administer, among other things, employees' preclearance requests for a specific business unit. . PRIVATE PLACEMENT - an offering of securities that is exempt from registration under the Securities Act of 1933 because it does not constitute a public offering. Includes limited partnerships. . SENIOR MANAGEMENT COMMITTEE - the Senior Management Committee of Mellon Financial Corporation. . SHORT SALE - the sale of a security that is not owned by the seller at the time of the trade. Page 92 EXHIBIT A - SAMPLE INSTRUCTION LETTER TO BROKER Date Broker ABC Street Address City, State ZIP Re: John Smith & Mary Smith Account No. xxxxxxxxxxxx In connection with my existing brokerage accounts at your firm noted above, please be advised that the Compliance Department of my employer should be noted as an "Interested Party" with respect to my accounts. They should, therefore, be sent copies of all trade confirmations and account statements relating to my account. Please send the requested documentation ensuring the account holder's name appears on all correspondence to: Manager, Corporate Compliance Preclearance Compliance Officer Mellon Bank or (obtain address from your PO Box 3130 Pittsburgh, PA designated Preclearance 15230-3130 Compliance Officer) Thank you for your cooperation in this request. Sincerely yours, Employee cc: Manager, Corporate Compliance (151-4340) or Preclearance Compliance Officer Page 93 MELLON SECURITIES TRADING POLICY ACCESS DECISION MAKER EDITION Page 94 QUICK REFERENCE - ACCESS DECISION MAKERS - ----------------------------------------------------------------------------- SOME THINGS 1. Statement of Holdings - Provide to your Preclearance YOU MUST DO Compliance Officer a statement of all securities holdings within 10 days of becoming an ADM, and within 30 days after every quarter-end thereafter. 2. Duplicate Statements & Confirmations - Instruct your broker, trust account manager or other entity through which you have a securities trading account to send directly to Compliance: . Trade confirmations summarizing each transaction . Periodic statements Exhibit A can be used to notify your broker. Contact your designated Preclearance Compliance Officer for the correct address. This applies to all accounts in which you have a beneficial interest. 3. Preclearance - Before initiating a securities transaction, written preclearance must be obtained from the designated Preclearance Compliance Officer. This can be accomplished by completing a Preclearance Request Form and: . delivering or faxing the request to the designated Preclearance Compliance Officer, or . contacting the designated Preclearance Compliance Officer for other available notification options. Preclearance Request Forms can be obtained from the designated Preclearance Compliance Officer. If preclearance approval is received the trade must be communicated to the broker on the same day, and executed before the end of the next business day, at which time the preclearance approval will expire. Page 95 4. Contemporaneous Disclosure - ADMs must obtain written authorization from the ADM's CIO or other Investment Ethics Committee designee prior to making or acting upon a portfolio recommendation in a security which they own personally. 5. Private Placements - Purchases must be precleared by the Investment Ethics Committee. Prior holdings must be approved by the Investment Ethics Committee within 90 days of becoming an ADM. To initiate preclearance or approval, contact the Manager of Corporate Compliance. 6. IPOs - Acquisition of securities through an allocation by the underwriter of an Initial Public Offering (IPO) is prohibited without the approval of the Manager of Corporate Compliance. Approval can be given only when the allocation is the result of a direct family relationship. 7. Micro-Cap Securities - MCADMs are prohibited from purchasing any security of an issuer with a common equity market capitalization of $100 million or less at the time of acquisition unless approved by the Investment Ethics Committee. MCADMs must obtain on their Preclearance Request Forms the written authorization of their immediate supervisor and their Chief Investment Officer prior to trading any security of an issuer with a common equity market capitalization of more than $100 million but less than or equal to $250 million at the time of trade. Any prior holding of such securities must be approved by the CIO. Page 96 - ----------------------------------------------------------------------------- SOME THINGS Mellon Securities - The following transactions in Mellon YOU MUST securities are prohibited for all Mellon employees: NOT DO . Short sales . Purchasing and selling or selling and purchasing within 60 days . Purchasing or selling during a blackout period . Margin purchases or options other than employee options. Non-Mellon Securities . Portfolio Managers are prohibited from purchasing/selling 7 days before or after a fund or other advised account transaction. . For all ADMs, purchasing and selling or selling and purchasing the same or equivalent security within 60 days is discouraged, and any profits must be disgorged. Other restrictions are detailed throughout the Policy. Read ------------------ ==== the Policy! ========== Page 97 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- EXEMPTIONS Preclearance is NOT required for certain other types of transactions, and transactions in certain other types of securities. See pages 6 & 7. - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- QUESTIONS? Contact your designated Preclearance Compliance Officer. If you don't know who that is, call 412-234-1661 - ----------------------------------------------------------------------------- This page is for reference purposes only. Employees are reminded they must read the Policy and comply with its provisions. Dear Colleague: At Mellon, we take great pride in our transformation over the years from a regional bank to a global financial services company. Our growth makes us better able to meet customers' changing needs, gives us greater stability during any unexpected economic downturn and affords us the opportunity to be the best performing financial services company. This diversity of our businesses also makes us a complex organization, which is why it's more important than ever that you clearly understand Mellon's SECURITIES TRADING POLICY. Mellon has long maintained strict policies regarding securities transactions, all with the same clear-cut objective: to establish and demonstrate our compliance with the high standards with which we conduct our business. If you are new to Mellon, please take the time to fully understand the POLICY and consult it whenever you are unsure about appropriate actions. If you have seen the POLICY previously, I urge you to renew your understanding of the entire document and its implications for you. Only by strict adherence to the POLICY can we ensure that our well-deserved reputation for integrity is preserved. Sincerely yours, Martin G. McGuinn Questions Concerning the Securities Trading Policy? Contact Corporate Compliance, (412) 234-1661 AIM 151-4340, Mellon Bank, Pittsburgh, PA 15258-0001 Page 98 CONTENTS
PAGE INTRODUCTION ............................................................ 1 Purpose .................................................. 1 CLASSIFICATION OF EMPLOYEES ............................................. 2 The Investment Ethics Committee .......................... 2 PERSONAL SECURITIES TRADING PRACTICES ................................... 3 Standards of Conduct for Access Decision Makers .......... 3 Conflict of Interest ................................. 3 Material Nonpublic Information ....................... 3 Brokers .............................................. 3 Personal Securities Transaction Reports .............. 3 Statement of Securities Accounts and Holdings ........ 4 Quarterly Reporting .................................. 4 Preclearance for Personal Securities Transactions .... 4 Contemporaneous Disclosure ........................... 5 Blackout Policy ...................................... 6 Exemptions from Requirement to Preclear .............. 6 Gifting of Securities ................................ 7 DRIPs, DPPs, and AIPs ................................ 7 Restricted List ...................................... 7 Confidential Treatment ............................... 8 Restrictions on Transactions in Mellon Securities ........ 9 Mellon 401(k) Plan ................................... 9 Mellon Employee Stock Options ........................ 10 Restrictions on Transactions in Other Securities ......... 11 Initial Public Offerings ............................. 11 Micro-Cap Securities ................................. 11 Private Placements ................................... 12 Prohibition on Investments in Securities of Financial Services Organizations ..................... 13 Beneficial Ownership ................................. 14 Non-Mellon Employee Benefit Plans .................... 14 Protecting Confidential Information ...................... 15 Insider Trading and Tipping - Legal Prohibitions ..... 15 Insider Trading and Tipping - Mellon's Policy ........ 16 The "Chinese Wall" ................................... 16 GLOSSARY Definitions .............................................. 17 Exhibit A - Sample Letter to Broker ...................... 23
Page 99 1 - ----------------------------------------------------------------------------- INTRODUCTION The SECURITIES TRADING POLICY (the "Policy") is designed to reinforce Mellon Financial Corporation's ("Mellon's") reputation for integrity by avoiding even the appearance of impropriety in the conduct of Mellon's business. The Policy sets forth procedures and limitations which govern the personal securities transactions of every Mellon Employee. Mellon and its employees are subject to certain laws and regulations governing personal securities trading. Mellon has developed this Policy to promote the highest standards of behavior and ensure compliance with applicable laws. Employees should be aware that they may be held personally liable for any improper or illegal acts committed during the course of their employment, and that "ignorance of the law" is not a defense. Employees may be subject to civil penalties such as fines, regulatory sanctions including suspensions, as well as criminal penalties. Page 100 Employees outside the United States are also subject to applicable laws of foreign jurisdictions, which may differ substantially from US law and which may subject such employees to additional requirements. Such employees must comply with applicable requirements of pertinent foreign laws as well as with the provisions of the Policy. To the extent any particular portion of the Policy is inconsistent with foreign law, employees should consult the General Counsel or the Manager of Corporate Compliance. Any provision of this Policy may be waived or exempted at the discretion of the Manager of Corporate Compliance. Any such waiver or exemption will be evidenced in writing and maintained in the Audit and Risk Review Department. Employees must read the Policy and must comply with it. Failure to comply with the provisions of the Policy may result in the imposition of serious sanctions, including but not limited to disgorgement of profits, dismissal, substantial personal liability and referral to law enforcement agencies or other regulatory agencies. Employees should retain the Policy in their records for future reference. Any questions regarding the Policy should be referred to the Manager of Corporate Compliance or his/her designee. SPECIAL EDITION This edition of the SECURITIES TRADING POLICY has been prepared especially for Access Decision Makers. If you believe you are not an Access Decision Maker, please contact your supervisor, designated Preclearance Compliance Officer or the Manager of Corporate Compliance to obtain the standard edition of the Policy. Page 101 PURPOSE It is imperative that Mellon and its affiliates avoid even the appearance of a conflict between the personal securities trading of its employees and its fiduciary duties to investment companies and managed account clients. Potential conflicts of interest are most acute with respect to personal securities trading by those employees most responsible for directing managed fund and account trades: portfolio managers and research analysts. In order to avoid even the appearance of impropriety, an Investment Ethics Committee has been formed. The Committee, in turn, has established the following practices which apply to Access Decision Makers. These practices do not limit the authority of any Mellon affiliate to impose additional restrictions or limitations. Page 102 CLASSIFICATION Employees are engaged in a wide variety of activities for OF EMPLOYEES Mellon. In light of the nature of their activities and the impact of federal and state laws and the regulations thereunder, the Policy imposes different requirements and limitations on employees based on the nature of their activities for Mellon. To assist the employees in complying with the requirements and limitations imposed on them in light of their activities, employees are classified into one or both of the following categories: Access Decision Maker and Micro-Cap Access Decision Maker. Appropriate requirements and limitations are specified in the Policy based upon the employee's classification. The Investment Ethics Committee will determine the classification of each employee based on the following guidelines. ACCESS DECISION A person designated as such by the Investment Ethics Committee. MAKER (ADM) Generally, this will be portfolio managers and research analysts who make recommendations or decisions regarding the purchase or sale of equity, convertible debt, and non-investment grade debt securities for mutual funds and other managed accounts. Portfolio managers in Mellon Private Capital Management are generally ADMs; other personal trust officers are generally not ADMs unless the investment discretion they exercise warrants ADM designation. Traders are not ADMs. Portfolio managers of funds which are limited to replicating an index are not ADMs. MICRO-CAP An ADM designated as such by the Investment Ethics Committee. ACCESS Generally, this will be ADMs who make recommendations or DECISION decisions regarding the purchase or sale of any security of an Page 103 MAKERS MCADM) issuer with a common equity market capitalization equal to or less than two-hundred fifty million dollars. MCADMs are also ADMs. CONSULTANTS, Managers should inform consultants, independent contractors INDEPENDENT and temporary employees of the general provisions of the CONTRACTORS Policy (such as the prohibition on trading while in possession AND of material nonpublic information), but generally they will TEMPORARY not be required to preclear trades or report their personal EMPLOYEES securities holdings. If one of these persons would be considered an ADM if the person were a Mellon employee, the person's manager should advise the Manager of Corporate Compliance who will determine whether such individual should be subject to the preclearance and reporting requirements of the Policy. THE INVESTMENT The Investment Ethics Committee is composed of investment, ETHICS legal, compliance, and audit management representatives of COMMITTEE Mellon and its affiliates. The chief executive officer, senior investment officer and the Preclearance Compliance Officer at each Mellon investment affiliate, working together, will be designees of the Investment Ethics Committee. The Investment Ethics Committee will meet periodically to review the actions taken by its designees and to consider issues related to personal securities trading and investment activity by ADMs. Page 104 Personal Securities Trading Practices STANDARDS OF Because of their particular responsibilities, ADMs are subject CONDUCT FOR to preclearance and personal securities reporting requirements, ACCESS as discussed below. DECISION MAKERS Every ADM must follow these procedures or risk serious sanctions, including dismissal. If you have any questions about these procedures you should consult the Manager of Corporate Compliance or your Preclearance Compliance Officer. Interpretive issues that arise under these procedures shall be decided by, and are subject to the discretion of, the Manager of Corporate Compliance. CONFLICT OF No employee may engage in or recommend any securities INTEREST transaction that places, or appears to place, his or her own interests above those of any customer to whom financial services are rendered, including mutual funds and managed accounts, or above the interests of Mellon. MATERIAL No employee may divulge the current portfolio positions, or NONPUBLIC current or anticipated portfolio transactions, programs or INFORMATION studies, of Mellon or any Mellon customer to anyone unless it is properly within his or her job responsibilities to do so. No employee may engage in or recommend a securities transaction, for his or her own benefit or for the benefit of others, including Mellon or its customers, while in possession of material nonpublic information regarding such securities. No employee may communicate material nonpublic information to others unless it is properly within his or her job responsibilities to do so. Page 105 BROKERS Trading Accounts - All ADMs are encouraged to conduct their personal investing through a Mellon affiliate brokerage account. This will assist in the monitoring of account activity on an ongoing basis in order to ensure compliance with the Policy. PERSONAL Statements & Confirmations - All ADMs are required to instruct SECURITIES their broker, trust account manager or other entity through TRANSACTIONS which they have a securities trading account to submit REPORTS directly to the Manager of Corporate Compliance or designated Preclearance Compliance Officer copies of all trade confirmations and statements relating to each account of which they are a beneficial owner regardless of what, if any, securities are maintained in such accounts. Thus, for example, even if the brokerage account contains only mutual funds or other Exempt Securities as that term is defined in the glossary and the account has the capability to have reportable securities traded in it, the ADM maintaining such an account must arrange for duplicate account statements and trade confirmations to be sent by the broker to the Manager of Corporate Compliance or designated Preclearance Compliance Officer. Exhibit A is an example of an instruction letter to a broker. Other securities transactions which were not completed through a brokerage account, such as gifts, inheritances, spin-offs from securities held outside brokerage accounts, or other transfers must be reported to the designated Preclearance Compliance Officer within 10 days. Page 106 STATEMENT OF Within ten days of becoming an ADM and on an annual basis SECURITIES thereafter, all ADMs must submit to their designated ACCOUNTS Preclearance Compliance Officer: AND HOLDINGS . a listing of all securities trading accounts in which the employee has a beneficial interest. . a statement of all securities in which they presently have any direct or indirect beneficial ownership other than Exempt Securities. The annual report must be completed upon the request of Corporate Compliance, and the information submitted must be current within 30 days of the date the report is submitted. The annual statement of securities holdings contains an acknowledgment that the ADM has read and complied with this Policy. QUARTERLY ADMs are required to submit quarterly to their Preclearance REPORTING Compliance Officer the Quarterly Securities Report. This report must be submitted within 30 days of each quarter end and includes information on: . securities beneficially owned at any time during the quarter which were also either recommended for a transaction or in the portfolio managed by the ADM during the quarter. . positions obtained in private placements. . securities of issuers with a common equity market capitalization of $250 million or less at security acquisition or at the date designated by the Preclearance Compliance Officer, whichever is later, which were beneficially owned at any time during the quarter. . Securities transactions which were not completed through a brokerage account, such as gifts inheritances, spin-offs from securities held outside brokerage accounts, or other transfers. A form for making this report can be obtained from your designated Preclearance Compliance Officer or from the Securities Trading Site on the Mellon intranet. Page 107 PRECLEARANCE All ADMs must notify the designated Preclearance Compliance FOR PERSONAL Officer in writing and receive preclearance before they engage SECURITIES in any purchase or sale of a security for their own accounts. TRANSACTIONS ADMs should refer to the provisions under "Beneficial Ownership" below, which are applicable to these provisions. All requests for preclearance for a securities transaction shall be submitted by completing a Preclearance Request Form which can be obtained from the designated Preclearance Compliance Officer. The designated Preclearance Compliance Officer will notify the ADM whether the request is approved or denied, without disclosing the reason for such approval or denial. Notifications may be given in writing or verbally by the designated Preclearance Compliance Officer to the ADM. A record of such notification will be maintained by the designated Preclearance Compliance Officer. However, it shall be the responsibility of the ADM to obtain a written record of the designated Preclearance Compliance Officer's notification within 48 hours of such notification. The ADM should retain a copy of this written record for at least two years. As there could be many reasons for preclearance being granted or denied, ADMs should not infer from the preclearance response anything regarding the security for which preclearance was requested. Although making a preclearance request does not obligate an ADM to do the transaction, it should be noted that: . Preclearance requests should not be made for a transaction that the ADM does not intend to make. . The order for a transaction must be placed with the broker on the same day that preclearance authorization is received. The broker must execute the trade by 4:00 p.m. Eastern Time on the next business day, at which time the preclearance authorization will expire. . ADMs should not discuss with anyone else, inside or outside Mellon, the response they received to a preclearance request. If the ADM is preclearing as beneficial owner of another's account, the response may be disclosed to the other owner. . Good Until Canceled/Stop Loss Orders ("Limit Orders") must be precleared, and security transactions receiving preclearance authorization must be executed before the preclearance expires. At the end of the preclearance authorization period, any unexecuted Limit Order must be canceled or a new preclearance authorization must be obtained. There are additional pre-approval requirements for initial public offerings, micro-cap securities and private placements. See page 11. Page 108 CONTEMPORANEOUS ADMs must obtain written authorization prior to making or DISCLOSURE acting upon a portfolio recommendation in a security which they own personally. This authorization must be obtained from the ADM's CIO/CEO or other Investment Ethics Committee designee immediately prior to the first such portfolio recommendation in a particular security in a calendar month. The following personal securities holdings are exempt from the requirement to obtain written authorization immediately preceding a portfolio recommendation or transaction: . Exempt Securities (see glossary). . Securities held in accounts over which the ADM has no investment discretion, which are professionally managed by a non-family member, and where the ADM has no actual knowledge that such account is currently holding the same or equivalent security at the time of the portfolio recommendation. . Personal holdings of equity securities of the top 200 issuers on the Russell list of largest publicly traded companies. . Personal equity holdings of securities of non-US issuers with a common equity market capitalization of $20 billion or more. . Personal holdings of debt securities which do not have a conversion feature and are rated BBB or better. . Personal holdings of ADMs who are index fund managers and who have no investment discretion in replicating an index. . Personal holdings of Portfolio Managers in Mellon Private Capital Management and Mellon Private Asset Management if the Portfolio Manager exactly replicates the model or clone portfolio. A disclosure form is required if the Portfolio Page 109 Manager recommends securities which are not in the clone or model portfolio or recommends a model or clone security in a different percentage than model or clone amounts. Disclosure forms are also required when the Portfolio Manager recommends individual securities to clients, even if Mellon shares control of the investment process with other parties. If a personal securities holding does not fall under one of these exemptions, the ADM must complete and forward a disclosure form for authorization by the CIO/CEO or designee, immediately prior to the first recommendation or transaction in the security in the current calendar month. Disclosure forms for subsequent transactions in the same security are not required for the remainder of the calendar month as long as purchases (or sales) in all portfolios do not exceed the maximum number of shares, options, or bonds disclosed on the disclosure form. If the ADM seeks to effect a transaction or makes a recommendation in a direction opposite to the most recent disclosure form, a new disclosure form must be completed prior to the transaction or recommendation. Once the CIO/CEO's authorization is obtained, the ADM may make the recommendation or trade the security in the managed portfolio without the Preclearance Compliance Officer's signature. However, the ADM must deliver the authorization form to the Preclearance Compliance Officer on the day of the CIO/CEO's authorization. The Preclearance Compliance Officer will forward a copy of the completed form for the ADM's files. Page 110 The ADM is responsible for following-up with the Preclearance Compliance Officer in the event a completed form is not returned to the ADM within 5 business days. It is recommended that the ADM retain completed forms for two years. A listing of Investment Ethics Committee designees, a listing of the Russell 200, and the personal securities disclosure forms are available on the Mellon intranet , or can be obtained from your designated Preclearance Compliance Officer. BLACKOUT POLICY Except as described below, ADMs will generally not be given clearance to execute a transaction in any security that is on the restricted list maintained by their Preclearance Compliance Officer, or for which there is a pending buy or sell order for an affiliated account. This provision does not apply to transactions effected or contemplated by index funds. In addition, portfolio managers (except index fund managers) are prohibited from buying or selling a security within seven calendar days before and after their investment company or managed account has effected a transaction in that security. In addition to other appropriate sanctions, if such ADMs effect such a personal transactions during that period, these individuals must disgorge any and all profit realized from such transactions. The amount of the disgorgement will be determined by the Investment Ethics Committee. Exceptions - Regardless of any restrictions above, ADMs will generally be given clearance to buy or sell up to the greater of 100 shares or $10,000 of securities of the top 500 Page 111 issuers on the Russell list of largest publicly traded companies. In addition, ADMs will be exempt from the 7-day disgorgement for the described transactions (but not the disgorgement for short-term/60-day trading). An ADM is limited to two such purchases or two such sales in the securities of any one issuer in any calendar month. EXEMPTIONS FROM Preclearance is not required for the following transactions: REQUIREMENT TO PRECLEAR . purchases or sales of Exempt Securities (see Glossary); . purchases or sales of securities issued by non-affiliated closed-end investment companies; non-financial commodities (such as agricultural futures, metals, oil, gas, etc.), currency futures, financial futures, index futures and index securities; . purchases or sales effected in any account over which an employee has no direct or indirect control over the investment decision making process (e.g., discretionary trading accounts). Discretionary trading accounts may be maintained, without being subject to preclearance procedures, only when the Manager of Corporate Compliance, after a thorough review, is satisfied that the account is truly discretionary; . transactions that are non-volitional on the part of an employee (such as stock dividends); . the sale of Mellon stock received upon the exercise of an employee stock option if the sale is part of a "netting of shares" or "cashless exercise" administered by the Page 112 Human Resources Department (for which the Human Resources Department will forward information to the Manager of Corporate Compliance); . changes to elections in the Mellon 401(k) plan; . purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of securities, to the extent such rights were acquired from such issuer; . sales of rights acquired from an issuer, as described above; and/or . sales effected pursuant to a bona fide tender offer. GIFTING OF ADMs desiring to make a bona fide gift of securities or who SECURITIES receive a bona fide gift of securities do not need to preclear the transaction. However, ADMs must report such bona fide gifts to the designated Preclearance Compliance Officer. The report must be made within 10 days of making or receiving the gift and must disclose the following information: the name of the person receiving (giving) the gift, the date of the transaction, and the name of the broker through which the transaction was effected. A bona fide gift is one where the donor does not receive anything of monetary value in return. An ADM who purchases a security with the intention of making a gift must preclear the purchase transaction. DRIPs, DPPs Certain companies with publicly traded securities establish: AND AIPs . Dividend reinvestment plans (DRIPs) - These permit shareholders to have their dividend payments channeled to the Page 113 purchase of additional shares of such company's stock. An additional benefit offered by many DRIPs to DRIP participants is the right to buy additional shares by sending in a check before the dividend reinvestment date ("optional cash purchases"). . Direct Purchase Plans (DPPs) - These allow purchasers to buy stock by sending a check directly to the issuer, without using a broker. . Automatic Investment Plans (AIPs) - These allow purchasers to set up a plan whereby a fixed amount of money is automatically deducted from their checking account each month and used to purchase stock directly from the issuer. Participation in a DRIP, DPP or AIP is voluntary. ADMs who enroll in a DRIP or AIP are not required to preclear enrollment, the periodic reinvestment of dividend payments into additional shares of company stock through a DRIP, or the periodic investments through an AIP. ADMs must preclear all optional cash purchases through a DRIP and all purchases through a DPP. ADMs must also preclear all sales through a DRIP, DPP or AIP. Page 114 RESTRICTED LIST Each Preclearance Compliance Officer will maintain a list (the "Restricted List") of companies whose securities are deemed appropriate for implementation of trading restrictions for ADMs in their area. From time to time, such trading restrictions may be appropriate to protect Mellon and its ADMs from potential violations, or the appearance of violations, of securities laws. The inclusion of a company on the Restricted List provides no indication of the advisability of an investment in the company's securities or the existence of material nonpublic information on the company. Nevertheless, the contents of the Restricted List will be treated as confidential information in order to avoid unwarranted inferences. The Preclearance Compliance Officer will retain copies of the restricted lists for five years. CONFIDENTIAL The Manager of Corporate Compliance and/or Preclearance TREATMENT Compliance Officer will use his or her best efforts to assure that all requests for preclearance, all personal securities transaction reports and all reports of securities holdings are treated as "Personal and Confidential." However, such documents will be available for inspection by appropriate regulatory agencies, and by other parties within and outside Mellon as are necessary to evaluate compliance with or sanctions under this Policy. Documents received from ADMs are also available for inspection by the boards of directors of 40-Act entities and by the boards of directors (or trustees or managing general partners, as applicable) of the investment companies managed or administered by 40-Act entities. Page 115 RESTRICTIONS ON Employees who engage in transactions involving Mellon TRANSACTIONS IN securities should be aware of their unique responsibilities MELLON with respect to such transactions arising from the employment SECURITIES relationship and should be sensitive to even the appearance of impropriety. The following restrictions apply to all transactions in Mellon's publicly traded securities occurring in the employee's own account and in all other accounts over which the employee could be presumed to exercise influence or control (see provisions under "Beneficial Ownership" below for a more complete discussion of the accounts to which these restrictions apply). These restrictions are to be followed in addition to any restrictions that apply to particular officers or directors (such as restrictions under Section 16 of the Securities Exchange Act of 1934). . Short Sales - Short sales of Mellon securities by employees are prohibited. . Short Term Trading - ADMs are prohibited from purchasing and selling, or from selling and purchasing Mellon securities within any 60 calendar day period. In addition to any other sanctions, any profits realized on such short term trades must be disgorged in accordance with procedures established by senior management. Page 116 . Margin Transactions - Purchases on margin of Mellon's publicly traded securities by employees is prohibited. Margining Mellon securities in connection with a cashless exercise of an employee stock option through the Human Resources Department is exempt from this restriction. Further, Mellon securities may be used to collateralize loans or the acquisition of securities other than those issued by Mellon. . Option Transactions - Option transactions involving Mellon's publicly traded securities are prohibited. Transactions under Mellon's Long-Term Incentive Plan or other employee option plans are exempt from this restriction. . Major Mellon Events - Employees who have knowledge of major Mellon events that have not yet been announced are prohibited from buying or selling Mellon's publicly traded securities before such public announcements, even if the employee believes the event does not constitute material nonpublic information. . Mellon Blackout Period - Employees are prohibited from buying or selling Mellon's publicly traded securities during a blackout period. The blackout period begins the 16th day of the last month of each calendar quarter and ends 3 business days after Mellon Financial Corporation publicly announces the financial results for that quarter. Thus, the blackout periods begin on March 16, June 16, September 16 and December 16. The end of the blackout period is determined by counting business days only, and the day of the earnings announcement is day 1. The blackout period ends at the end of day 3, and employees can trade Mellon securities on day 4. Page 117 MELLON 401(K) For purposes of the blackout period and the short term trading PLAN rule, employees' changing their existing account balance allocation to increase or decrease the amount allocated to Mellon Common Stock will be treated as a purchase or sale of Mellon Stock, respectively. This means: . Employees are prohibited from increasing or decreasing their existing account balance allocation to Mellon Common Stock during the blackout period. . Employees are prohibited from increasing their existing account balance allocation to Mellon Common Stock and then decreasing it within 60 days. Similarly, employees are prohibited from decreasing their existing account balance allocation to Mellon Common Stock and then increasing it within 60 days. However: - with respect to ADMs, any profits realized on short term changes in the 401(k) will not have to be disgorged. - changes to existing account balance allocations in the 401(k) plan will not be compared to transactions in Mellon securities outside the 401(k) for purposes of the 60-day rule. (Note: this does not apply to members of the Executive Management Group, who should consult with the Legal Department.) Except for the above there are no other restrictions applicable to the 401(k) plan. This means, for example: . Employees are not required to preclear any elections or changes made in their 401(k) account. . There is no restriction on employees' changing their salary deferral contribution percentages with regard to either the blackout period or the 60-day rule. . The regular salary deferral contribution to Mellon Common Stock in the 401(k) that takes place with each pay will not be considered a purchase for the purposes of either the blackout or the 60-day rule. Page 118 MELLON EMPLOYEE Receipt - Your receipt of an employee stock option from Mellon STOCK OPTIONS is not deemed to be a purchase of a security. Therefore, it is exempt from preclearance and reporting requirements, can take place during the blackout period and does not constitute a purchase for purposes of the 60-day prohibition. Exercises - The exercise of an employee stock option that results in your holding the shares is exempt from preclearance and reporting requirements, can take place during the blackout period and does not constitute a purchase for purposes of the 60-day prohibition. "Cashless" Exercises - The exercise of an employee stock option which is part of a "cashless exercise" or "netting of shares" that is administered by the Human Resources Department or Chase Mellon Shareholder Services is exempt from the preclearance and reporting requirements and will not constitute a purchase or a sale for purposes of the 60-day prohibition. A "cashless exercise" or "netting of shares" transaction is permitted during the blackout period for ShareSuccess plan options only. They are not permitted during the blackout period for any other plan options. Sales - The sale of the Mellon securities that were received in the exercise of an employee stock option is treated like any other sale under the Policy (regardless of how little time has elapsed between the option exercise and the sale). Thus, such sales are subject to the preclearance and reporting requirements, are prohibited during the blackout period and constitute sales for purposes of the 60-day prohibition. Page 119 RESTRICTIONS ON Purchases or sales by an employee of the securities of TRANSACTIONS IN issuers with which Mellon does business, or other third OTHER party issuers, could result in liability on the part of such SECURITIES employee. Employees should be sensitive to even the appearance of impropriety in connection with their personal securities transactions. Employees should refer to "Beneficial Ownership" below, which is applicable to the following restrictions. The Mellon Code of Conduct contains certain restrictions on investments in parties that do business with Mellon. Employees should refer to the Code of Conduct and comply with such restrictions in addition to the restrictions and reporting requirements set forth below. The following restrictions apply to all securities transactions by ADMs: . Customer Transactions - Trading for customers and Mellon accounts should always take precedence over employees' transactions for their own or related accounts. . Excessive Trading, Naked Options - Mellon discourages all employees from engaging in short-term or speculative trading, in trading naked options, in trading that could be deemed excessive or in trading that could interfere with an employee's job responsibilities. . Front Running - Employees may not engage in "front running," that is, the purchase or sale of securities for their own accounts on the basis of their knowledge of Mellon's trading positions or plans. . Initial Public Offerings - ADMs are prohibited from Page 120 acquiring securities through an allocation by the underwriter of an Initial Public Offering (IPO) without the approval of the Investment Ethics Committee. Approval can be given only when the allocation comes through an employee of the issuer who is a direct family relation of the ADM. Due to NASD rules, this approval may not be available to employees of registered broker/dealers. . Material Nonpublic Information - Employees possessing material nonpublic information regarding any issuer of securities must refrain from purchasing or selling securities of that issuer until the information becomes public or is no longer considered material. . Micro-Cap Securities - Unless specifically authorized in writing by the Investment Ethics Committee, MCADMs are prohibited from voluntarily obtaining beneficial ownership of any security of an issuer with a common equity market capitalization of $100 million or less at the time of acquisition. If any MCADM involuntarily acquires such a micro-cap security through inheritance, gift, or spin-off, this fact must be disclosed in a memo to the MCADM's Preclearance Compliance Officer within 10 business days of the MCADM's knowledge of this fact. A copy of this memo should be attached to the MCADM's next Quarterly Securities Report. A form for making this report can be obtained from your designated Preclearance Compliance Officer. MCADMs must obtain on their Preclearance Request Forms the written authorization of their immediate supervisor Page 121 and their Chief Investment Officer prior to voluntarily obtaining, or disposing of, a beneficial ownership of any security of an issuer with a common equity market capitalization of more than $100 million but less than or equal to $250 million at the time of acquisition. MCADMs who have prior holdings of securities of an issuer with a common equity market capitalization of $250 million or less must disclose on their next Quarterly Securities Report that they have not yet received CIO/CEO authorization for these holdings. The Preclearance Compliance Officer will utilize these forms to request the appropriate authorizations. . Private Placements - Participation in private placements is prohibited without the prior written approval of the Investment Ethics Committee. The Committee will generally not approve an ADM's acquiring, in a private placement, beneficial ownership of any security of an issuer in which any managed fund or account is authorized to invest within the ADM's fund complex. Private placements include certain co-operative investments in real estate, co-mingled investment vehicles such as hedge funds, and investments in family owned businesses. For the purpose of this policy, time-shares and cooperative investments in real estate used as a primary or secondary residence are not considered to be private placements. When considering requests for participation in private placements, the Investment Ethics Committee will take Page 122 account the specific facts and circumstances of the request prior to reaching a decision on whether to authorize a private placement investment by an ADM. These factors include, among other things, whether the opportunity is being offered to an individual by virtue of his or her position with Mellon or its affiliates, or his or her relationship to a managed fund or account. The Investment Ethics Committee will also consider whether a fund or account managed by the ADM is authorized to invest in securities of the issuer in which the ADM is seeking to invest. At its discretion, the Investment Ethics Committee may request any and all information and/or documentation necessary to satisfy itself that no actual or potential conflict, or appearance of a conflict, exists between the proposed private placement purchase and the interests of any managed fund or account. ADMs who have prior holdings of securities obtained in a private placement must request the written authorization of the Investment Ethics Committee to continue holding the security. This request for authorization must be initiated within 90 days of becoming an ADM. To request authorization for prior holdings or new proposed acquisitions of securities issued in an eligible private placement, contact the Manager of Corporate Compliance. . Scalping - Employees may not engage in "scalping," that is, the purchase or sale of securities for their own or Mellon's accounts on the basis of knowledge of customers' trading positions or plans. . Short Term Trading - ADMs are discouraged from purchasing and selling, or from selling and purchasing, the same (or equivalent) securities within any 60 calendar day period. Any profits realized on such short term trades must be disgorged in accordance with procedures established by senior management. Exception: securities may be sold pursuant to a bona fide tender offer without disgorgement under the 60-day rule. Page 123 PROHIBITION ON You are prohibited from acquiring any security issued by a INVESTMENTS IN financial services organization if you are: SECURITIES OF FINANCIAL . a member of the Mellon Senior Management Committee. SERVICES ORGANIZATIONS . employed in any of the following departments: - Corporate Strategy & Development - Legal (Pittsburgh only) - Finance (Pittsburgh only) . an employee specifically designated by the Manager of Corporate Compliance and informed that this prohibition is applicable to you. Financial Services Organizations - The term "security issued by a financial services organization" includes any security issued by: - Commercial Banks other than Mellon - Thrifts - Bank Holding Companies other than Mellon - Savings and Loan Associations - Insurance Companies - Broker/Dealers - Investment Advisory Companies - Transfer Agents - Shareholder Servicing Companies - Other Depository Institutions Page 124 The term "securities issued by a financial services organization" does not include securities issued by mutual funds, variable annuities or insurance policies. Further, for purposes of determining whether a company is a financial services organization, subsidiaries and parent companies are treated as separate issuers. Effective Date - Securities of financial services organizations properly acquired before the employee's becoming subject to this prohibition may be maintained or disposed of at the owner's discretion consistent with this policy. Additional securities of a financial services organization acquired through the reinvestment of the dividends paid by such financial services organization through a dividend reinvestment program (DRIP), or through an automatic investment plan (AIP) are not subject to this prohibition, provided the employee's election to participate in the DRIP or AIP predates the date of the employee's becoming subject to this prohibition. Optional cash purchases through a DRIP or direct purchase plan (DPP) are subject to this prohibition. Securities acquired in any account over which an employee has no direct or indirect control over the investment decision making process (e.g. discretionary trading accounts) are not subject to this prohibition. Within 30 days of becoming subject to this prohibition, all holdings of securities of financial services organizations must be disclosed in writing to the Manager of Corporate Compliance. Page 125 BENEFICIAL The provisions of the Policy apply to transactions in the OWNERSHIP employee's own name and to all other accounts over which the employee could be presumed to exercise influence or control, including: . accounts of a spouse, minor children or relatives to whom substantial support is contributed; . accounts of any other member of the employee's household (e.g., a relative living in the same home); . trust or other accounts for which the employee acts as trustee or otherwise exercises any type of guidance or influence; . corporate accounts controlled, directly or indirectly, by the employee; . arrangements similar to trust accounts that are established for bona fide financial purposes and benefit the employee; and . any other account for which the employee is the beneficial owner (see Glossary for a more complete legal definition of "beneficial owner"). NON-MELLON The provisions discussed above do not apply to transactions EMPLOYEE done under a bona fide employee benefit plan administered by BENEFIT PLANS an organization not affiliated with Mellon and by an employee of that organization who shares beneficial interest with a Mellon employee, and in the securities of the employing organization. This means if a Mellon employee's spouse is employed at a non- Mellon company, the Mellon employee is not required to obtain approval for transactions in the employer's securities done by the spouse as part of the spouse's employee benefit plan. The Securities Trading Policy does not apply in such a situation. Rather, the other organization is relied upon to provide adequate supervision with respect to conflicts of interest and compliance with securities laws. Page 126 PROTECTING As an employee you may receive information about Mellon, its CONFIDENTIAL customers and other parties that, for various reasons, should INFORMATION be treated as confidential. All employees are expected to strictly comply with measures necessary to preserve the confidentiality of information. Employees should refer to the Mellon Code of Conduct. INSIDER TRADING Federal securities laws generally prohibit the trading of AND TIPPING securities while in possession of "material nonpublic" LEGAL information regarding the issuer of those securities (insider PROHIBITIONS trading). Any person who passes along material nonpublic information upon which a trade is based (tipping) may also be liable. Information is "material" if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to buy, sell or hold securities. Obviously, information that would affect the market price of a security would be material. Examples of information that might be material include: . a proposal or agreement for a merger, acquisition or divestiture, or for the sale or purchase of substantial assets; Page 127 . tender offers, which are often material for the party making the tender offer as well as for the issuer of the securities for which the tender offer is made; . dividend declarations or changes; . extraordinary borrowings or liquidity problems; . defaults under agreements or actions by creditors, customers or suppliers relating to a company's credit standing; . earnings and other financial information, such as large or unusual write-offs, write-downs, profits or losses; . pending discoveries or developments, such as new products, sources of materials, patents, processes, inventions or discoveries of mineral deposits; . a proposal or agreement concerning a financial restructuring; . a proposal to issue or redeem securities, or a development with respect to a pending issuance or redemption of securities; . a significant expansion or contraction of operations; Page 128 . information about major contracts or increases or decreases in orders; . the institution of, or a development in, litigation or a regulatory proceeding; . developments regarding a company's senior management; . information about a company received from a director of that company; and . information regarding a company's possible noncompliance with environmental protection laws. This list is not exhaustive. All relevant circumstances must be considered when determining whether an item of information is material. "Nonpublic" - Information about a company is nonpublic if it is not generally available to the investing public. Information received under circumstances indicating that it is not yet in general circulation and which may be attributable, directly or indirectly, to the company or its insiders is likely to be deemed nonpublic information. If you obtain material non-public information you may not trade related securities until you can refer to some public source to show that the information is generally available (that is, available from sources other than inside sources) and that enough time has passed to allow wide dissemination of the information. While information appearing in widely accessible sources--such as in newspapers or on the internet--becomes public very soon after publication, information appearing in less accessible sources--such as regulatory filings, may take up to several days to be deemed public. Similarly, highly complex information might take longer to become public than would information that is easily understood by the average investor. MELLON'S POLICY Employees who possess material nonpublic information about a company--whether that company is Mellon, another Mellon entity, a Mellon customer or supplier, or other company--may not trade in that company's securities, either for their own accounts or for any account over which they exercise investment discretion. In addition, employees may not recommend trading in those securities and may not pass the information along to others, except to employees who need to know the information in order to perform their job responsibilities with Mellon. These prohibitions remain in effect until the information has become public. Employees who have investment responsibilities should take appropriate steps to avoid receiving material nonpublic information. Receiving such information could create severe limitations on their ability to carry out their responsibilities to Mellon's fiduciary customers. Employees managing the work of consultants and temporary employees who have access to the types of confidential information described in this Policy are responsible for ensuring that consultants and temporary employees are aware of Mellon's policy and the consequences of noncompliance. Questions regarding Mellon's policy on material nonpublic information, or specific information that might be subject to it, should be referred to the General Counsel. Page 129 RESTRICTIONS As a diversified financial services organization, Mellon faces ON THE FLOW OF unique challenges in complying with the prohibitions on INFORMATION insider trading and tipping of material non-public WITHIN MELLON information, and misuse of confidential information. This is (THE "CHINESE because one Mellon unit might have material nonpublic WALL") information about a company while other Mellon units may have a desire, or even a fiduciary duty, to buy or sell that company's securities or recommend such purchases or sales to customers. To engage in such broad-ranging financial services activities without violating laws or breaching Mellon's fiduciary duties, Mellon has established a "Chinese Wall" policy applicable to all employees. The "Chinese Wall" separates the Mellon units or individuals that are likely to receive material nonpublic information (Potential Insider Functions) from the Mellon units or individuals that either trade in securities--for Mellon's account or for the accounts of others--or provide investment advice (Investment Functions). Employees should refer to CPP 903-2(C) The Chinese Wall. Page 130 GLOSSARY DEFINITIONS . 40-ACT ENTITY - A Mellon entity registered under the Investment Company Act and/or the Investment Advisers Act of 1940 . ACCESS DECISION MAKER - A person designated as such by the Investment Ethics Committee. Generally, this will be portfolio managers and research analysts who make recommendations or decisions regarding the purchase or sale of equity, convertible debt, and non-investment grade debt securities for investment companies and other managed accounts. . ACCESS PERSON - As defined by Rule 17j-1 under the Investment Company Act of 1940, "access person" means: Page 131 (A) With respect to a registered investment company or an investment adviser thereof, any director, officer, general partner, or advisory person (see definition below), of such investment company or investment adviser; (B) With respect to a principal underwriter, any director, officer, or general partner of such principal underwriter who in the ordinary course of his business makes, participates in or obtains information regarding the purchase or sale of securities for the registered investment company for which the principal underwriter so acts, or whose functions or duties as part of the ordinary course of his business relate to the making of any recommendations to such investment company regarding the purchase or sale of securities. (C) Notwithstanding the provisions of paragraph (A) hereinabove, where the investment adviser is primarily engaged in a business or businesses other than advising registered investment companies or other advisory clients, the term "access person" shall mean: any director, officer, general partner, or advisory person of the investment adviser who, with respect to any registered investment company, makes any recommendations, participates in the determination of Page 132 which recommendation shall be made, or whose principal function or duties relate to the determination of which recommendation will be made, to any such investment company; or who, in connection with his duties, obtains any information concerning securities recommendations being made by such investment adviser to any registered investment company. (D) An investment adviser is "primarily engaged in a business or businesses other than advising registered investment companies or other advisory clients" when, for each of its most recent three fiscal years or for the period of time since its organization, whichever is less, the investment adviser derived, on an unconsolidated basis, more than 50 percent of (i) its total sales and revenues, and (ii) its income (or loss) before income taxes and extraordinary items, from such other business or businesses. . ADVISORY PERSON of a registered investment company or an investment adviser thereof means: (A) Any employee of such company or investment adviser (or any company in a control relationship to such investment company or investment adviser) who, in connection with his regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security by a registered investment company, or whose functions relate to the making of any recommendation with respect to such purchases or sales; and (B) Any natural person in a control relationship to such company or investment adviser who obtains information concerning recommendations made to such company with regard to the purchase or sale of a security. Page 133 . APPROVAL - written consent or written notice of non-objection. . BENEFICIAL OWNERSHIP - The definition that follows conforms to interpretations of the Securities and Exchange Commission on this matter. Because a determination of beneficial ownership requires a detailed analysis of personal financial circumstances that are subject to change, Corporate Compliance ordinarily will not advise employees on this definition. It is the responsibility of each employee to read the definition and based on that definition, determine whether he/she is the beneficial owner of an account. If the employee determines that he/she is not a beneficial owner of an account and Corporate Compliance becomes aware of the existence of the account, the employee will be responsible for justifying his/her determination. Securities owned of record or held in the employee's name are generally considered to be beneficially owned by the employee. Securities held in the name of any other person are deemed to be beneficially owned by the employee if by reason of any contract, understanding, relationship, agreement or other arrangement, the employee obtains therefrom benefits substantially equivalent to those of ownership, including the power to vote, or to direct the disposition of, such securities. Beneficial ownership includes securities Page 134 held by others for the employee's benefit (regardless of record ownership), e.g., securities held for the employee or members of the employee's immediate family, defined below, by agents, custodians, brokers, trustees, executors or other administrators; securities owned by the employee, but which have not been transferred into the employee's name on the books of the company; securities which the employee has pledged; or securities owned by a corporation that should be regarded as the employee's personal holding corporation. As a natural person, beneficial ownership is deemed to include securities held in the name or for the benefit of the employee's immediate family, which includes the employee's spouse, the employee's minor children and stepchildren and the employee's relatives or the relatives of the employee's spouse who are sharing the employee's home, unless because of countervailing circumstances, the employee does not enjoy benefits substantially equivalent to those of ownership. Benefits substantially equivalent to ownership include, for example, application of the income derived from such securities to maintain a common home, meeting expenses that such person otherwise would meet from other sources, and the ability to exercise a controlling influence over the purchase, sale or voting of such securities. An employee is also deemed the beneficial owner of securities held in the name of some other person, even though the employee does not obtain benefits of ownership, if the employee can vest or revest title in himself at once, or at some future time. Page 135 In addition, a person will be deemed the beneficial owner of a security if he has the right to acquire beneficial ownership of such security at any time (within 60 days) including but not limited to any right to acquire: (1) through the exercise of any option, warrant or right; (2) through the conversion of a security; or (3) pursuant to the power to revoke a trust, discretionary account or similar arrangement. With respect to ownership of securities held in trust, beneficial ownership includes ownership of securities as a trustee in instances where either the employee as trustee or a member of the employee's "immediate family" has a vested interest in the income or corpus of the trust, the ownership by the employee of a vested beneficial interest in the trust and the ownership of securities as a settlor of a trust in which the employee as the settlor has the power to revoke the trust without obtaining the consent of the beneficiaries. Certain exemptions to these trust beneficial ownership rules exist, including an exemption for instances where beneficial ownership is imposed solely by reason of the employee being settlor or beneficiary of the securities held in trust and the ownership, acquisition and disposition of such securities by the trust is made without the employee's prior approval as settlor or beneficiary. "Immediate family" of an employee as trustee means the employee's son or daughter (including any legally adopted children) or any descendant of either, the employee's stepson or stepdaughter, the employee's father or Page 136 mother or any ancestor of either, the employee's stepfather or stepmother and the employee's spouse. To the extent that stockholders of a company use it as a personal trading or investment medium and the company has no other substantial business, stockholders are regarded as beneficial owners, to the extent of their respective interests, of the stock thus invested or traded in. A general partner in a partnership is considered to have indirect beneficial ownership in the securities held by the partnership to the extent of his pro rata interest in the partnership. Indirect beneficial ownership is not, however, considered to exist solely by reason of an indirect interest in portfolio securities held by any holding company registered under the Public Utility Holding Company Act of 1935, a pension or retirement plan holding securities of an issuer whose employees generally are beneficiaries of the plan and a business trust with over 25 beneficiaries. Any person who, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement or device with the purpose or effect of divesting such person of beneficial ownership as part of a plan or scheme to evade the reporting requirements of the Securities Exchange Act of 1934 shall be deemed the beneficial owner of such security. The final determination of beneficial ownership is a question to be determined in light of the facts of a particular case. Thus, while the employee may include security holdings Page 137 of other members of his family, the employee may nonetheless disclaim beneficial ownership of such securities. . "CHINESE WALL" POLICY - procedures designed to restrict the flow of information within Mellon from units or individuals who are likely to receive material nonpublic information to units or individuals who trade in securities or provide investment advice. . DIRECT FAMILY RELATION - employee's husband, wife, father, mother, brother, sister, daughter or son. Includes the preceding plus, where appropriate, the following prefixes/suffix: grand-, step-, foster-, half- and -in-law. . DISCRETIONARY TRADING ACCOUNT - an account over which the employee has no direct or indirect control over the investment decision making process. . EMPLOYEE - any employee of Mellon Financial Corporation or its more-than-50%-owned direct or indirect subsidiaries; includes all full-time, part-time, benefited and non-benefited, exempt and non-exempt, domestic and international employees; does not include consultants and contract or temporary employees . EXEMPT SECURITIES - Exempt Securities are defined as: - direct obligations of the government of the United States; - high quality short-term debt instruments; - bankers' acceptances; - bank certificates of deposit and time deposits; Page 138 - commercial paper; - repurchase agreements; - securities issued by open-end investment companies; . FAMILY RELATION - see direct family relation. . GENERAL COUNSEL - General Counsel of Mellon Financial Corporation or any person to whom relevant authority is delegated by the General Counsel. . INDEX FUND - an investment company or managed portfolio which contains securities of an index in proportions designed to replicate the return of the index. . INITIAL PUBLIC OFFERING (IPO) - the first offering of a company's securities to the public through an allocation by the underwriter. . INVESTMENT CLUB - is a membership organization where investors make joint decisions on which securities to buy or sell. The securities are generally held in the name of the investment club. Since each member of an investment club participates in the investment decision making process, Insider Risk Employees, Investment Employees and Access Decision Makers belonging to such investment clubs must preclear and report the securities transactions contemplated by such investment clubs. In contrast, a private investment company is an organization where the investor invests his/her money, but has no direct control over the way his/her money is invested. Insider Risk Employees, Investment Employees and Page 139 Access Decision Makers investing in such a private investment company are not required to preclear any of the securities transactions made by the private investment company. Insider Risk Employees, Investment Employees and Access Decision Makers are required to report their investment in a private investment company to the Manager of Corporate Compliance and certify to the Manager of Corporate Compliance that they have no direct control over the way their money is invested. . INVESTMENT COMPANY - a company that issues securities that represent an undivided interest in the net assets held by the company. Mutual funds are investment companies that issue and sell redeemable securities representing an undivided interest in the net assets of the company. . INVESTMENT ETHICS COMMITTEE is composed of investment, legal, compliance, and audit management representatives of Mellon and its affiliates. The members of the Investment Ethics Committee are: President and Chief Investment Officer of The Dreyfus Corporation (Committee Chair) General Counsel, Mellon Financial Corporation Chief Risk Management Officer, Mellon Trust Manager of Corporate Compliance, Mellon Financial Corporation Corporate Chief Auditor, Mellon Financial Corporation Chief Investment Officer, Mellon Private Asset Management Executive Officer of a Mellon investment adviser (rotating membership) The Committee has oversight of issues related to personal securities trading and investment activity by Access Decision Page 140 Makers. . MANAGER OF CORPORATE COMPLIANCE - the employee within the Audit and Risk Review Department of Mellon Financial Corporation who is responsible for administering the Securities Trading Policy, or any person to whom relevant authority is delegated by the Manager of Corporate Compliance. . MELLON - Mellon Financial Corporation and all of its direct and indirect subsidiaries. . OPTION - a security which gives the investor the right, but not the obligation, to buy or sell a specific security at a specified price within a specified time. For purposes of compliance with the Policy, any Mellon employee who buys/sells an option, is deemed to have purchased/sold the underlying security when the option was purchased/sold. Four combinations are possible as described below. - Call Options If a Mellon employee buys a call option, the employee is considered to have purchased the underlying security on the date the option was purchased. If a Mellon employee sells a call option, the employee is considered to have sold the underlying security on the date the option was sold. - Put Options If a Mellon employee buys a put option, the employee is considered to have sold the underlying security on the date the option was purchased. If a Mellon employee sells a put option, the employee is considered to have bought the underlying security on the date the option was sold. Page 141 Below is a table describing the above: ------------------------------------------------ Transaction Type ------------------------------------------------ --------------------------------------------------------- Option Type Buy Sale --------------------------------------------------------- --------------------------------------------------------- Put Sale of Underlying Purchase of Security Underlying Security --------------------------------------------------------- --------------------------------------------------------- Call Purchase of Underlying Sale of Underlying Security Security --------------------------------------------------------- Page 142 . PRECLEARANCE COMPLIANCE OFFICER - a person designated by the Manager of Corporate Compliance and/or the Investment Ethics Committee to administer, among other things, employees' preclearance requests for a specific business unit. . PRIVATE PLACEMENT - an offering of securities that is exempt from registration under the Securities Act of 1933 because it does not constitute a public offering. Includes limited partnerships. . SENIOR MANAGEMENT COMMITTEE - the Senior Management Committee of Mellon Financial Corporation. . SHORT SALE - the sale of a security that is not owned by the seller at the time of the trade. Page 143 EXHIBIT A - SAMPLE INSTRUCTION LETTER TO BROKER Date Broker ABC Street Address City, State ZIP Re: John Smith & Mary Smith Account No. xxxxxxxxxxxx In connection with my existing brokerage accounts at your firm noted above, please be advised that the Compliance Department of my employer should be noted as an "Interested Party" with respect to my accounts. They should, therefore, be sent copies of all trade confirmations and account statements relating to my account. Please send the requested documentation ensuring the account holder's name appears on all correspondence to: Manager, Corporate Compliance Preclearance Compliance Officer Mellon Bank or (obtain address from your PO Box 3130 Pittsburgh, PA designated Preclearance 15230-3130 Compliance Officer) Thank you for your cooperation in this request. Sincerely yours, Associate cc: Manager, Corporate Compliance (151-4340) or Preclearance Compliance Officer Securities Trading Policy Page 144 Dreyfus Nonmanagement Board Member Edition INTRODUCTION The Securities Trading Policy (the "Policy") is designed to reinforce the reputation for integrity of The Dreyfus Corporation and its subsidiaries (collectively, "Dreyfus") by avoiding even the appearance of impropriety in the conduct of their businesses. The Policy sets forth procedures and limitations which govern the personal securities transactions of every Dreyfus employee. SPECIAL This edition of the Policy has been prepared specifically EDITION for Nonmanagement Board Members of Dreyfus and the investment companies advised by Dreyfus (each a "Fund"). NONMANAGEMENT You are considered to be a Nonmanagement Board Member if you are: BOARD MEMBER . a director of Dreyfus who is not also an officer or employee of Dreyfus ("Dreyfus Board Member"); or . a director or trustee of any Fund who is not also an officer or employee of Dreyfus ("Mutual Fund Board Member"). Page 145 INDEPENDENT The term "Independent Mutual Fund Board Member" means those MUTUAL FUND Mutual Fund Board Members who are not deemed "interested BOARD MEMBER persons" of their Fund(s), as defined by the Investment Company Act of 1940, as amended. STANDARDS OF Outside Activities CONDUCT FOR NONMANAGEMENT - Mutual Fund Board Members are prohibited from accepting BOARD MEMBERS nomination or serving as a director, trustee or managing general partner of an investment company not advised by Dreyfus, or accepting employment with or acting as a consultant to any person acting as a registered investment adviser to an investment company, without the express prior approval of the board of directors/trustees of the pertinent Fund(s) for which the Mutual Fund Board Member serves as a director/trustee. In any such circumstance, management of Dreyfus must be given advance notice by the Mutual Fund Board Member of his/her request in order to allow management to provide its input, if any, for the relevant Fund board of directors/trustees' consideration. - Dreyfus Board Members are prohibited from accepting nomination or serving as a director, trustee or managing general partner of an investment company not advised by Dreyfus, or accepting employment with or acting as a consultant to any person acting as a registered investment adviser to an investment company, without Dreyfus's express prior approval. - Independent Mutual Fund Board Members are prohibited from owning Mellon securities (since that would destroy his or her independent status). - Nonmanagement Board Members are prohibited from buying or selling Mellon's publicly traded securities during a blackout period, which begins the 16th day of the last month of each calendar quarter and ends three business days after Mellon publicly announces the financial results for that quarter. Page 146 Insider Trading and Tipping Federal securities laws generally prohibit the trading of securities while in possession of "material nonpublic" information regarding the issuer of those securities (insider trading). Any person who passes along material nonpublic information upon which a trade is based (tipping) may also be liable. Information is "material" if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to buy, sell or hold securities. Obviously, information that would affect the market price of a security would be material. Examples of information that might be material include: . a proposal or agreement for a merger, acquisition or divestiture, or for the sale or purchase of substantial assets; . tender offers, which are often material for the party making the tender offer as well as for the issuer of the securities for which the tender offer is made; . dividend declarations or changes; . extraordinary borrowings or liquidity problems; . defaults under agreements or actions by creditors, customers or suppliers relating to a company's credit standing; . earnings and other financial information, such as large or unusual write-offs, write-downs, profits or losses; Page 147 . pending discoveries or developments, such as new products, sources of materials, patents, processes, inventions or discoveries of mineral deposits; . a proposal or agreement concerning a financial restructuring; . a proposal to issue or redeem securities, or a development with respect to a pending issuance or redemption of securities; . a significant expansion or contraction of operations; . information about major contracts or increases or decreases in orders; . the institution of, or a development in, litigation or a regulatory proceeding; . developments regarding a company's senior management; . information about a company received from a director of that company; and . information regarding a company's possible noncompliance with environmental protection laws. This list is not exhaustive. All relevant circumstances must be considered when determining whether an item of information is material. "Nonpublic"- Information about a company is nonpublic if it is not generally available to the investing public. Information received under circumstances indicating that it is not yet in general circulation and which may be attributable, directly or indirectly, to the company or its insiders is likely to be deemed nonpublic information. Page 148 If you obtain material non-public information you may not trade related securities until you can refer to some public source to show that the information is generally available (that is, available from sources other than inside sources) and that enough time has passed to allow wide dissemination of the information, While information appearing in widely accessible sources--such as in newspapers or on the internet--becomes public very soon after publication, information appearing in less accessible sources-- such as regulatory filings, may take up to several days to be deemed public. Similarly, highly complex information might take longer to become public than would information that is easily understood by the average investor. Conflict of Interest--No Nonmanagement Board Member may recommend a securities transaction for Mellon, Dreyfus or any Fund without disclosing any interest he or she has in such securities or issuer thereof (other than an interest in publicly traded securities where the total investment is less than or equal to $25,000), including: . any direct or indirect beneficial ownership of any securities of such issuer; . any contemplated transaction by the Nonmanagement Board Member in such securities; . any position with such issuer or its affiliates; and . any present or proposed business relationship between such issuer or its affiliates and the Nonmanagement Board Member or any party in which the Nonmanagement Board Member has a beneficial ownership interest (see "Beneficial Ownership" in the Glossary). Page 149 the Glossary). Portfolio Information--No Nonmanagement Board Member may divulge the current portfolio positions, or current or anticipated portfolio transactions, programs or studies, of Mellon, Dreyfus or any Fund, to anyone unless it is properly within his or her responsibilities as a Nonmanagement Board Member to do so. Material Nonpublic Information--No Nonmanagement Board Member may engage in or recommend any securities transaction, for his or her own benefit or for the benefit of others, including Mellon, Dreyfus or any Fund, while in possession of material nonpublic information. No Nonmanagement Board Member may communicate material nonpublic information to others unless it is properly within his or her responsibilities as a Nonmanagement Board Member to do so. Page 150 PRECLEARANCE Nonmanagement Board Members are permitted to engage in personal FOR securities transactions without obtaining prior approval from the PERSONAL Preclearance Compliance Officer. SECURITIES TRANSACTIONS PERSONAL - Independent Mutual Fund Board Members--Any Independent Mutual SECURITIES Fund Board Member, as defined above, who effects a securities TRANSACTIONS transaction where he or she knew, or in the ordinary course of REPORTS fulfilling his or her official duties should have known, that during the 15-day period immediately preceding or after the date of such transaction, the same security was purchased or sold, or was being considered for purchase or sale by Dreyfus (including any Page 151 Fund or other account managed by Dreyfus), is required to report such personal securities transaction. In the event a personal securities transaction report is required, it must be submitted to the Preclearance Compliance Officer not later than ten days after the end of the calendar quarter in which the transaction to which the report relates was effected. The report must include the date of the transaction, the title and number of shares or principal amount of the security, the nature of the transaction (e.g., purchase, sale or any other type of acquisition or disposition), the price at which the transaction was effected and the name of the broker or other entity with or through whom the transaction was effected. This reporting requirement can be satisfied by sending a copy of the confirmation statement regarding such transaction to the Preclearance Compliance Officer within the time period specified. Page 152 . Dreyfus Board Members and "Interested" Mutual Fund Board Members- Dreyfus Board Members and Mutual Fund Board Members who are "interested persons" of a Fund, as defined by the Investment Company Act of 1940, are required to report their personal securities transactions. Personal securities transaction reports are required to be submitted to the Preclearance Compliance Officer not later than ten days after the end of the calendar quarter in which the transaction to which the report relates was effected. The report must include the date of the transaction, the title and number of shares or principal amount of the security, the nature of the transaction (e.g., purchase, sale or any other type of acquisition or disposition), the price at which the transaction was effected and the name of the broker or other entity with or through whom the transaction was effected. This reporting requirement can be satisfied by sending a copy of the confirmation statement regarding such transaction to the Preclearance Compliance Officer within the time period specified. Page 153 EXEMPTIONS FROM Notwithstanding the foregoing, securities transaction reports REPORTING are not required for the following transactions purchases or REQUIREMENTS sales of "Exempt Securities" (see Glossary); purchases or sales effected in any account over which the Nonmanagement Board Member has no direct or indirect control over the investment decision-making process (i.e., discretionary trading accounts); transactions which are non-volitional on the part of the Nonmanagement Board Member (such as stock dividends); purchases which are part of an automatic reinvestment of dividends under a DRIP; purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of securities, to the extent such rights were acquired from such issuer; and\or sales of rights acquired from an issuer, as described above. CONFIDENTIAL TREATMENT THE PRECLEARANCE COMPLIANCE OFFICER WILL USE HIS OR HER BEST EFFORTS TO ASSURE THAT ALL PERSONAL SECURITIES TRANSACTION REPORTS ARE TREATED AS "PERSONAL AND CONFIDENTIAL." HOWEVER, SUCH DOCUMENTS WILL BE AVAILABLE FOR INSPECTION BY APPROPRIATE REGULATORY AGENCIES AND OTHER PARTIES WITHIN AND OUTSIDE MELLON AS ARE NECESSARY TO EVALUATE COMPLIANCE WITH OR SANCTIONS UNDER THIS POLICY. Page 154 GLOSSARY DEFINITIONS - ACCESS PERSON - As defined by Rule 17j-1 under the Investment Company Act of 1940, "access person" includes, with respect to a registered investment company or an investment adviser thereof, any director of such investment company or investment adviser. Each Nonmanagement Board Member is therefore considered an access person of Dreyfus or their respective Funds. - APPROVAL - written consent or written notice of nonobjection. - BENEFICIAL OWNERSHIP - The definition that follows conforms to interpretations of the Securities and Exchange Commission on this matter. Because a determination of beneficial ownership requires a detailed analysis of personal financial circumstances that are subject to change, Corporate Compliance ordinarily will not advise Nonmanagement Board Members ("NBM") on this definition. It is the responsibility of each NBM to read the definition, and based on that definition determine whether he/she is the beneficial owner of a security. Securities owned of record or held in the NBM's name are generally considered to be beneficially owned by the NBM. Securities held in the name of any other person are deemed to be beneficially owned by the NBM if by reason of any contract, understanding, relationship, agreement or other arrangement, the NBM obtains therefrom benefits substantially equivalent to those of ownership, including the power to vote, or to direct the disposition of, such securities. Beneficial ownership includes securities held by others for the NBM's benefit (regardless of record ownership), e.g., securities held for the NBM or members of the NBM's immediate family, defined below, by agents, custodians, brokers, trustees, executors or other administrators; securities owned by the NBM, but which have not been transferred into the NBM's name on the books of the company; securities which the NBM has pledged; or securities owned by a corporation that should be regarded as the NBM's personal holding corporation. As a natural person, beneficial ownership is deemed to include securities held in the name or for the benefit of the NBM's immediate family, which includes the NBM's spouse, the NBM's minor children and stepchildren and the NBM's relatives or the relatives of the NBM's spouse who are sharing the NBM's home, unless because of countervailing circumstances, the NBM does not enjoy benefits substantially equivalent to those of ownership. Benefits substantially equivalent to ownership include, for example, application of the income derived from such securities to maintain a common home, meeting expenses that such person otherwise would meet from other sources, and the ability to exercise a controlling influence over the purchase, sale or voting of such securities. An NBM is also deemed the beneficial owner of securities held in the name of some other person even through the NBM does not obtain benefits of ownership, if the NBM can vest or revest title in himself or herself at once, or at some future time. In addition, a person will be deemed the beneficial owner of a security if he/she has the right to acquire beneficial ownership of such security at any time (within 60 days) including but not limited to any right to acquire: (1) through the exercise of any option, warrant or right; (2) through the conversion of a security; or (3) pursuant to the power to revoke a trust, discretionary account or similar arrangement. Page 155 With respect to ownership of securities held in trust, beneficial ownership includes ownership of securities as a trustee in instances where either the NBM as trustee or a member of the NBM's "immediate family" has a vested interest in the income or corpus of the trust, the ownership by the NBM of a vested beneficial interest in the trust and the ownership of securities as a settlor of a trust in which the NBM as the settlor has the power to revoke the trust without obtaining the consent of the beneficiaries. Certain exemptions to these trust beneficial ownership rules exist, including an exemption for instances where beneficial ownership is imposed solely by reason of the NBM being settlor or beneficiary of the securities held in trust and the ownership, acquisition and disposition of such securities by the trust is made without the NBM's prior approval as settlor or beneficiary. "Immediate family" of an NBM as trustee means the NBM's son or daughter (including any legally adopted children or any descendant of either), the NBM's stepson or stepdaughter, the NBM's father or mother or any ancestor of either, the NBM's stepfather or stepmother and the NBM's spouse. Page 156 To the extent that stockholders of a company use it as a personal trading or investment medium and the company has no other substantial business, stockholders are regarded as beneficial owners, to the extent of their respective interests, of the stock thus invested or traded in. A general partner in a partnership is considered to have indirect beneficial ownership in the securities held by the partnership to the extent of his pro rata interest in the partnership. Indirect beneficial ownership is not, however, considered to exist solely by reason of an indirect interest in portfolio securities held by any holding company registered under the Public Utility Holding Company Act of 1935, a pension or retirement plan holding securities of an issuer whose employees generally are beneficiaries of the plan, and a business trust with over 25 beneficiaries. Any person who, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement or device with the purpose or effect of divesting such person of beneficial ownership as part of a plan or scheme to evade the reporting requirements of the Securities Exchange Act of 1934 shall be deemed the beneficial owner of such security. The final determination of beneficial ownership is a question to be determined in light of the facts of a particular case. Thus, while the NBM may report the security holdings of other members of his family, the NBM may nonetheless disclaim beneficial ownership of such securities. . DISCRETIONARY TRADING ACCOUNT - an account over which the NBM has no direct or indirect control over the investment decision making process. Page 157 . EXEMPT SECURITIES - Exempt Securities are defined as: - direct obligations of the government of the United States; - bankers' acceptances; - bank certificates of deposit and time deposits; - commercial paper; - high quality short-term debt instruments; - repurchase agreements; - securities issued by open-end investment companies. . INVESTMENT COMPANY - a company that issues securities that represent an undivided interest in the net assets held by the company. Mutual funds are investment companies that issue and sell redeemable securities representing an undivided interest in the net assets of the company. . INVESTMENT ETHICS COMMITTEE is composed of investment, legal, compliance, and audit management representatives of Mellon and its affiliates. The members of the Investment Ethics Committee are: President and Chief Investment Officer of The Dreyfus Corporation (Committee Chair) General Counsel, Mellon Financial Corporation Chief Risk Management Officer, Mellon Trust Manager of Corporate Compliance, Mellon Financial Corporation Corporate Chief Auditor, Mellon Financial Corporation Chief Investment/Executive Officers of two investment departments or affiliates (rotating memberships) The Committee has oversight of issues related to personal securities trading and investment activity by certain employees, including those who make recommendations or decisions regarding the purchase or sale of portfolio securities by Funds or other managed accounts. . MELLON - Mellon Financial Corporation and all of its direct and indirect subsidiaries. . PRECLEARANCE COMPLIANCE OFFICER - a person designated by the Manager of Corporate Compliance and/or the Investment Ethics Committee to administer, among other things, employees' preclearance requests for a specific business unit. Page 158 EX-99.(P)(2)(C) 22 0022.txt INVESCO CODE OF ETHICS 1 EXHIBIT (p)(2)(c) [LOGO] INVESCO Funds Group, Inc. & INVESCO Distributors, Inc. Compliance and Business Policies INTRODUCTION ------------ INVESCO's compliance and business policies adhere strictly to sound investment principles and practices and to the highest of ethical standards. Our policies are intended to ensure full conformity to the rules and regulations of our regulatory organizations. The responsibility for following the policies and procedures rests with you, the employee. While INVESCO has a variety of procedures to oversee compliance, a conscientious, professional, and ethical attitude on your part will ensure that we fulfill the rules, regulations and business customs of our industry. Every attempt has been made to cover all requirements, however, your good judgment is required for the success of INVESCO's compliance program. You should be familiar with the procedures and policies in this manual. Occasionally, questions may arise which cannot be answered through this manual. In this instance, questions should be directed to the Legal & Compliance department. Disciplinary sanctions such as suspension, with or without pay, or termination of employment may be imposed against any person who fails to adhere to the policies and procedures set forth in this manual. On an annual basis, each INVESCO officer, director, and employee will be required to provide a written certification that he or she has read and understands the policies in the manual, recognizing that he or she is subject to the policies. In addition, on an annual basis each INVESCO officer, director, and employee will be required to certify in writing the disclosure of all personal securities transactions and reportable accounts. Questions regarding the contents of this manual should be directed to: Stephanie Barres, ext. 6475 Tison Cory, 6829 Tane Tyler, Assistant General Counsel, ext. 6243 Glen Payne, General Counsel, ext. 6200 Code of Ethics -------------- As members of an organization serving the public, all employees are guided in their actions by the highest ethical and professional standards. 1. The general conduct of all employees must at all times reflect the professional nature of the business we are in. INVESCO employees are judicious, accurate, objective and reasonable in dealing with both clients and other parties. The personal integrity of all employees must be beyond the slightest shadow of a doubt. 2. All INVESCO personnel must act within the spirit and the letter of all federal, state, and local laws and regulations pertaining to the securities business. 2 3. At all times, the interest of the client has precedence over any personal interest. 4. All officers, directors and employees shall obtain written prior approval before placing a securities transaction (as listed in the following INVESCO policies). 5. INVESCO personnel will not accept compensation of any sort for services, from any outside source without the permission of the CEO or their representative. 6. When personal interests conflict with the interests of INVESCO and it's clients, the employee will report the conflict to the Legal & Compliance department for resolution. 7. Recommendations and actions of INVESCO are confidential and private matters between INVESCO and its clients. It is INVESCO's policy to prohibit, prior to general public release, the transmission, distribution or communication of any information regarding securities transaction of client accounts except to broker/dealers in the ordinary course of business. 8. No information obtained during the course of employment regarding particular securities (including reports and recommendations of INVESCO) may be transmitted, distributed, or communicated to anyone who is not affiliated with INVESCO. In addition, an employee in possession of this information may not use this information for their own personal gain. 9. The policies and guidelines set forth in this Code of Ethics must be strictly adhered to by all INVESCO employees. Severe disciplinary actions, including dismissal, may be imposed for violations of this Code, including the guidelines that follow. Guidelines for Avoiding Prohibited Acts --------------------------------------- INVESCO employees are prohibited from the following ("Prohibited Acts"): 1. Soliciting or recommending purchases, sales or reinvestment in securities not in accordance with the client's investment objectives and guidelines. 2. Attempting to use their influence to cause any client account to purchase, sell or retain any securities for the purpose of seeking any form of personal gain. 3. Warranting the value or price of any security or guaranteeing its future performance. 4. Promising or representing that an issuer of securities will meet its obligations or will fulfill its investment or business objectives in the future. 5. Agreeing to protect a client against loss by repurchasing a security at some future time. 6. Owning or taking title to any funds or assets of a client. 7. Maintaining a joint brokerage or bank account with any client; sharing any benefit, profit or loss resulting from securities transactions with any client; or entering into any business transaction with any client. 8. Borrowing money or securities from any client, regardless of the relationship between the client and INVESCO representative. 9. Owning, operating, managing or otherwise engaging in or being employed by any outside business activity on either a full-time or part-time basis without the prior written approval of the President or CEO. 3 10. Violating or failing to abide by INVESCO's policy designed to detect and prevent insider trading, and INVESCO policy regarding buying and selling AMVESCAP shares or ADR's. 11. Entering orders in any account for which there is no client. Any employee who becomes aware of any conduct which might violate the Prohibited Acts listed above, any laws or regulations, or improper or unauthorized actions, should report such conduct to their supervisor. Any questions about the conduct required by INVESCO should be directed to the Legal & Compliance department. Need-to-Know Policy ------------------- In conjunction with the policies regarding insider trading and material information, INVESCO maintains a Need-to-Know Policy. This policy has been adopted to prevent even the appearance of impropriety. As INVESCO diversifies its products and services, we must be aware that potential conflicts may arise. For instance, in the normal course of business with a retirement plan, INVESCO may receive confidential information about the plan's company (such as imminent lay-offs, poor earnings, etc.) that may be material to a portfolio manager holding the stock and trying to determine to buy or sell the securities. In consideration of our professional responsibilities, and under law, INVESCO must not use nonpublic information improperly to benefit INVESCO, a client, or an individual. INVESCO personnel should always make every effort to avoid even the appearance of misusing nonpublic information. In light of this, INVESCO employees who have nonpublic information must not disclose it to anyone who does not have a "need to know." This policy, also know as a "Fire Wall," is designed to keep the information confidential. While there may be times in which trading or other activities must be restricted, reliance on a successful operating Fire Wall allows INVESCO to minimize such restrictions. The Fire Wall permits INVESCO personnel in non-affected areas to continue to engage in activities involving a particular company's securities. Under the Fire Wall policy, those on the "informed" side of the wall have a special duty to ensure that appropriate standards or confidentiality are maintained. For those on the "uninformed" side of the wall, a corresponding duty exists. All INVESCO personnel are prohibited from making any effort to obtain nonpublic information that may be in the possession of other parts of the organization. Again, INVESCO employees who have nonpublic information must not disclose it to anyone who does not have a need to know. When material information is communicated, whether to other personnel or to those outside the organization, the second person is then "brought over the wall" and is then prohibited from effecting transactions in the concerned company securities until the information is made public. Therefore, extreme care should be taken to ensure that they are not put in a position of nonpublic information about other transactions that might prejudice or inhibit the appropriate performance of their other functions in their normal area of operation. Any questions as to whether a piece of information is material or should not be communicated should be directed to the Legal & Compliance department of INVESCO. This policy is to be read in conjunction with the INVESCO Personal Securities Trading Policies. GIFTS AND GRATUITIES -------------------- In compliance with the National Association of Securities Dealers Regulation, Inc. (NASDR) Conduct Rule 3060 (a): No officer, director, or employee of INVESCO shall directly or indirectly accept in any one year gifts, gratuities or favors ------ in excess of $100 per individual per year from any one broker/dealer without the prior written approval of the Legal department. 4 In connection with the retail sale or distribution of shares of the INVESCO Funds products (retail, variable, etc.), no officer director, or employee covered by this policy may offer or pay to any broker/dealer anything of material value over $50, and no broker/dealer may solicit or accept anything of material value (over $50). See NASDR Conduct Rules 2820 & 2830. Gifts or gratuities of any amount to any fiduciary of an existing or prospective ERISA account, or any associated person thereof, should be pre-approved in writing by the Legal Department. The U.S. Department of Labor (DOL) has specific regulations regarding this issue which may necessitate a review for individual clients. Lavish or frequent entertainment may be considered a gift. NASDR Rules require that the receipt of a gift or the giving of a gift must be documented. Recordkeeping for gifts is maintained in the Legal department. To report a gift, complete the Gift Reporting Form and forward to Stephanie Barres, Mail Stop 201. Activities Outside of INVESCO ----------------------------- If you wish to accept a position with a corporation (public or private), charitable organization, foundation or similar group, you should seek prior approval. Submit a memorandum detailing the proposed activity to the Human Resources department, the Chief Executive Officer and to the General Counsel. The memorandum should state the compensation or benefits, direct or indirect, that you will receive from your participation and the nature of the time commitment involved. These types of requests will be treated on a case-by-case basis with the interests of INVESCO and its clients being paramount. If authorization to serve on the board of directors of a company is granted, the INVESCO officer, director or employee serving as a director shall refrain from any direct or indirect involvement in the consideration for purchase or sale and in the purchase of sale by any INVESCO client. For example, securities of the company of which the INVESCO officer, director or employee serves as a director, or any securities of an affiliate of such company, should not be purchased for INVESCO clients. From time to time our employees are asked to serve as Directors, Advisory Directors, Trustees or officers of various corporations, charitable organizations, foundations and the like--these may be paid or volunteer. Sometimes the corporations are public or are thinking of becoming public and sometimes they are closely held corporations never expected to be publicly traded. Some of the activities may involve participation in, or knowledge of, proposed financial investments by the group involved. This section will briefly address the issues raised by these activities. There is no absolute prohibition on an INVESCO employee participating in outside activities. As a practical matter, however, there may be circumstances in which it would not be in INVESCO's best interest to allow employees to participate in outside activities. The first consideration must be whether the activity will take so much of the employee's time that it will affect his or her performance. As important, however, is whether the activity will subject the employee to conflicts of interest that will reflect poorly on both him or her and INVESCO. Our business is such that we must adhere strictly to the highest ethical standards and strive to avoid even the appearance of impropriety and conflict. It is impossible to anticipate every conflict that may arise, but activities should be limited to those that have the least probability of creating them. For example, serving on the board of a publicly traded company has clear potential for conflict, while serving on the board of a charitable organization generally does not. Another consideration is that under the law, INVESCO and its employees must not use non-public material information improperly to benefit themselves or INVESCO's clients. It is conceivable, for example, that as an advisory board member, you may receive material non-public information about certain public companies. If this occurs, you would be prohibited from effecting transactions (either for your account or client accounts) until the information either is made available to the public or ceases to be material. You would also be required to keep the information confidential and, 5 pursuant to our Code of Ethics and Insider Trading Policies, avoid using the information to effect trades. Additionally, even if you are positive that you do not have any "insider information," unforeseen market events may make it look as if you did -- e.g., you sell securities of a company that subsequently reports an adverse event (e.g., loss of a major customer, departure of key employees, etc.). It is virtually impossible to prove a negative -- that you didn't know about the event - -- and it may make it difficult to win any lawsuit that is brought or to mitigate any resulting adverse publicity. Business Card Policy -------------------- It is the policy of INVESCO, that the business cards of the officers and employees of INVESCO be accurate, clear, and not misleading to the recipient. The SEC and NASDR categorize business cards as advertising material, and thus apply all general marketing rules to business cards. Accordingly, when developing and disseminating business cards, certain guidelines should be followed. Also, as with all advertising and marketing materials, approval should be obtained from the Legal & Compliance department. Standard INVESCO business cards prepared by the marketing Communications group meet all the necessary requirements. INVESCO Funds employees should only use business cards ordered from the Communications group. Employee Political and Charitable Contributions ----------------------------------------------- INVESCO realizes that, as active members of the community and involved citizens, its employees often participate in political and charitable projects and activities that may include donations and contributions by employees to political candidates or charitable organizations. Although INVESCO encourages civic and community involvement by its employees, INVESCO desires to avoid any situation that raises a conflict of interest or that creates an appearance of impropriety in the context of INVESCO's business relationships. Specifically, this policy prohibits employees from making political or charitable contributions when the solicitation or request for such contributions implies that continued or future business with INVESCO depends on making such a contribution. Similarly, no contribution should be made that creates the appearance that INVESCO stands to benefit in its business relations because of an employee's contribution. Campaign Contributions - ---------------------- Both federal and state campaign finance laws include limits on political contributions that employees may make. Under federal law, the maximum amount an individual may contribute to a political candidate is $1,000 per election. The limits imposed by state law vary. Generally, INVESCO policy is that all contributions made by employees must be entirely voluntary and should only be in an amount that is determined by the employee, taking into account this policy, to be unlikely to influence the candidate's judgment regarding any continued or future business with INVESCO. No contributions should be made that create the appearance of any of the conflicts discussed. In no case may any contribution exceed the applicable federal or state limitations. If an employee is unsure if a particular political contribution would be in compliance with this policy, they should consult the Legal & Compliance department. Contract Recordkeeping ---------------------- All signed original agreements entered into on behalf of INVESCO should be sent to the Legal & Compliance department for inclusion in the contract database, and for disaster recovery purposes. 6 Only officers (Assistant Vice President, Vice President, and Senior Vice President) of INVESCO Funds Group, Inc., and of INVESCO Distributors, Inc., may sign contacts on behalf of INVESCO. Contact your department head to determine the appropriate officer to sign a contract. - -------------------------------------------------------------------------------- INVESCO Personal Securities Trading Policies (Substantially identical to the policies applicable to all AMVESCAP entities Globally) I. Core Principles (All Employees) A. Employees have a duty to serve the best interests of clients and not to engage in conduct that is in conflict with such interests. B. Employees are prohibited from misusing "inside information". C. Employees are permitted to acquire shares of AMVESCAP PLC ("AMVESCAP") through authorized share purchase schemes (including the AMVESCAP International Sharesave Plan) and otherwise in a manner consistent with applicable law. D. Employees are encouraged to invest in mutual funds, unit trusts and other collective investment vehicles sponsored by subsidiaries of AMVESCAP. E. Subject to certain exceptions set forth in these Policies employees are permitted to invest in other securities if they observe applicable laws and regulations and both the letter and spirit of these Policies. F. These Policies operate as a minimum "threshold" standard, and it is recognized that the Company's operating divisions and individual business units may wish to establish stricter standards. Less strict standards than those set forth in these Policies are generally discouraged and will be permitted only on an exceptional "case by case" basis and only where such exceptions are permitted by applicable law and are not inconsistent with these Core Principles. II. Prohibition Against Insider Trading (All Employees) A. Terms and Definitions - As used in this Section II, certain key terms have --------------------- the following meanings: 1. "Insider" - The concept of "Insider" is broad, and includes at a minimum all directors, officers and employees of a company. Directors, officers and employees of AMVESCAP and its subsidiary companies are deemed to be Insiders of AMVESCAP. In addition, any person may be a temporary Insider if he/she enters into a special, confidential relationship with a company in the conduct of its affairs and, as a result, has access to non-public information developed for the company's purposes. Thus, any person associated with AMVESCAP or any of its subsidiaries may become a temporary Insider of a company which is advised by a subsidiary or for which a subsidiary performs other services. Temporary Insiders of a company may also include, for example, its attorneys, accountants, consultants and other agents, or employees of its bank lenders and major customers. 2. "Insider Trading" - While the law concerning "Insider Trading" is not static, it generally includes: (1) trading by an Insider while in possession of Material or Market/Price Sensitive Non-Public Information; (2) trading by non-insiders while in possession of Material or Market/Price Sensitive Non-Public Information either improperly obtained by the non- insider or disclosed to the non-insider by an Insider in violation of the Insider's duty to keep it confidential; and (3) communicating Material or Market/Price Sensitive Non-Public Information to others. 7 3. "Material Information" (U.S. terminology) and "Market or Price Sensitive Information" (U.K. terminology) - These terms generally include (1) any information that a reasonable investor would likely consider to be important to making an investment decision; and (2) any information that is reasonably certain to have a substantial effect on the price of a company's securities. Examples of Material or Market/Price Sensitive Information include (but are not limited to) changes in dividends or dividend policy, earnings estimates or changes in previously released earnings estimates, developments concerning significant merger or acquisition proposals, developments in major litigation, and significant changes in management. 4. "Non-Public Information" - Information is "non-public" until it has been effectively communicated to the market and the market has had time to "absorb" the information. For example, information found in a report filed with the Securities and Exchange Commission, or appearing in Dow Jones, Reuters Economic Services, The Wall Street Journal or other publications of ----------------------- general circulation would be considered public. B. General Prohibition - All Directors, officers and employees (including -------------------- contract employees and part-time personnel) of AMVESCAP, its subsidiaries and affiliated companies worldwide, are prohibited from engaging in Insider Trading. This prohibition applies to both personal and client accounts. C. Reporting Obligation - Any Director, officer or employee (including any -------------------- contract or part-time employee) who possesses or believes that he/she may possess Material or Market/Price Sensitive Non-Public Information about any issuer of securities must report the matter immediately to his/her legal/compliance department, which will review the matter and provide further instructions as to the appropriate handling of the information. III. Policies and Procedures Governing Personal Securities Transactions Generally (Covered Persons only) A. Covered Persons - The policies and procedures set forth in this Section III apply to Directors, officers and employees of AMVESCAP, its subsidiaries and affiliated companies ("AMVESCAP Companies") who are deemed to be "Covered Persons" as defined herein. The term "Covered Persons" includes all such Directors, officers and employees except those who have been determined to be "Exempt Persons" by the relevant management committee of an operating division of AMVESCAP or its designee ("Relevant Management Committee"). B. Exempt Persons - An "Exempt Person" must meet all of the following criteria: 1. Work in a position which is unrelated to any AMVESCAP Company's investment management, investment policy or investment strategy activities and who has no day-to-day access to information on current investment strategy, portfolio holdings and portfolio transactions; 2. Demonstrate lack of day-to-day access to such information by factors such as physical separation (e.g. employment in a facility physically separated from the locations where investment-related activities occur) and lack of access to computer systems that would provide access to portfolio information; 3. Annually sign a statement to the effect that such person has no actual access to such information, and that if he/she comes into contact with such information he/she will promptly notify his/her legal/compliance department who will determine, based on a review of the employee's circumstances, whether he/she may continue to be designated as an "Exempt Person". Note: Each exempt person's status will be reviewed periodically by the legal/compliance department. If any one of the above 8 requirements is not met, the employee will immediately be considered to be a covered person. C. General Policy 1. Covered Persons may not engage in personal securities transactions that create an actual or potential conflict of interest with client trading activity. Thus Covered Persons have a fiduciary responsibility to ensure that all client trading activity in a security is completed before engaging in personal securities transactions in the same security. 2. For purposes of this Section III the term "personal securities transaction" includes any transaction by a Covered Person for a "Covered Account", defined as any account: (a) in which a Covered Person has a direct or indirect financial interest; or (b) over which such Covered Person has direct or indirect control over the purchase or sale of securities. Such Covered Accounts may include, but are not limited to, accounts of a spouse, minor child, relative, friend, or personal business associate. D. Pre-clearance Requirements 1. General Requirement - a. A Covered Person may not engage in a personal securities transaction unless it has been pre-cleared by his/her legal/compliance department following a determination that the transaction does not give rise to an actual or potential conflict of interest with client activity in the same security. This determination shall not be made, and pre-clearance shall not be given, if there has been a client account transaction in the same security within seven (7) calendar days of the proposed personal securities transaction (the "7-Day Rule"). b. Subject to oversight by the Relevant Management Committee, the legal/compliance department has responsibility for setting the policy for determining which client accounts will be matched against each Covered Person's personal securities transactions. c. The pre-clearance requirements and procedures set forth in this paragraph D apply to personal securities transactions in any security that is not the subject of an exception set forth in paragraph F below, and specifically apply to transactions in shares of AMVESCAP and to transactions in shares of closed-end investment companies and closed-end investment trusts managed by an AMVESCAP company. d. In the case of personal securities transactions involving the purchase or sale of an option on an equity security, the legal/compliance department will determine whether to pre-clear the transaction by matching the personal securities transaction against client account activity in both the option and the underlying security. e. It shall be the responsibility of the legal/compliance department following pre-clearance of a personal securities transaction, to monitor client account activity in the same security for the following seven (7) calendar days to determine whether the appearance of a conflict is present, either in conjunction with a particular transaction or as the result of a pattern of trading activity and, if so, whether any additional action (such as disgorgement of profits) is warranted. 2. Pre-Clearance Procedures - The legal/compliance department shall be responsible for setting appropriate procedures (and documentation) to carry out the pre-clearance requirements set forth in this paragraph D. These procedures shall include the following: a. The requirement that a Covered Person complete and submit to his/her legal/compliance department a pre-clearance request form setting forth details of each proposed personal securities transaction; b. The review of each such pre-clearance request form by the legal/compliance department, followed by its authorization or denial (as time-stamped on the form) of the request, and a communication of this decision to 9 the affected Covered Person. c. The execution by such Covered Person of the authorized personal securities transaction within one trading day following the date of approval, ---------------------- following which time period a new pre-clearance request form must be submitted. 3. De Minimis Exemption A pre-clearance request relating to a proposed personal securities transaction involving 2,000 or fewer shares (or 20 or fewer contracts, in the case of options) of an issuer that has at least US $1 billion (or non-U.S. currency equivalent) in market capitalization shall not be subject to the 7-Day Rule or other provisions of sub-paragraph D.1, provided (a) that any pre-clearance approval given for such transaction shall be valid for ten (10) calendar days only; and (b) no Covered Persons may make pre-clearance requests relating to transactions involving 2,000 shares (or 20 contracts in the case of options) of any particular security more than once every 30 calendar days. E. Reporting Requirements 1. Initial Reports by Covered Persons - Within 10 days of commencement of employment each Covered Person must provide to his/her legal/compliance department a complete list of all of his or her Covered Accounts. 2. Reports of Trade Confirmations - Within (ten) 10 calendar days of settlement of each personal securities transaction, the Covered Person engaging in the transaction must file or cause to be filed with the legal/compliance department a duplicate copy of the broker-dealer confirmation for such transaction. (Note: The duplicate confirmation must be generated by the broker-dealer and mailed directly to the legal/compliance department. Employee delivered photostat copies are not acceptable.) 3. Annual Update and Certification - No later that February 1 of each year, each Covered Person must file with the legal/compliance department an annual account statement that lists, as of December 31 of each prior year, all Covered Accounts of such Covered Person and all securities holdings of such Covered Accounts. Annually, each Covered Person must execute and provide his/her legal/compliance department with a certificate of compliance with these Policies and any other personal trading policies then in effect which apply to such Covered Person. F. Exceptions to Pre-Clearance and Reporting Requirements 1. Personal securities transactions in the following securities are not subject to either the pre-clearance requirements or the reporting requirements set forth in this Section III: a. Open-end mutual funds and open-end unit trusts (whether or not managed or distributed by an AMVESCAP Company); b. Variable annuities, variable life products and other similar unit-based insurance products issued by insurance companies and insurance company separate accounts. c. U.S. (Federal) Government Securities, and d. Money market instruments (as defined by the relevant legal/compliance department). 2. Independent Directors - Personal securities transactions of an Independent Director of AMVESCAP are not subject to either the pre- clearance or reporting requirements set forth in this Section III except with respect to personal securities transactions in the shares of AMVESCAP or shares of any closed-end investment company or investment trust served by such Independent Director in a Director or Trustee capacity. For purposes of this exception the term "Independent Director" includes (a) any Director of AMVESCAP (i) who is neither an officer nor employee of AMVESCAP or of any AMVESCAP Company, or (ii) who is not otherwise "connected with" AMVESCAP or any AMVESCAP Company within the meaning of the London Stock 10 Exchange Yellow Book; Personal securities transactions in the following are not subject to the pre-clearance requirements set forth in this Section III but are subject to the reporting requirements: a. Securities acquired through automatic dividend reinvestment plans; b. Securities acquired through the receipt or exercise of rights or warrants issued by a company on a pro rata basis to all holders of a class of security; c. A City Index (e.g., IG Index) (UK only); d. Futures contracts; e. Commodities contracts; and f. Futures or Options on a stock market index, a foreign currency or commodity. 4. Delegated Discretionary Accounts - Pre-clearance is not required for transactions in a Covered Account as to which a Covered Person is not exercising power over investment discretion, provided that: a. The Covered Account is the subject of a written contract providing for the delegation by the Covered Person of substantially all investment discretion to another party; b. The Covered Person has provided his/her legal/compliance department with a copy of such written agreement; c. The Covered Person certifies in writing that he/she has not discussed, and will not discuss, potential investment decisions with the party to whom investment discretion has been delegated; and d. The Covered Person complies with all reporting requirements outlined in paragraph E above, and also provides or makes provision for the delivery to his/her legal/compliance department of monthly/quarterly statements of discretionary account holdings. The foregoing exception from the pre-clearance requirement does not apply to transactions by a delegated discretionary account in shares of AMVESCAP. All employees are required to notify parties to whom they have delegated investment discretion that such discretion may not be exercised to purchase shares of AMVESCAP and that any sales of AMVESCAP shares by a Covered Account which is the subject of delegated investment discretion are subject to the pre-clearance and reporting requirements set forth in this Section III and the policies and provisions set forth in Section IV below. - -------------------------------------------------------------------------------- G. Restrictions on Certain Activities In order to avoid even the appearance of conduct that might be deemed contrary to a client's best interests, Covered Persons (other than Independent Directors of AMVESCAP) are subject to the following additional restrictions and prohibitions relating to certain investment activities and related conduct: 1. Prohibition Against Trading in Securities on "Restricted Lists" - It is recognized that there may be occasions when AMVESCAP, an AMVESCAP Company, or a Covered Person who is a key executive of AMVESCAP or an AMVESCAP Company, may have a special relationship with an issuer of securities. In such occasions the Board of Directors of AMVESCAP or the Relevant Management Committee may decide to 11 place the securities of such issuer on a "restricted list", to be maintained by the relevant legal/compliance department. All employees are prohibited from engaging in any personal securities transactions in a security on a "restricted list". 2. Prohibition Against Short-Term Trading Activities - Covered Persons are prohibited from profiting in an "opposite transaction" in the same security within 60 days of its purchase or sale. Generally, only those securities requiring pre-clearance are subject to this Short-Term Trading Prohibition. However, while options and futures transactions are generally not subject to this Short-Term Trading Prohibition, such transactions may not be used to circumvent the prohibition. 3. Prohibition Against Short Sales - Covered Persons are prohibited from engaging in short sales of securities. 4. Prohibition Against Purchases in Initial Public Offerings - Covered Persons are prohibited from purchasing securities in initial public offerings except in those circumstances where different amounts of such offerings are specified for different investor types (e.g. private investors and institutional investors) and the purchase has --- been pre-cleared by the relevant legal/compliance department on the basis that it is not likely to create any actual or potential conflict of interest. 5. Restrictions on the Purchase of Restricted Securities Issued by Public Companies - Generally, Covered Persons are discouraged from investing in restricted securities of public companies. A Covered Person may purchase such securities, however, if such purchase has been pre- cleared by his/her legal/compliance department following its determination that the proposed transaction does not present any actual or potential conflict of interest. 6. Restrictions on Private Placements (Including Hedge Funds) - A Covered Person may not purchase or sell any security obtained through a private placement (including the purchase or sale of an interest in a so-called "hedge fund") unless such transaction has been pre-cleared by his/her legal/compliance department following its determination that the proposed transaction does not present any actual or potential conflict of interest. In addition, if a Covered Person owning securities of a privately held company knows that the company is proposing to engage in a public offering involving securities of that company (whether or not such securities are of the same class as the securities held by such Covered Person), he/she must disclose this information to his/her legal/compliance department which will determine whether further action should be taken. 7. Participation in Investment Clubs - A Covered Person is prohibited from participating in an investment club unless such participation has been pre-cleared by his/her legal /compliance department following its determination that the following conditions have been satisfied: a. the Covered Person's participation does not create any actual or potential conflict of interest; b. the Covered Person does not control investment decision- making for the investment club; and c. The Covered Person has made satisfactory arrangements to ensure that duplicate trade confirmations of investment club activity and quarterly statements of investment club holdings are provided to his/her legal/compliance department by brokers acting on behalf of the investment club. Should the Covered Person contribute, but not necessarily control, investment decision-making for the investment club, all transactions by the investment club would be subject to pre-clearance. (Note: Exemption from trading pre-clearance for Investment Club participation may be made by the legal/compliance department. Such account activity will be periodically reviewed and if deemed necessary, the pre-clearance exemption may be revoked at any time.) IV. Policies Governing Transactions in Shares of AMVESCAP PLC (All Employees) A. Personal securities transactions in shares of AMVESCAP PLC by Directors, officers and employees of AMVESCAP and the AMVESCAP Companies are governed by AMVESCAP's Share Dealing Code ( the "Code", ---------- a copy of which is attached hereto) adopted in accordance with requirements of the London Stock Exchange. The Code is incorporated by reference and made a part of these Policies so that a violation of the 12 Code is also deemed a violation of these Policies. Among other provisions the Code generally prohibits all trading in AMVESCAP shares during certain defined "closed periods" which are typically two calendar months before annual results and earnings announcements and one calendar month before quarterly results and earnings announcements. B. The prohibitions against insider trading set forth above in Section II of these Policies and the pre-clearance and reporting provisions set forth above in Section III of these Policies apply to personal securities transactions in shares of AMVESCAP, with the exception that the purchase of shares through regular payroll deduction in connection with operation of the AMVESCAP International Sharesave Plan is exempt from the pre-clearance provisions of Section III. C. The foregoing provisions apply to all Directors, officers and employees of AMVESCAP, including both Covered Persons and Exempt Persons as defined in Section III, and apply to all personal securities transactions by or for the benefit of such persons, including transactions in discretionary accounts maintained for such persons. - -------------------------------------------------------------------------------- V. Administration of Policies (All Employees) A. With the exception of Part IV above, administration of these Policies is the responsibility of the various legal/compliance departments within the AMVESCAP group, subject to general oversight by the Relevant Management Committees. B. Responsibility for the administration of these Policies as they relate to transactions in AMVESCAP shares (Part IV above) rests jointly with the AMVESCAP Company Secretary, responsible for interpretations of the Code; its Group Compliance Officer, responsible for determinations made in the event of possible violations of the Code or of these Policies; and its various legal/compliance departments, responsible for pre-clearance and reporting of transactions. In any event responsibility for these Policies as they pertain to trading in AMVESCAP shares is subject to general oversight by the AMVESCAP Board of Directors. C. Administrative responsibility for these Policies includes: 1. the authority to adopt such forms and procedures as may be appropriate to implement these Policies; 2. the authority to recommend and to implement policies that are more restrictive than those set forth in these Policies; 3. the authority, on a case by case basis, and to a limited extent, to approve exceptions from any of the prohibitions, restrictions or procedures set forth in Part III of these Policies; and 4. The authority to review violations of the Policies and to recommend to the Relevant Management Committee (or to the AMVESCAP Board of Directors in the case of violation of the Policies set forth in Part IV), such penalties and sanctions as may be appropriate under the circumstances. D. Exceptions - Where exceptions are approved under subparagraph C (3) above, a determination shall be made, in the case of each such exception, that it is consistent with the Core Principles set forth in Section I of these Policies and that it does not create an actual or potential conflict of interest. The approval of the exception and the circumstances surrounding such approval shall be noted in writing and reported to the Relevant Management Committee at the next available opportunity. 13 E. Penalties and Sanctions 1. Persons who are found to have violated the prohibitions against Insider Trading set forth in Section II of these Policies may be subject to severe penalties and sanctions including but not limited to disgorgement of profits and suspension or termination of employment. These penalties and sanctions shall be in addition to any penalties that may be imposed by law, including (a) civil injunctions; (b) revocation of licenses and registrations; (c) substantial fines; and/or (d) imprisonment. 2. Persons who are found to have knowingly violated any of the other provisions of these Policies, including the pre-clearance and reporting requirements, the restrictions against certain defined activities and the rules governing trading in shares of AMVESCAP, shall be subject to a range of possible sanctions including, among other actions: (a) required special education or training; (b) letters of admonition or censure; (c) restrictions on further personal securities transactions; (d) disgorgement of profits; and (e) reassignment, demotion, suspension or termination of employment. - -------------------------------------------------------------------------------- POLICY FOR DIRECTOR AND EMPLOYEE PERSONAL DEALINGS IN THE SHARES AND OPTIONS OF AMVESCAP PLC INTRODUCTION The London Stock Exchange requires all listed companies to adopt a share dealing policy and procedures designed to prevent members of the Board of Directors and employees from improperly using material non-public information. We must comply with this policy if we wish to deal in the Ordinary Shares, American Depository Receipts ("ADRs"), or exercise share options of AMVESCAP PLC. PERSONS COVERED BY THE POLICY All members of the AMVESCAP PLC Board of Directors, Executive Board, and all employees are subject to this policy. In addition, all "connected persons" of Board members or employees are also covered. Persons connected to directors or employees includes: . Our spouses; . Our dependent children under the age of 18 (including adopted, illegitimate or step-children); . Any body corporate, or other business entity, with which the director or employee is "associated" i.e., where 20% or more of the equity share capital or voting power is controlled by the director or employee and their connected persons; . The trustees of any trust where the beneficiaries of the trust include any of the above connected persons (with the exception of employee share schemes and pension schemes); . Our business partners i.e., a person or business entity with which we share a mutual economic interest under an agreement to share that interest. 14 DEALING PROCEDURES All of our transactions in AMVESCAP PLC ordinary shares or ADRs must be approved in advance, including those in plans or trusts sponsored by the Company. Members of the Board of Directors and Executive Board must obtain prior clearance from the Group Compliance Officer. Employees must obtain approval in accordance with the personal share dealing policies in effect in their business unit. Generally this will mean seeking approval via their local compliance team which will be notified by the Company Secretary of any dates when employees are not free to deal. Details of "close periods", namely periods when employees are not free to deal, are also circulated to all employees on the internal e-mail system. All of our options transactions, including those through plans or trusts sponsored by the Company, must also be approved in advance. Members of the Board of Directors, Executive Board members, and employees must obtain approval from the Group Company Secretary. The Request for Authorization to Deal Form must be used for dealing in shares and ADRs. The Application Form for the Purpose of Exercises of Share Options must be used for options transactions. We are obligated to inform our connected persons that they are also subject to these requirements. Any dealing they may do must be approved as described above. PROHIBITED DEALINGS In order to prevent even the appearance of impropriety, we must be careful to deal in AMVESCAP shares or options only when not in possession of material non- public information. This includes, but is not limited to the following: . No share dealing within two months before the Company announces its annual results or dividends; . No share dealing within one month before the announcement of semi-annual or quarterly results; . The exercise of an option or right to purchase under an employee share scheme is generally not permissible where the final exercise date falls within the above periods, although certain transactions may be permissible depending upon the circumstances. In any event, if you are unsure as to your ability to exercise an option you should contact the Company Secretary; . No short term or day trading of shares or ADRs, i.e. purchases and sales within a 30-day period. Any questions regarding this policy or procedures should be referred to the Group Compliance Officer or Group Company Secretary. EX-99.(P)(2)(D) 23 0023.txt NEUBERGER CODE OF ETHICS EXHIBIT (p)(2)(d) CODE OF ETHICS - AMENDED AND RESTATED This Code of Ethics ("Code") is adopted pursuant to Rule 17j-1 promulgated by the Securities and Exchange Commission (the "Rule") under the Investment Company Act of 1940 by Neuberger Berman Management Inc. ("NB Management") and Neuberger Berman, LLC ("NB") with respect to the services of each as the sub-adviser of one or more registered investment companies or series thereof (the "Fund") for which neither NB Management nor NB nor any of their affiliates is investment manager, investment adviser, administrator or distributor. Statement of General Principles This Code of Ethics is adopted in recognition of the following principles that govern personal investment activities of all individuals associated with the Fund, NB Management, and NB: It is their duty at all times to place the interests of Fund shareholders ahead of their personal interests. Priority must be given to Fund trades over personal securities trades. All personal securities transactions must be conducted consistent with this Code of Ethics and in such a manner as to avoid any actual or potential conflict of interest or any abuse of an individual's position of trust and responsibility. Individuals should not take advantage of their positions to benefit themselves at the expense of any Fund. In personal securities investing, individuals should follow a philosophy of investment rather than trading. -1- TABLE OF CONTENTS ----------------- 1. General Prohibitions........................................................................ 4 2. Definitions................................................................................. 4 Access Person............................................................................... 4 Advisory Person............................................................................. 4 Beneficial Interest......................................................................... 5 Blind Trust................................................................................. 5 Covered Security............................................................................ 6 Day......................................................................................... 6 Immediate Family............................................................................ 6 Investment Company.......................................................................... 6 Investment Person........................................................................... 6 Legal and Compliance Department............................................................. 7 Related Issuer.............................................................................. 7 Trading Desk................................................................................ 7 3. Required Compliance Procedures.............................................................. 7 3.1 All Securities Transactions through Neuberger Berman.................................... 7 3.2 Preclearance of Securities Transactions by NB Access Persons............................ 8 3.3 Post-Trade Monitoring of Precleared Transactions........................................ 9 3.4 Notification of Reporting Obligations................................................... 9 3.5 Certification of Compliance with Code of Ethics......................................... 9 4. Restrictions................................................................................ 9 4.1 Initial Public Offerings................................................................ 9 4.2 Private Placements...................................................................... 10 4.3 Related Issuers......................................................................... 10 4.4 Blackout Period......................................................................... 10 4.5 Price Switches.......................................................................... 12 4.6 Gifts................................................................................... 12 4.7 Service as Director of Publicly Traded Companies........................................ 13 5. Procedures with Regard to Dissemination of Information...................................... 13 6. Reports of Holdings by NB Access Persons.................................................... 13 6.1 Initial Report.......................................................................... 13
-2- 6.2 Annual Report.......................................................................... 14 6.3 Exceptions............................................................................. 14 7. Quarterly Reports of Transactions by NB Access Persons..................................... 14 7.1 General Requirement.................................................................... 14 7.2 Contents............................................................................... 15 7.3 Exceptions............................................................................. 15 8. Quarterly Reports by NB Access Persons Regarding Securities Accounts.............................................................. 16 9. Annual Report to Board of Trustees......................................................... 16 10. Implementation............................................................................. 17 10.1 Violations........................................................................... 17 10.2 Sanctions............................................................................ 17 10.3 Forms................................................................................ 17 10.4 Exceptions........................................................................... 17
-3- 1. General Prohibitions - ----------------------- No person associated with the Fund, NB Management, or NB, in connection with the purchase or sale, directly or indirectly, by such person of a security held or to be acquired by the Trust or Fund, shall: Employ any device, scheme or artifice to defraud such Fund; Make to such Fund any untrue statement of a material fact or omit to state to such Fund a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any Fund; Engage in any manipulative practice with respect to such Fund; Engage in any transaction in a security while in possession of material nonpublic information regarding the security or the issuer of the security; or Engage in any transaction intended to raise, lower, or maintain the price of any security or to create a false appearance of active trading. 2. Definitions - -------------- The following words have the following meanings, regardless of whether such terms are capitalized or not in this Code: Access Person - any Trustee, director, officer, or Advisory Person of ------------- the Fund, NB Management or NB. The determination as to whether an individual is an Access Person shall be made by the Legal and Compliance Department. Advisory Person - any employee of the Fund, NB Management or NB (or of --------------- any company in a control relationship to the Trust, NB or NB Management) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of Covered Securities by the Fund or whose functions relate to the making of any recommendations with respect to such purchases or sales; and any natural person in a control relationship to the Fund, NB Management or NB who obtains information concerning recommendations made to such Fund with regard to the purchase or sale of Covered Securities by such Fund. -4- Beneficial Interest - a person has a Beneficial Interest in an account ------------------- in which he or she may profit or share in the profit from transactions. Without limiting the foregoing, a person has a Beneficial Interest when the securities in the account are held: (i) in his or her name; (ii) in the name of any of his or her Immediate Family; (iii) in his or her name as trustee for himself or herself or for his or her Immediate Family; (iv) in a trust in which he or she has a Beneficial Interest or is the settlor with a power to revoke; (v) by another person and he or she has a contract or an understanding with such person that the securities held in that person's name are for his or her benefit; (vi) in the form of a right to acquisition of such security through the exercise of warrants, options, rights, or conversion rights; (vii) by a partnership of which he or she is a member; (viii) by a corporation which he or she uses as a personal trading medium; (ix) by a holding company which he or she controls; or (x) any other relationship in which a person would have beneficial ownership under Rule 16a-1(a)(2) of the Securities Exchange Act of 1934 and the rules and regulations thereunder, except that the determination of direct or indirect Beneficial Interest shall apply to all securities which an Access Person has or acquires. Any person who wishes to disclaim a Beneficial Interest in any securities must submit a written request to the Legal and Compliance Department explaining the reasons therefor. Any disclaimers granted by the Legal and Compliance Department must be made in writing. Without limiting the foregoing, if a disclaimer is granted to any person with respect to shares held by a member or members of his or her Immediate Family, the provisions of this Code of Ethics applicable to such person shall not apply to any member or members of his or her Immediate Family for which such disclaimer was granted, except with respect to requirements specifically applicable to members of a person's Immediate Family. Blind Trust - a trust in which an Access Person or employee has ----------- Beneficial Interest or is the settlor with a power to revoke, with respect to which the Legal and Compliance Department has -5- determined that such Access Person or employee has no direct or indirect influence or control over the selection or disposition of securities and no knowledge of transactions therein, provided, however, that direct or indirect -------- ------- influence or control of such trust is held by a person or entity not associated with Neuberger Berman or any affiliate of Neuberger Berman and not a relative of such Access Person or employee. Covered Security - (a) any note, stock, treasury stock, bond, debenture, ---------------- evidence of indebtedness, certificate of interest or participation on any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of trust for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly know as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing; and (b) any security or instrument related to, but not necessarily the same as, those held or to be acquired by a particular Fund; The term Covered Security does not include: direct obligations of the Government of the United States; bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; and shares of registered open-end investment companies. Day - a calendar day. --- Immediate Family - any of the following relatives sharing the same ---------------- household with an individual: child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, including adoptive relationships. Investment Company - each registered investment company and series ------------------ thereof for which NB Management is the investment manager, investment adviser, sub-adviser, administrator or distributor, or for which NB is the investment adviser or sub-adviser. Investment Person - Any employee of NB Management or NB (or of any ----------------- company in a control relationship to NB Management or NB) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by the Fund; and any natural person who controls NB Management or NB and who obtains information concerning recommendations made to such Fund regarding the purchase or sale of securities by such Fund. The determination as to whether an individual is an Investment Person shall be made by the Legal and Compliance Department. Legal and Compliance Department - NB Legal and Compliance Department. ------------------------------- -6- Related Issuer - an issuer with respect to which an Investment Person or -------------- his or her Immediate Family: (i) has a business relationship with such issuer or any promoter, underwriter, officer, director, or employee of such issuer; or (ii) is related to any officer, director or senior management employee of such issuer. Trading Desk - NB Trading Desk. ------------ 3. Required Compliance Procedures - --------------------------------- 3.1 All Securities Transactions through Neuberger Berman. -------------------------------------------------------- (a) Every Access Person who is an employee of NB Management or NB or of any company in a control relationship to NB Management or NB (hereinafter "NB Access Person") is required to execute through Neuberger Berman ("NB") all transactions in Covered Securities held in his or her own name or in which he or she has a direct or indirect Beneficial Interest. Every Investment Person is also required to provide the Legal and Compliance Department with duplicate copies of confirmations of all transactions in Covered Securities held in the name of members of his or her Immediate Family or in which such members have a Beneficial Interest. (b) Exceptions will only be granted upon a showing of extenuating circumstances. Any individual seeking an exception to this policy must submit a written request to the Legal and Compliance Department explaining the reasons therefor. Any exceptions granted must be made in writing. (c) Any individual granted an exception is required to direct his or her broker, adviser or trustee, as the case may be, to supply to the Legal and Compliance Department, on a timely basis, duplicate copies of confirmations of all personal securities transactions and copies of periodic statements for all securities accounts in his or her own name or in which he or she has a Beneficial Interest. (d) Individuals are not required to execute through NB transactions in which they are establishing a dividend reinvestment plan directly through an issuer. However, individuals must obtain written approval from the Legal and Compliance Department prior to establishing any such plan and supply to the Legal and Compliance Department, on a timely basis, duplicate copies of all confirmations relating to the plan. 3.2 Preclearance of Securities Transactions by Access Persons. ------------------------------------------------------------- (a) Every NB Access Person must obtain prior approval from the Trading Desk before executing any transaction in Covered Securities held in his or her own name or in which he or she -7- has a Beneficial Interest. Before granting such approval, the Trading Desk shall determine that: (i) No Investment Company has a pending "buy" or "sell" order in that security; (ii) The security does not appear on any "restricted" list of NB; and (iii) Such transaction is not short selling or option trading that is economically opposite any pending transaction for any Investment Company. (b) The following securities are exempt from preclearance requirements: (i) Securities transactions effected in blind trusts; (ii) The acquisition of securities through stock dividends, dividend reinvestments, stock splits, reverse stock splits, mergers, consolidations, spin-offs, or other similar corporate reorganizations or distributions generally applicable to all holders of the same class of securities; (iii) The acquisition of securities through the exercise of rights issued by an issuer pro rata to all holders of a --- ---- class of securities, to the extent the rights were acquired in the issue, and sales of such rights so acquired; (iv) Options on the Standard & Poor's "500" Composite Stock Price Index; and (v) Other securities that may from time to time be so designated in writing by the Code of Ethics Committee. (c) Obtaining preclearance approval does not constitute a waiver of any prohibitions, restrictions, or disclosure requirements in this Code of Ethics. 3.3 Post-Trade Monitoring of Precleared Transactions. ---------------------------------------------------- After the Trading Desk has granted preclearance to an NB Access Person with respect to any personal securities transaction, the investment activity of such Access Person shall be monitored by the Legal and Compliance Department to ascertain that such activity conforms to the preclearance so granted and the provisions of this Code. 3.4 Notification of Reporting Obligations. ----------------------------------------- The Legal and Compliance Department shall identify all NB Access Persons who are required to make reports under the Code and inform those Access Persons of their reporting obligations. -8- 3.5 Certification of Compliance With Code of Ethics. --------------------------------------------------- All NB Access Persons are required to certify annually in writing that they have: (a) read and understand the Code of Ethics and recognize that they are subject thereto; (b) complied with the requirements of the Code of Ethics; (c) disclosed or reported all personal securities transactions, holdings and accounts required to be disclosed or reported pursuant to the requirements of the Code; and (d) with respect to any blind trusts in which such person has a Beneficial Interest, that such person has no direct or indirect influence or control and no knowledge of any transactions therein. 4. Restrictions - --------------- 4.1 Initial Public Offerings. ---------------------------- (a) All Investment Persons are prohibited from acquiring a Beneficial Interest in any Covered Securities in an initial public offering, in order to preclude any possibility of their profiting improperly from their positions on behalf of a Fund. No member of an Immediate Family of an Investment Person may acquire a Beneficial Interest in an initial public offering without the prior written consent of the Legal and Compliance Department. (b) Prior approval shall take into account, among other factors, whether the investment opportunity should be reserved for a Fund and its shareholders and whether the opportunity is being offered to an individual by virtue of his or her position or relationship to the Fund. 4.2 Private Placements. ---------------------- (a) No Investment Person or member of his or her Immediate Family may acquire a direct or indirect Beneficial Interest in any Covered Securities in private placements without prior written approval by the Legal and Compliance Department. (b) Prior approval shall take into account, among other factors, whether the investment opportunity should be reserved for a Trust or Fund and its shareholders and whether the opportunity is being offered to an individual by virtue of his or her position or relationship to the Trust or Fund. (c) An Investment Person who has (or a member of whose Immediate Family has) acquired a Beneficial Interest in securities in a private placement is required to disclose that investment to the -9- Legal and Compliance Department when such Investment Person plays a part in any subsequent consideration of an investment in the issuer for any Fund. In any such circumstances, the decision to purchase securities of the issuer for a Fund is subject to an independent review by Investment Personnel with no personal interest in the issuer. Such independent review shall be made in writing and furnished to the Legal and Compliance Department. 4.3 Related Issuers. ------------------- Investment Personnel are required to disclose to the Legal and Compliance Department when they play a part in any consideration of an investment by a Fund in a Related Issuer. In any such circumstances, the decision to purchase securities of the Related Issuer for a Fund is subject to an independent review by an Investment Person with no personal interest in the Related Issuer. Such independent review shall be made in writing and furnished to the Legal and Compliance Department. 4.4 Blackout Period. ------------------- No NB Access Person may execute a securities transaction in Covered Securities held in his or her own name or in which he or she has, or as a result of such transaction, will have, a direct or indirect Beneficial Interest on a day during which any Investment Company has a pending "buy" or "sell" order in that same security until that order is executed or withdrawn. 4.5 Price Switches. ------------------ (a) Same Day Price Switch --------------------- (i) If any employee of NB Management or NB or of any company in a control relationship to NB Management or NB purchases a Covered Security (other than a fixed income security) held, or by reason of such transaction held, in his or her own name or in which he or she has a Beneficial Interest and an Investment Company purchases the same security during the same day, then, to the extent that the price paid per share by the Investment Company for such purchase is less favorable than the price paid per share by such employee, the Investment Company shall have the benefit of the more favorable price per share. (ii) If any employee of NB Management or NB or of any company in a control relationship to NB management or NB sells a Covered Security (other than a fixed income security) held in his or her own name or in which he or she has a Beneficial Interest and an Investment Company sells the same security during the same day, then, to the extent that the price per share received by the Investment Company for such sale is less favorable than the price per share received by the employee, the Investment Company shall have the benefit of the more favorable price per share. -10- (b) 7-Day Price Switch ----------------------- (i) If any Investment Person purchases a Covered Security (other than a fixed income security) held, or by reason of such transaction held, in his or her own name or in which he or she has a Beneficial Interest and within seven (7) days prior or subsequent thereto a Fund with respect to which he or she is an Investment Person has purchased or purchases the same security, then, to the extent that the price paid per share by such Fund for such purchase was or is less favorable than the price paid per share by such Investment Person, such Fund shall have the benefit of the more favorable price per share. (ii) If any Investment Person sells a Covered Security (other than a fixed income security) held in his or her own name or in which he or she has a Beneficial Interest and within seven (7) days prior or subsequent thereto a Fund with respect to which he or she is an Investment Person has sold or sells the same security, then, to the extent that the price received per share by such Fund for such sale was or is less favorable than the price received per share by such Investment Person, such Fund shall have the benefit of the more favorable price per share. (c) An amount of money necessary to effectuate the price switch shall be transferred from the account of the employee or Investment Person subject to the price switch policies, to the Investment Company's or Fund's account, as the case may be. The price switch shall be limited to the number of shares purchased or sold by the employee or Investment Person or the number of shares purchased or sold by the Investment Company or Fund, as the case may be, whichever is smaller. (d) Notwithstanding the foregoing, price switching shall not apply to: (i) Securities transactions effected in blind trusts; (ii) Securities transactions that are non-volitional on the part of either the employee, Investment Person or the Investment Company; (iii) The acquisition of securities through stock dividends, dividend reinvestments, stock splits, reverse stock splits, mergers, consolidations, spin-offs, or other similar corporate reorganizations or distributions generally applicable to all holders of the same class of securities; (iv) The acquisition of securities through the exercise of rights issued by an issuer pro rata to all holders of a class of --- ---- securities, to the extent the rights were acquired in the issue, and sales of such rights so acquired; (v) Options on the Standard & Poor's "500" Composite Stock Price Index; -11- (vi) Transactions arising through arbitrage, market making activities or hedged options trading; (vii) Transactions in the NB ERISA Profit Sharing and Retirement Plan; (viii) Transactions involving odd lots; and (ix) Other securities that may from time to time be so designated in writing by the Code of Ethics Committee. 4.6 Gifts. ----- All NB Access Persons and employees are prohibited from giving or receiving any gift or other thing of more than One Hundred Dollars ($ 100) in value to or from any person or entity that does business with or on behalf of the Fund in any one year. 4.7 Service as Director of Publicly Traded Companies. ---------------------------------------------------- Investment Persons are prohibited from serving on the Boards of Directors of publicly traded companies. 5. Procedures with Regard to Dissemination of Information - --------------------------------------------------------- Access Persons and employees of NB Management, NB, or the Trust are prohibited from revealing information relating to current or anticipated investment intentions, portfolio transactions or activities of Funds except to persons whose responsibilities require knowledge of the information. 6. Reports of Holdings by NB Access Persons - ------------------------------------------- 6.1 Initial Report. - ------------------ No later than 10 days after a person becomes an NB Access Person, such person shall report to NB Management or NB: (a) The title, number of shares and principal amount of each Covered Security in which the NB Access Person had a direct or indirect beneficial ownership when the person became an NB Access Person; -12- (b) The name of any broker, dealer or bank with whom the NB Access Person maintained an account in which any securities were held for the direct or indirect benefit of the NB Access Person as of the date the person become an Access Person; and (c) The date that the report is submitted by the NB Access Person. 6.2 Annual Report. ------------- Annually, each NB Access Person shall report the following information, which must be current as of a date no more than 30 days before the report is submitted: (a) The title, number of shares and principal amount of each Covered Security in which the NB Access Person had a direct or indirect beneficial ownership; (b) The name of any broker, dealer or bank with whom the NB Access Person maintains an account in which any securities are held for the direct or indirect benefit of the NB Access Person; and (c) The date that the report is submitted by the NB Access Person. 6.3 Exceptions. ---------- No report is required with respect to holdings where such report would duplicate information recorded by NB or NB Management pursuant to Rules 204-2(a)(12) or 204-2(a)(13) under the Investment Advisers Act of 1940. For purposes of the foregoing, no report is required with respect to the holdings of securities in accounts maintained at NB. 7. Quarterly Reports of Transactions by NB Access Persons - --------------------------------------------------------- 7.1 General Requirement. ----------------------- Every NB Access Person shall report, or cause to be reported, to the Trust and Legal and Compliance Department the information described in Section 7.3 with respect to transactions in any Covered Security in which such NB Access Person has, or by reason of such transaction acquires, any direct or indirect Beneficial Interest. 7.2 Contents of Quarterly Reports of Transactions. ------------------------------------------------- Every report shall be made not later than 10 days after the end of the calendar quarter and shall -13- contain the following information: (a) The date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares, and the principal amount of each Covered Security involved; (b) The nature of the transaction (i.e., purchase, sale or any other type ---- of acquisition or disposition); (c) The price of the Covered Security at which the transaction was effected; (d) The name of the broker, dealer or bank with or through whom the transaction was effected; and (e) The date that the report is submitted by the Access Person. Unless otherwise stated, no report shall be construed as an admission by the person making such report that he or she has any direct or indirect Beneficial Interest in the security to which the report relates. 7.3 Exceptions. -------------- No report is required with respect to transactions where such report would duplicate information recorded by NB or NB Management pursuant to Rules 204-2(a)(12) or 204-2(a)(13) under the Investment Advisers Act of 1940. For purposes of the foregoing, the Legal and Compliance Department maintains (i) electronic records of all securities transactions effected through NB, and (ii) copies of any duplicate confirmations that have been provided to the Legal and Compliance Department under this Code of Ethics with respect to securities transactions that, pursuant to exceptions granted by the Legal and Compliance Department, have not been effected through NB; accordingly, no report is required with respect to such transactions. 8. Quarterly Reports by NB Access Persons Regarding Securities Accounts. - ------------------------------------------------------------------------ (a) Every NB Access Person shall report, or cause to be reported, to the Legal and Compliance Department, the information regarding any securities account established by the NB Access Person during any quarter. Every report shall be made not later than 10 days after the end of the calendar quarter and shall contain the following information: (i) The name of the broker, dealer or bank with whom the Access Person established the account; (ii) The date the account was established; and -14- (iii) The date that the report is submitted by the NB Access Person. (b) No report is required with respect to securities accounts where such report would duplicate information recorded by NB or NB Management pursuant to Rules 204-2(a)(12) or 204-2(a)(13) under the Investment Advisers Act of 1940. For purposes of the foregoing, no report is required with respect to securities accounts at NB. 9. Annual Report to Board of Trustees. - ------------------------------------- No less frequently than annually and concurrently with reports to the Boards of Trustees of the Neuberger Berman Funds, NB Management and NB shall furnish to the Board of Trustees of the Fund, and the Board must consider, a written report that: (i) describes any issues arising under this Code or procedures concerning personal investing since the last such report, including, but not limited to, information about material violations of the Code or procedures and sanctions imposed in response to the material violations; (ii) certifies that the NB Management and NB, as applicable, have adopted procedures reasonably necessary to prevent Access Persons from violating the Code; and (iii) identifies any recommended changes in existing restrictions or procedures based upon the Fund's experience under the Code of Ethics, evolving industry practices, or developments in applicable laws or regulations. 10. Implementation. - ------------------ 10.1 Violations. --------------- Any person who has knowledge of any violation of this Code shall report said violation to the Legal and Compliance Department. 10.2 Sanctions. -------------- NB Management and NB shall each have authority to impose sanctions for violations of this Code. Such sanctions may include a letter of censure, suspension or termination of the employment of the violator, forfeiture of profits, forfeiture of personal trading privileges, forfeiture of gifts, or any -15- other penalty deemed to be appropriate. 10.3 Forms. ---------- The Legal and Compliance Department is authorized, with the advice of counsel, to prepare written forms for use in implementing this Code. Such forms shall be attached as an Appendix to this Code and shall be disseminated to all individuals subject to the Code. 10.4 Exceptions. --------------- Exceptions to the requirements of this Code shall rarely, if ever, be granted. However, the Legal and Compliance Department shall have authority to grant exceptions on a case-by-case basis. Amended and Restated as of August 1, 2000 Code of Ethics -16- EX-99.(P)(2)(E) 24 0024.txt T. ROWE PRICE CODE OF ETHICS EXHIBIT (p)(2)(e) EFFECTIVE MARCH 1, 2000 CODE OF ETHICS T. ROWE PRICE ASSOCIATES, INC. AND ITS AFFILIATES CODE OF ETHICS OF T. ROWE PRICE ASSOCIATES, INC. AND ITS AFFILIATES TABLE OF CONTENTS
Page ---- GENERAL POLICY STATEMENT.................................................. 1-1 Purpose and Scope of Code of Ethics................................ 1-1 Who is Subject to the Code......................................... 1-1 Price Associates' Status as a Fiduciary............................ 1-2 What the Code Does Not Cover....................................... 1-2 Compliance with the Code........................................... 1-2 Questions Regarding the Code....................................... 1-2 STANDARDS OF CONDUCT OF PRICE ASSOCIATES AND ITS EMPLOYEES................ 2-1 Allocation of Client Brokerage..................................... 2-1 Antitrust.......................................................... 2-1; 8-1 Compliance with Copyright Laws..................................... 2-1 Computer Security.................................................. 2-1; 7-1 Conflicts of Interest.............................................. 2-1 Relationships with Profitmaking Enterprises.................. 2-1 Service with Nonprofitmaking Enterprises..................... 2-2 Relationships with Financial Service Firms................... 2-2 Investment Clubs............................................. 2-2 Confidentiality.................................................... 2-3 Internal Operating Procedures and Planning................... 2-3 Clients, Fund Shareholders, and TRP Brokerage Customers...... 2-3 Investment Advice............................................ 2-3 Investment Research.......................................... 2-4 Understanding as to Clients' Accounts and Company Records at time of Employee Termination............................ 2-4 Corporate Responsibility........................................... 2-4; 5-1 Employment of Former Government Employees.......................... 2-5 Employment Practices............................................... 2-5
i-1 Equal Opportunity................................................ 2-5 Harassment....................................................... 2-5 Drug and Alcohol Abuse........................................... 2-5 Past and Current Litigation............................................ 2-6 Financial Reporting.................................................... 2-6 Health and Safety in the Workplace..................................... 2-6 Illegal Payments....................................................... 2-6 Marketing and Sales Activities......................................... 2-6 Policy Regarding Acceptance and Giving of Gifts and Gratuities......... 2-6 Receipt of Gifts................................................. 2-7 Giving of Gifts.................................................. 2-7 Additional Requirements for the Giving of Gifts in Connection with the Broker/Dealer......................................... 2-7 Entertainment.................................................... 2-8 Research Trips................................................... 2-9 Political Activities................................................... 2-9 Protection of Corporate Assets......................................... 2-10 Quality of Services.................................................... 2-10 Record Retention....................................................... 2-10 Referral Fees.......................................................... 2-10 Release of Information to the Press.................................... 2-10 Responsibility to Report Violations.................................... 2-10 Service as Trustee, Executor or Personal Representative................ 2-11 Speaking Engagements and Publications.................................. 2-11 Trading in Securities with Inside Information.......................... 2-11; 3-1 STATEMENT OF POLICY ON MATERIAL, INSIDE (NON-PUBLIC) INFORMATION.............. 3-1 STATEMENT OF POLICY ON SECURITIES TRANSACTIONS................................ 4-1 STATEMENT OF POLICY ON CORPORATE RESPONSIBILITY............................... 5-1 STATEMENT OF POLICY WITH RESPECT TO COMPLIANCE WITH COPYRIGHT LAWS............ 6-1 STATEMENT OF POLICY WITH RESPECT TO COMPUTER SECURITY AND RELATED ISSUES...... 7-1 STATEMENT OF POLICY ON COMPLIANCE WITH ANTITRUST LAWS......................... 8-1
March, 2000 i-2 CODE OF ETHICS OF T. ROWE PRICE ASSOCIATES, INC. AND ITS AFFILIATES INDEX
Page ---- Access Persons.................................................... 4-3 Activities, Political............................................. 2-9 Alcohol Abuse..................................................... 2-5 Allocation of Client Brokerage.................................... 2-1 Antitrust......................................................... 2-1; 8-1 Approved Company Rating Changes................................... 4-11 Assets, Protection of Corporate................................... 2-10 Association of Investment Management and Research ("AIMR")........ 2-6 Brokerage Accounts................................................ 4-11; 4-12 Chinese Wall...................................................... 3-6 Client Brokerage, Allocation of................................... 2-1 Client Limit Orders............................................... 4-16 Code of Ethics, Compliance with................................... 1-2 Code of Ethics, Purpose and Scope of.............................. 1-1 Code of Ethics, Questions Regarding............................... 1-2 Code of Ethics, Who is Subject to................................. 1-1 Co-Investment by Employees with Client Investment Partnerships.... 4-14 Computer Security................................................. 2-1; 7-1 Conduct, Standards of, Price Associates and its Employees......... 2-1 Confidentiality................................................... 2-3 Confidentiality of Computer Systems Activities and Information.... 7-1 Conflicts of Interest............................................. 2-1 Copyright Laws, Compliance with................................... 2-1; 6-1 Corporate Assets, Protection of................................... 2-10
ii-1 Corporate Responsibility....................................... 2-4; 5-1 Drug Abuse..................................................... 2-5 Employee Co-Investment with Client Investment Partnerships..... 4-14 Employees, Standards of Conduct................................ 2-1 Employment of Former Government Employees...................... 2-5 Employment Practices........................................... 2-5 Entertainment.................................................. 2-8 Equal Opportunity.............................................. 2-5 Exchange - Traded Index Options................................ 4-16 Executor, Service as........................................... 2-11 Fees, Referral................................................. 2-10 Fiduciary, Price Associates' Status as a ...................... 1-2 Financial Reporting............................................ 2-6 Financial Service Firms, Relationships with.................... 2-2 Front Running.................................................. 4-1 General Policy Statement....................................... 1-1 Gifts, Giving.................................................. 2-7 Gifts, Receipt of.............................................. 2-7 Government Employees, Employment of Former..................... 2-5 Harassment..................................................... 2-5 Health and Safety in the Workplace............................. 2-6 Illegal Payments............................................... 2-6 Information, Release to the Press.............................. 2-10 Initial Public Offerings....................................... 4-9 Inside Information, Trading in Securities with................. 2-11 Interest, Conflicts of......................................... 2-1 Internet, Access to............................................ 7-2 Investment Clubs............................................... 2-2; 4-14 Investment Personnel........................................... 4-3 Large Company Exemption for Securities Transactions............ 4-15 Margin Accounts................................................ 4-15 Marketing and Sales Activities................................. 2-6 Non-Access Persons............................................. 4-4 Nonprofitmaking Enterprises, Service with...................... 2-2 Options and Futures............................................ 4-16
ii-2 Payments, Illegal.................................................................. 2-6 Personal Securities Holdings, Disclosure of by Access Persons...................... 4-18 Personal Representative, Service as................................................ 2-11 Political Activities............................................................... 2-9 Press, Release of Information to the............................................... 2-10 Price Associates, Standards of Conduct............................................. 2-1 Price Associates' Stock, Transactions in........................................... 4-5 Prior Clearance of Securities Transactions (other than Price Associates' stock).... 4-8 Private Placement, Investment In................................................... 4-10 Private Placement Memoranda........................................................ 3-7 Profitmaking Enterprises, Relationships with....................................... 2-1 Protection of Corporate Assets..................................................... 2-10 Publications....................................................................... 2-11 Quality of Services................................................................ 2-10 Questions Regarding the Code....................................................... 1-2 Rating Changes, Approved Company................................................... 4-11 Record Retention................................................................... 2-10 Referral Fees...................................................................... 2-10 Release of Information to the Press................................................ 2-10 Reporting, Financial............................................................... 2-6 Reporting, Price Associates' Stock Transactions.................................... 4-6 Reporting, Securities Transactions (other than Price Associates' stock)............ 4-12 Research Trips..................................................................... 2-9 Responsibility, Corporate.......................................................... 2-4; 5-1 Restricted List.................................................................... 3-7 Retention, Record.................................................................. 2-10 Safety and Health in the Workplace................................................. 2-6 Securities Transactions, Reporting of (other than Price Associates' stock)......... 4-12 Services, Quality of............................................................... 2-10 Short Sales........................................................................ 4-17 Sixty (60) Day Rule................................................................ 4-17 Software Programs, Application of Copyright Law.................................... 7-5 Speaking Engagements............................................................... 2-11 Standards of Conduct of Price Associates and its Employees......................... 2-1 Statement, General Policy.......................................................... 1-1
ii-3 Temporary Workers, Application of Code to............................ 1-1; 4-2 Termination of Employment............................................ 2-4 Trading Activity..................................................... 4-15 Trips, Research...................................................... 2-9 Trustee, Service as.................................................. 2-11 Violations, Responsibility to Report................................. 2-10 Watch List........................................................... 3-6
March, 2000 ii-4 CODE OF ETHICS OF T. ROWE PRICE ASSOCIATES, INC. AND ITS AFFILIATES GENERAL POLICY STATEMENT Purpose and Scope of Code of Ethics. In recognition of T. Rowe Price Associates, Inc.'s ("Price Associates") commitment to maintain the highest standards of professional conduct and ethics, the firm's Board of Directors has adopted this Code of Ethics ("Code") composed of Standards of Conduct and the following Statements of Policy ("Statements"): 1. Statement of Policy on Material, Inside (Non-Public) Information 2. Statement of Policy on Securities Transactions 3. Statement of Policy on Corporate Responsibility 4. Statement of Policy with Respect to Compliance with Copyright Laws 5. Statement of Policy with Respect to Computer Security and Related Issues 6. Statement of Policy on Compliance with Antitrust Laws The purpose of this Code is to help preserve our most valuable asset - the reputation of Price Associates and its employees. Who is Subject to the Code. Price Associates, its subsidiaries and their officers, directors and employees are all subject to the Code, as are all Rowe Price-Fleming International, Inc. ("RPFI") and T. Rowe Fleming Asset Management Limited ("TRFAM") personnel (officers, directors, and employees) who are stationed in Baltimore. In addition, the following persons are also subject to the Code: 1. All temporary workers hired on the Price Associates payroll ("TRPA Temporaries"); 2. All agency temporaries, whose assignments at Price Associates exceed four weeks or whose cumulative assignments exceed eight weeks over a twelve- month period; 3. All independent or agency-provided consultants whose assignments exceed four weeks or whose cumulative assignments exceed eight weeks over a twelve-month period and whose work is closely related to the ongoing work of Price Associates' employees (versus project work that stands apart from ongoing work); and 4. Any contingent worker whose assignment is more than casual in nature or who will be exposed to the kinds of information and situations that would create conflicts on matters covered in the Code. 1-1 Price Associates' Status as a Fiduciary. The primary responsibility of Price Associates as an investment adviser is to render to its clients on a professional basis unbiased and continuous advice regarding their investments. As an investment adviser, Price Associates has a fiduciary relationship with all of its clients, which means that it has an absolute duty of undivided loyalty, fairness and good faith toward its clients and mutual fund shareholders and a corresponding obligation to refrain from taking any action or seeking any benefit for itself which would, or which would appear to, prejudice the rights of any client or shareholder or conflict with his or her best interests. What the Code Does Not Cover. The Code was not written for the purpose of covering all policies, rules and regulations to which employees may be subject. As an example, T. Rowe Price Investment Services, Inc. ("Investment Services") is a member of the National Association of Securities Dealers, Inc. ("NASD") and, as such, is required to maintain written supervisory procedures to enable it to supervise the activities of its registered representatives and associated persons to ensure compliance with applicable securities laws and regulations, and with the applicable rules of the NASD and its regulatory subsidiary, NASD Regulation, Inc. ("NASDR"). Compliance with the Code. Strict compliance with the provisions of this Code is considered a basic condition of employment with the firm. An employee may be required to surrender any profit realized from a transaction which is deemed to be in violation of the Code. In addition, any breach of the Code may constitute grounds for disciplinary action, including dismissal from employment. Employees may appeal to the Management Committee any ruling or decision rendered with respect to the Code. Questions Regarding the Code. Questions regarding the Code should be referred as follows: 1. Standards of Conduct of Price Associates and its Employees: the Chairperson of the Ethics Committee or the Director of Human Resources. 2. Statement of Policy on Material, Inside (Non-Public) Information: Legal Department. 3. Statement of Policy on Securities Transactions: The Chairperson of the Ethics Committee or his or her designee. 4. Statement of Policy on Corporate Responsibility: Corporate Responsibility Committee. 5. Statement of Policy with Respect to Compliance with Copyright Laws: Legal Department. 6. Statement of Policy with Respect to Computer Security and Related Issues: Legal Department. 7. Statement of Policy on Compliance with Antitrust Laws: Legal Department. March, 2000 1-2 STANDARDS OF CONDUCT OF PRICE ASSOCIATES AND ITS EMPLOYEES Allocation of Client Brokerage. The firm's policies with respect to the allocation of client brokerage are set forth in Part II of Form ADV, Price Associates' registration statement filed with the Securities and Exchange Commission ("SEC"). It is imperative that all employees --especially those who are in a position to make recommendations regarding brokerage allocation, or who are authorized to select brokers who will execute securities transactions on behalf of our clients -- read and become fully knowledgeable concerning our policies in this regard. Any questions regarding our firm's allocation of client brokerage should be addressed to the Chairperson of the Brokerage Control Committee. Antitrust. The U.S. antitrust laws are designed to ensure fair competition and preserve the free enterprise system. Some of the most common antitrust issues with which an employee may be confronted are in the areas of pricing (adviser fees) and trade association activity. To ensure its employees' understanding of these laws, Price Associates has adopted a Statement of Policy on Compliance with Antitrust Laws. All employees should read and understand this Statement. (See page 8-1). Compliance with Copyright Laws. To protect Price Associates and its employees, Price Associates has adopted a Statement of Policy with Respect to Compliance with Copyright Laws. All employees should read and understand this Statement (see page 6-1). Computer Security. Computer systems and programs play a central role in Price Associates' operations. To establish appropriate computer security to minimize potential for loss or disruptions to our computer operations, Price Associates has adopted a Statement of Policy with Respect to Computer Security and Related Issues. All employees should read and understand this Statement (see page 7-1). Conflicts of Interest. A direct or indirect interest in a supplier, creditor, debtor or competitor may conflict with the interests of Price Associates. All employees must avoid placing themselves in a "compromising position" where their interests may be in conflict with those of Price Associates or its clients. Relationships with Profitmaking Enterprises. A conflict may occur when an employee of Price Associates is also employed by another firm, directly or as a consultant or independent contractor; has a direct financial interest in another firm; has an immediate family financial interest in another firm; or is a director, officer or partner of another firm. Employees of our firm sometimes serve as directors, officers, partners, or in other capacities with profitmaking enterprises not related to Price Associates or its mutual funds. Employees are generally prohibited from serving as officers or directors of corporations which are approved or are likely to be approved for purchase in our firm's client accounts. 2-1 An employee may not accept outside employment that would require him or her to become registered (or dually registered) as a representative of an unaffiliated broker/dealer, investment adviser, or an insurance broker or company. An employee may also not become independently registered as an investment adviser. An employee who is contemplating obtaining another interest or relationship that might conflict or appear to conflict with the interests of Price Associates, such as accepting employment with or an appointment as a director, officer or partner of an outside profitmaking enterprise must receive the prior approval of the Ethics Committee. Upon review by the Ethics Committee, the employee will be advised in writing of the Committee's decision. Decisions by the Ethics Committee regarding outside directorships in profitmaking enterprises will be reviewed by the Management Committee before becoming final. Outside business interests that will not conflict or appear to conflict with the interests of the firm need not be reviewed by the Ethics Committee, but must be approved by the Employee's supervisor. Certain employees may serve as directors or as members of Creditors Committees or in similar positions for non-public, for-profit entities in connection with their professional activities at Price Associates. An employee must obtain the permission of the Management Committee before accepting such a position and must relinquish the position if the entity becomes publicly held, unless otherwise determined by the Management Committee. Service with Nonprofitmaking Enterprises. Price Associates encourages its employees to become involved in community programs and civic affairs. However, employees should not permit such activities to affect the performance of their job responsibilities. Approval by the Chairperson of the Ethics Committee must be obtained before an employee accepts a position as a trustee or member of the Board of Directors of any non-profit organization. Relationships with Financial Service Firms. In order to avoid any actual or apparent conflicts of interest, employees are prohibited from investing in or entering into any relationship, either directly or indirectly, with corporations, partnerships, or other entities which are engaged in business as a broker, a dealer, an underwriter, and/or an investment adviser. As described above, this prohibition extends to registration and/or licensure with an unaffiliated firm. This prohibition, however, is not meant to prevent employees from purchasing publicly traded securities of broker/dealers, investment advisers or other companies engaged in the mutual fund industry. Of course, all such purchases are subject to prior clearance and reporting procedures, as applicable. This policy does not preclude an employee from engaging an outside investment adviser to manage his or her assets. If any member of an employee's immediate family is employed by, has a partnership interest in, or has an equity interest of .5% or more in a broker/dealer, investment adviser or other company engaged in the mutual fund industry, the relationship must be reported to the Ethics Committee. 2-2 Investment Clubs. Access Persons (defined on p. 4-3 of the Code) must receive the prior approval of the Chairperson of the Ethics Committee before forming or participating in a stock or investment club. Transactions in which Access Persons have beneficial ownership or control (see p. 4-4) through investment clubs are subject to the firm's Statement of Policy on Securities Transactions. Non-Access Persons (defined on p. 4-4) do not have to receive prior approval to form or participate in a stock or investment club and need only obtain prior clearance of transactions in Price Associates' stock. As described on p. 4-16, an exemption from prior clearance for an Access Person (except for transactions in Price Associates' stock) is generally available if the Access Person has beneficial ownership solely by virtue of his or her spouse's participation in the club and has no investment control or input into decisions regarding the club's securities transactions. Confidentiality. The exercise of confidentiality extends to four major areas of our operations: internal operating procedures and planning; clients, fund shareholders and TRP Brokerage customers; investment advice; and investment research. The duty to exercise confidentiality applies not only when an employee is with the firm, but also after he or she terminates employment with the firm. Internal Operating Procedures and Planning. During the years we have been in business, a great deal of creative talent has been used to develop specialized and unique methods of operations and portfolio management. In many cases, we feel these methods give us an advantage over our competitors, and we do not want these ideas disseminated outside our firm. Accordingly, employees should be guarded in discussing our business practices with outsiders. Any requests from outsiders for specific information of this type should be cleared with your supervisor before it is released. Also, from time to time management holds meetings with employees in which material, non-public information concerning the firm's future plans is disclosed. Employees should never discuss confidential information with, or provide copies of written material concerning the firm's internal operating procedures or projections for the future to, unauthorized persons outside the firm. Clients, Fund Shareholders, and TRP Brokerage Customers. In many instances, when clients subscribe to our services, we ask them to disclose fully their financial status and needs. This is done only after we have assured them that every member of our organization will hold this information in strict confidence. It is essential that we respect their trust. A simple rule for employees to follow is that the names of our clients, fund shareholders, or TRP Brokerage customers or any information pertaining to their investments must never be divulged to anyone outside the firm, not even to members of their immediate families, and must never be used as a basis for personal trades over which the employee has beneficial interest or control. Investment Advice. Because of the fine reputation our firm enjoys, there is a great deal of public interest in what we are doing in the market. There are two major considerations that dictate why we must not provide investment "tips": 2-3 . From the point of view of our clients, it is not fair to give other people information which clients must purchase. . From the point of view of the firm, it is not desirable to create an outside demand for a stock when we are trying to buy it for our clients, as this will only serve to push the price up. The reverse is true if we are selling. In light of these considerations, employees must never disclose to outsiders our buy and sell recommendations, securities we are considering for future investment, or the portfolio holdings of our clients or mutual funds. The practice of giving investment advice informally to members of your immediate family should be restricted to very close relatives. Any transactions resulting from such advice are subject to the prior approval (Access Persons only) and reporting requirements (Access Persons and Non- Access Persons) of the Statement of Policy on Securities Transactions. Under no circumstances should an employee receive compensation directly or indirectly (other than from Price Associates or an affiliate) for rendering advice to either clients or non-clients. Investment Research. Any report circulated by a research analyst is confidential in its entirety and should not be reproduced or shown to anyone outside of our organization, except our clients where appropriate. Understanding as to Clients' Accounts and Company Records at Time of Employee Termination. The accounts of clients, mutual fund shareholders, and TRP Brokerage customers are the sole property of Price Associates. This applies to all clients for whom Price Associates acts as investment adviser, regardless of how or through whom the client relationship originated and regardless of who may be the counselor for a particular client. At the time of termination of employment with Price Associates, an employee must: (1) surrender to Price Associates in good condition any and all materials, reports or records (including all copies in his or her possession or subject to his or her control) developed by him or her or any other person which are considered confidential information of Price Associates (except copies of any research material in the production of which the employee participated to a material extent); and (2) refrain from communicating, transmitting or making known to any person or firm any information relating to any materials or matters whatsoever which are considered by Price Associates to be confidential. Employees must use care in disposing of any confidential records or correspondence. Confidential material that is to be discarded should be torn up or, if a quantity of material is involved, you should contact Document Management for instructions regarding proper disposal. Corporate Responsibility. As a major institutional investor with a fiduciary duty to its clients, including its mutual fund shareholders, Price Associates has adopted a Statement of Policy on Corporate Responsibility (see page 5-1). The purpose of this Statement is to establish formal standards and procedures to guide Price Associates with respect to its responsibilities to deal 2-4 with matters of corporate and social responsibilities which may affect the companies in which client assets are invested. Employment of Former Government Employees. Federal laws and regulations govern the employment of former employees of the U.S. Government and its agencies, including the SEC. In addition, certain states have adopted similar statutory restrictions. Finally, certain states and municipalities which are clients of Price Associates have imposed contractual restrictions in this regard. Before any action is taken to discuss employment by Price Associates of a former government employee, guidance must be obtained from the Legal Department. Employment Practices Equal Opportunity. Price Associates is committed to the principles of Equal Employment. We believe our continued success depends on talented people, without regard to race, color, religion, national origin, gender, age, disability, sexual orientation, Vietnam era military service or any other classification protected by federal, state or local laws. This commitment to Equal Opportunity covers all aspects of the employment relationship including recruitment, application and initial employment, promotion and transfer, selection for training opportunities, wage and salary administration, and the application of service, retirement, and employee benefit plan policies. All members of T. Rowe Price staff are expected to comply with the spirit and intent of our Equal Employment Opportunity Policy. If you feel you have not been treated in accordance with this policy, contact your immediate supervisor, your manager or a Human Resources Representative. No retaliation will be taken against any employee who reports an incident of alleged discrimination. Harassment. Price Associates intends to provide employees a workplace free from any form of harassment. This includes sexual harassment which, banned by and punishable under the Civil Rights Act of 1964, may result from unwelcome advances, requests for favors or any verbal or physical conduct of a sexual nature. Such actions or statements may or may not be accompanied by explicit or implied promises of preferential treatment or negative consequences in connection with one's employment. Harassment might include uninvited sex-oriented conversations, touching, comments, jokes, suggestions or innuendos. This type of behavior can create a stressful, intimidating and offensive atmosphere; it may adversely affect morale and work performance. Any employee who feels offended by the action or comments of another, or any employee who has observed such behavior, should report the matter, in confidence, to his or her immediate supervisor. If that presents a problem, report the matter to the Director of Human Resources or another person in the Human Resources Department. All complaints will be investigated immediately and confidentially. Any employee who has 2-5 behaved in a reprehensible manner will be subject to disciplinary action in keeping with the gravity of the offense. Drug and Alcohol Abuse. Price Associates has adopted a Statement of Policy, available from Human Resources, to maintain a drug-free workplace and prevent alcohol abuse. This policy fosters a safe, healthful and productive environment for its employees and customers and protects Price Associates' property, equipment, operations and reputation in the community and the industry. Past and Current Litigation. As a condition of employment, each new employee is required to answer a questionnaire regarding past and current civil and criminal actions and certain regulatory matters. Price Associates uses the information obtained through these questionnaires to answer questions asked on federal and state registration forms and for insurance and bonding purposes. Each employee is responsible for keeping answers on the questionnaire current. If an employee becomes party to any proceeding that could lead to his or her conviction for any felony or misdemeanor (other than traffic or other minor offenses) or becomes the subject of a regulatory action by the SEC, a state, a foreign government or any domestic or foreign self-regulatory organization relating to securities or investment activities, he or she should notify the Legal Department promptly. Financial Reporting. Price Associates' records are maintained in a manner that provides for an accurate record of all financial transactions in conformity with generally accepted accounting principles. No false or deceptive entries may be made and all entries must contain an appropriate description of the underlying transaction. All reports, vouchers, bills, invoice, payroll and service records and other essential data must be accurate, honest and timely and should provide an accurate and complete representation of the facts. Health and Safety in the Workplace. Price Associates recognizes its responsibility to provide employees a safe and healthful workplace and proper facilities to help them do their jobs effectively. Illegal Payments. State, federal and foreign laws prohibit the payment of bribes, kickbacks, inducements or other illegal gratuities or payments by or on behalf of Price Associates. Price Associates, through its policies and practices, is committed to comply fully with these laws. The Foreign Corrupt Practices Act makes it a crime to corruptly give, promise or authorize payment, in cash or in kind, for any service to a foreign official or political party in connection with obtaining or retaining business. If an employee is solicited to make or receive an illegal payment, he or she should contact the Legal Department. Marketing and Sales Activities. All written and oral marketing materials and presentations (including performance data) must be in compliance with applicable SEC, NASD, and Association of Investment Management and Research ("AIMR") requirements. All advertisements, sales literature and other written marketing materials (whether they be for the Price Funds, non-Price funds, or various advisory or brokerage services) must be reviewed and approved by the advertising section of the Legal Department prior to use. All performance data distributed outside the firm, including total return and yield information, must be obtained from the Performance Group before distribution. 2-6 Policy Regarding Acceptance and Giving of Gifts and Gratuities. The firm, as well as its employees and members of their families, should not accept or give gifts that might in any way create or appear to create a conflict of interest or interfere with the impartial discharge of our responsibilities to clients or place our firm in a difficult or embarrassing position. Such gifts would include gratuities or other accommodations from or to business contacts, brokers, securities salespersons, approved companies, suppliers, clients, or any other individual or organization with whom our firm has a business relationship, but would not include certain types of business entertainment as described later in this section. Receipt of Gifts. Personal contacts may lead to gifts which are offered on a friendship basis and may be perfectly proper. It must be remembered, however, that business relationships cannot always be separated from personal relationships and that the integrity of a business relationship is always susceptible to criticism in hindsight where gifts are received. Under no circumstances may employees accept gifts from any business or business contact in the form of cash or cash equivalents. Gift certificates may only be accepted if used; they may not be converted to cash except for nominal amounts not consumed when the gift certificate is used. There may be an occasion where it might be awkward to refuse a token non- cash expression of appreciation given in the spirit of friendship. In such cases, the value of all gifts received from a business contact should not exceed $100 in any twelve-month period. The value of a gift directed to the members of a department as a group may be divided by the number of the employees in that Department. Gifts received which are unacceptable according to this policy must be returned to the givers. Giving of Gifts. An employee may never give a gift to a business contact in the form of cash or cash equivalents, including gift certificates. Token gifts may be given to business contacts, but the aggregate value of all such gifts given to the business contact may not exceed $100 in any twelve- month period without the permission of the Chairperson of the Ethics Committee. If an employee believes that it would be appropriate to give a gift with a value exceeding $100 to a business contact in a specific situation, he or she must submit a written request to the Chairperson of the Ethics Committee. The request should specify: . the name of the giver; . the name of the intended recipient and his or her employer; . the nature of the gift and its monetary value; . the nature of the business relationship; and . the reason the gift is being given. 2-7 NASD regulations prohibit exceptions to the $100 limit for gifts given in connection with Investment Services' business. Baltimore/Legal Compliance will retain a record of all such gifts. Additional Requirements for the Giving of Gifts in Connection with the Broker/Dealer. NASD Conduct Rule 3060 imposes stringent reporting requirements for gifts given to any principal, employee, agent or similarly situated person where the gift is in connection with Investment Services' business with the person's employer. Examples of gifts that fall under this rule would include any gift given to an employee of a company to which our firm provides investment products such as mutual funds (e.g., many 401(k) plans) or to which we are marketing investment products. Under this NASD rule, gifts may not exceed $100 (without exception) and persons associated with Investment Services, including its registered representatives, must report each such gift. The NASD reporting requirement is normally met when an item is ordered electronically from the Corporate Gift website. If a gift is obtained from another source, it must be reported to Baltimore/Legal Compliance. The report to Baltimore Legal/Compliance must include: . the name of the giver; . the name of the recipient and his or her employer; . the nature of the gift and its monetary value; . the nature of the business relationship; and . the date the gift was given. Entertainment. Our firm's $100 limit on the acceptance and giving of gifts not only applies to gifts of merchandise, but also covers the enjoyment or use of property or facilities for weekends, vacations, trips, dinners, and the like. However, this limitation does not apply to dinners, sporting events and other activities which are a normal part of a business relationship. To illustrate this principle, the following examples are provided: First Example: The head of institutional research at brokerage firm "X" (whom you have known and done business with for a number of years) invites you and your wife to join her and her husband for dinner and afterwards a theatrical production. Second Example: You are going to New York for a weekend with your wife. You wish to see a recent Broadway hit, but are told it is sold out. You call a broker friend who works at company "X" to see if he can get tickets for you. The broker says yes and offers you two tickets free of charge. 2-8 Third Example: You have been invited by a vendor to a multi-day excursion to a resort where the primary focus is entertainment as opposed to business. The vendor has offered to pay your travel and lodging for this trip. In the first example, it would be proper for you to accept the invitation. With respect to the second example, it would not be proper to solicit a person doing business with the firm for free tickets to any event. You could, however, accept the tickets if you pay for them at their fair value or, if greater, at the cost to the broker. With respect to the third example, trips of substantial value, such as multi-day excursions to resorts, hunting locations or sports events, where the primary focus is entertainment as opposed to business activities, would not be considered a normal part of a business relationship. Generally, such invitations may not be accepted unless our firm or the employee pays for the cost of the excursion and the employee has obtained approval from his or her Division Head. The same principles apply if an employee wishes to entertain a business contact. Inviting business contacts and, if appropriate, their guests, to an occasional meal, sporting event, the theater, or comparable entertainment is acceptable as long as it is neither so frequent nor so extensive as to raise any question of propriety. If an employee wishes to pay for a business guest's transportation (e.g., airfare) and/or accommodations as part of business entertainment, he or she must first receive the permission of the Chairperson of the Ethics Committee. Research Trips. Occasionally, brokers or portfolio companies invite employees of our firm to attend or participate in research conferences, tours of portfolio companies' facilities, or meetings with the management of such companies. These invitations may involve traveling extensive distances to and from the sites of the specified activities and may require overnight lodging. Employees may not accept any such invitations until approval has been secured from their Division heads. As a general rule, such invitations should only be accepted after a determination has been made that the proposed activity constitutes a valuable research opportunity which will be of primary benefit to our clients. All travel expenses to and from the sites of the activities, and the expenses of any overnight lodging, meals or other accommodations provided in connection with such activities, should be paid for by our firm except in situations where the costs are considered to be insubstantial and are not readily ascertainable. Employees may not accept reimbursement from brokers or portfolio companies for: travel and hotel expenses; speaker fees or honoraria for addresses or papers given before audiences; or consulting services or advice they may render. Likewise, employees may neither request nor accept loans or personal services from brokers or portfolio companies. Political Activities. Employees are encouraged to participate and vote in all federal, state and local elections. All officers and directors of Price Associates are required to disclose certain Maryland local and state political contributions on a semi-annual basis (a Political Contribution Questionnaire is sent to officers and directors each January and July). No political contribution of corporate funds, direct or indirect, to any political candidate or party, or to any other organization that might use the contribution for a political candidate or party, or 2-9 use of corporate property, services or other assets may be made without the written approval of the Legal Department. These prohibitions cover not only direct contributions but also indirect assistance or support of candidates or political parties through purchase of tickets to special dinners or other fund raising events, or the furnishing of any other goods, services or equipment to political parties or committees. Protection of Corporate Assets. All employees are responsible for taking measures to ensure that Price Associates' assets are properly protected. This responsibility not only applies to our business facilities, equipment and supplies, but also to intangible assets such as proprietary, research or marketing information, corporate trademarks and servicemarks, and copyrights. Quality of Services. It is a continuing policy of Price Associates to provide investment products and services which: (1) meet applicable laws, regulations and industry standards; (2) are offered to the public in a manner which ensures that each client/shareholder understands the objectives of each investment product selected; and (3) are properly advertised and sold in accordance with all applicable SEC, state and NASD rules and regulations. The quality of Price Associates' investment products and services and operations affects our reputation, productivity, profitability and market position. Price Associates' goal is to be a quality leader and to create conditions that allow and encourage all employees to perform their duties in an efficient, effective manner. Record Retention. Under various federal and state laws and regulations, Price Associates is required to produce, maintain and retain various records, documents and other written (including electronic) communications. Each employee is responsible for adhering to Price Associates' record maintenance and retention policies. Referral Fees. Federal securities laws strictly prohibit the payment of any type of referral fee unless certain conditions are met. This would include any compensation to persons who refer clients or shareholders to us (e.g., brokers, registered representatives or any other persons) either directly in cash, by fee splitting, or indirectly by the providing of gifts or services (including the allocation of brokerage). No arrangements should be entered into obligating Price Associates or any employee to pay a referral fee unless approved by the Legal Department. Release of Information to the Press. All requests for information from the media concerning T. Rowe Price Associates' corporate affairs, mutual funds, investment services, investment philosophy and policies, and related subjects should be referred to the Public Relations Department for reply. Investment professionals who are contacted directly by the press concerning a particular fund's investment strategy or market outlook may use their own discretion, but are advised to check with the Public Relations Department if they do not know the reporter or feel it may be inappropriate to comment on a particular matter. Responsibility to Report Violations. Every employee who becomes aware of a violation of this Code is encouraged to report, on a confidential basis, the violation to his or her supervisor. If the supervisor appears to be involved in the wrongdoing, the report should be made to the next level of supervisory authority or to the Director of the Human Resources Department. Upon notification of the alleged violation, the supervisor is obligated to advise the Legal Department. 2-10 It is Price Associates' policy that no adverse action will be taken against any employee who reports a violation in good faith. Service as Trustee, Executor or Personal Representative. Employees may serve as trustees, co-trustees, executors or personal representatives for the estates of or trusts created by close family members. Employees may also serve in such capacities for estates or trusts created by nonfamily members. However, if an Access Person expects to be actively involved in an investment capacity in connection with an estate or trust created by a nonfamily member, he or she must first be granted permission by the Ethics Committee. If an employee serves in any of these capacities, securities transactions effected in such accounts will be subject to the prior approval (Access Persons only) and reporting requirements (Access Persons and Non-Access Persons) of our Statement of Policy on Securities Transactions. If any employees presently serve in any of these capacities for nonfamily members, they should report these relationships in writing to the Ethics Committee. Speaking Engagements and Publications. Employees are often asked to accept speaking engagements on the subject of investments, finance, or their own particular specialty with our organization. This is encouraged by the firm, as it enhances our public relations, but you should obtain approval from the head of your Division before you accept such requests. You may also accept an offer to teach a course or seminar on investments or related topics (for example, at a local college) in your individual capacity with the approval of the head of your Division and provided the course is in compliance with the Guidelines found in Investment Services' Compliance Manual. Before making any commitment to write or publish any article or book on a subject related to investments or your work at Price Associates, approval should be obtained from your Division head. Trading in Securities with Inside Information. The purchase or sale of securities while in possession of material, inside information is prohibited by state and federal laws. Information is considered inside and material if it has not been publicly disclosed and is sufficiently important that it would affect the decision of a reasonable person to buy, sell or hold stock in a company, including Price Associates' stock. Under no circumstances may an employee transmit such information to any other person, except to other employees who are required to be kept informed on the subject. All employees should read and understand the Statement of Policy on Material, Inside (Non-Public) Information (see page 3-1). March, 2000 2-11 T. ROWE PRICE ASSOCIATES, INC. STATEMENT OF POLICY ON MATERIAL, INSIDE (NON-PUBLIC) INFORMATION Introduction. "Insider trading" is a top enforcement priority of the Securities and Exchange Commission. In 1988, the Insider Trading and Securities Fraud Enforcement Act (the "Act") was signed into law. This Act has had a far reaching impact on all public companies and especially those engaged in the securities brokerage or investment advisory industries, including directors, executive officers and other controlling persons of such companies. While the Act does not provide a statutory definition of "insider trading," it contained major changes to the previous law. Specifically, the Act: Written Procedures. Requires SEC-registered brokers, dealers and investment advisers to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, non-public information by such persons. Civil Penalties. Imposes severe civil penalties on brokerage firms, investment advisers, their management and advisory personnel and other "controlling persons" who fail to take adequate steps to prevent insider trading and illegal tipping by employees and other "controlled persons." Persons who directly or indirectly control violators, including entities such as Price Associates and their officers and directors, face penalties to be determined by the court in light of the facts and circumstances, but not to exceed the greater of $1,000,000 or three times the amount of profit gained or loss avoided as a result of the violation. Criminal Penalties. Provides as penalties for criminal securities law violations: . Maximum jail term -- from five to ten years; . Maximum criminal fine for individuals -- from $100,000 to $1,000,000; . Maximum criminal fine for entities -- from $500,000 to $2,500,000. Private Right of Action. Establishes a statutory private right of action on behalf of contemporaneous traders against insider traders and their controlling persons. Bounty Payments. Authorizes the SEC to award bounty payments to persons who provide information leading to the successful prosecution of insider trading violations. Bounty payments are at the discretion of the SEC, but may not exceed 10% of the penalty imposed. Purpose of Statement of Policy. The purpose of this Statement of Policy ("Statement") is to comply with the Act's requirement to establish, maintain, and enforce written procedures designed to prevent insider trading. This Statement explains: (i) the general legal prohibitions and sanctions regarding insider trading; (ii) the meaning of the key concepts underlying the prohibitions; (iii) the obligations of each employee of Price Associates in the event he or she 4-1 comes into possession of material, non-public information; and (iv) the firm's educational program regarding insider trading. Price Associates has also adopted a Statement of Policy on Securities Transactions (see page 4-1), which requires both Access Persons (see p. 4-3) and Non-Access Persons (see p. 4-4) to obtain prior clearance with respect to their transactions in Price Associates' stock and requires Access Persons to obtain prior clearance with respect to all pertinent securities transactions. In addition, both Access Persons and Non- Access Persons are required to report such transactions on a timely basis to the firm. The Basic Insider Trading Prohibition. The "insider trading" doctrine under federal securities laws generally prohibits any person (including investment advisers) from: . trading in a security while in possession of material, non-public information regarding the issuer of the security; . tipping such information to others; . recommending the purchase or sale of securities while in possession of such information; . assisting someone who is engaged in any of the above activities. Thus, "insider trading" is not limited to insiders of the company whose securities are being traded. It can also apply to non-insiders, such as investment analysts, portfolio managers and stockbrokers. In addition, it is not limited to persons who trade. It also covers persons who tip material, non-public information or recommend transactions in securities while in possession of such information. Policy of Price Associates on Insider Trading. It is the policy of Price Associates and its affiliates to forbid any of their officers, directors, or employees, while in possession of material, non-public information, from trading securities or recommending transactions, either personally or in its proprietary accounts or on behalf of others (including mutual funds and private accounts), or communicating material, non-public information to others in violation of federal securities laws. "Need to Know" Policy. All information regarding planned, prospective or ongoing securities transactions must be treated as confidential. Such information must be confined, even within the firm, to only those individuals and departments who must have such information in order for Price Associates to carry out its engagement properly and effectively. Ordinarily, these prohibitions will restrict information to only those persons who are involved in the matter. Transactions Involving Price Associates' Stock. Officers, directors and employees are reminded that they are "insiders" with respect to Price Associates since Price Associates is a public company and its stock is traded in the over-the-counter market. It is therefore important that employees not discuss with family, friends or other persons any matter concerning Price Associates which might involve material, non-public information, whether favorable or unfavorable. 4-2 Sanctions. Penalties for trading on material, non-public information are severe, both for the individuals involved in such unlawful conduct and their employers. An employee of Price Associates who violates the insider trading laws can be subject to some or all of the penalties described below, even if he or she does not personally benefit from the violation: . Injunctions; . Treble damages; . Disgorgement of profits; . Criminal fines; . Jail sentences; . Civil penalties for the person who committed the violation (which would, under normal circumstances, be the employee and not the firm) of up to three times the profit gained or loss avoided, whether or not the individual actually benefitted; and . Civil penalties for Price Associates (and other persons, such as managers and supervisors, who are deemed to be controlling persons) of up to the greater of $1,000,000 or three times the amount of the profit gained or loss avoided. In addition, any violation of this Statement can be expected to result in serious sanctions being imposed by Price Associates, including dismissal of the person(s) involved. Basic Concepts of Insider Trading. The four critical concepts in insider trading cases are: (1) fiduciary duty/misappropriation, (2) materiality, (3) non-public, and (4) possession. Each concept is discussed below. Fiduciary Duty/Misappropriation. In two decisions, Dirks v. SEC and Chiarella v. United States, the United States Supreme Court held that insider trading and tipping violate the federal securities law if the trading or tipping of the information results in a breach of duty of trust or confidence. A typical breach of duty arises when an insider, such as a corporate officer, purchases securities of his or her corporation on the basis of material, non-public information. Such conduct breaches a duty owed to the corporation's shareholders. The duty breached, however, need not be to shareholders to support liability for insider trading; it could also involve a breach of duty to a client, an employer, employees, or even a personal acquaintance. For example, courts have held that if the insider receives a personal benefit (either direct or indirect) from the disclosure, such as a pecuniary gain or reputational benefit, that would be enough to find a fiduciary breach. The concept of who constitutes an "insider" is broad. It includes officers, directors and employees of a company. In addition, a person can be a "temporary insider" if he or she enters into a confidential relationship in the conduct of a company's affairs and, as a result, is given access to information solely for the company's purpose. A temporary insider can include, among 4-3 others, a company's attorneys, accountants, consultants, and bank lending officers, as well as the employees of such organizations. In addition, any person may become a temporary insider of a company if he or she advises the company or provides other services, provided the company expects such person to keep any material, non-public information disclosed confidential. Court decisions have held that under a "misappropriation" theory, an outsider (such as an investment analyst) may be liable if he or she breaches a duty to anyone by: (1) obtaining information improperly, or (2) using information that was obtained properly for an improper purpose. For example, if information is given to an analyst on a confidential basis and the analyst uses that information for trading purposes, liability could arise under the misappropriation theory. Similarly, an analyst who trades in breach of a duty owed either to his or her employer or client may be liable under the misappropriation theory. For example, the Supreme Court upheld the misappropriation theory when a lawyer received material, non-public information from a law partner who represented a client contemplating a tender offer, where that lawyer used the information to trade in the securities of the target company. The situations in which a person can trade while in possession of material, non-public information without breaching a duty are so complex and uncertain that the only safe course is not to trade, tip or recommend securities while in possession of material, non-public information. Materiality. Insider trading restrictions arise only when the information that is used for trading, tipping or recommendations is "material." The information need not be so important that it would have changed an investor's decision to buy or sell; rather, it is enough that it is the type of information on which reasonable investors rely in making purchase, sale, or hold decisions. Resolving Close Cases. The Supreme Court has held that, in close cases, doubts about whether or not information is material should be resolved in favor of a finding of materiality. You should also be aware that your judgment regarding materiality may be reviewed by a court or the SEC with the 20-20 vision of hindsight. Effect on Market Price. Any information that, upon disclosure, is likely to have a significant impact on the market price of a security should be considered material. Future Events. The materiality of facts relating to the possible occurrence of future events depends on the likelihood that the event will occur and the significance of the event if it does occur. Illustrations. The following list, though not exhaustive, illustrates the types of matters that might be considered material: a joint venture, merger or acquisition; the declaration or omission of dividends; the acquisition or loss of a significant contract; a change in control or a significant change in management; a call of securities for redemption; the borrowing of a significant amount of funds; the purchase or sale of a significant asset; a significant change in capital investment plans; a significant labor dispute or disputes with subcontractors or suppliers; an event requiring a company to file a current report on Form 8-K with the SEC; establishment of a program to make purchases of the company's own shares; a tender offer for another company's securities; an event of technical default or default on interest and/or 4-4 principal payments; advance knowledge of an upcoming publication that is expected to affect the market price of the stock. These illustrations are equally applicable to Price Associates as a public company and should serve as examples of the types of matters that employees should not discuss with persons outside the firm. Remember, even though you may have no intent to violate any federal securities law, an offhand comment to a friend might be used unbeknownst to you by such friend to effect purchases or sales of Price Associates' stock. If such transactions were discovered and your friend were prosecuted, your status as an informant or "tipper" would directly involve you in the case. Non-Public Vs. Public Information. Any information which is not "public" is deemed to be "non-public." Just as an investor is permitted to trade on the basis of information that is not material, he or she may also trade on the basis of information that is public. Information is considered public if it has been disseminated in a manner making it available to investors generally. An example of non-public information would include material information provided to a select group of analysts but not made available to the investment community at large. Set forth below are a number of ways in which non-public information may be made public. Disclosure to News Services and National Papers. The U.S. stock exchanges require exchange-traded issuers to disseminate material, non-public information about their companies to: (1) the national business and financial newswire services (Dow Jones and Reuters); (2) the national service (Associated Press); and (3) The New York Times and The Wall Street Journal. Local Disclosure. An announcement by an issuer in a local newspaper might be sufficient for a company that is only locally traded, but might not be sufficient for a company that has a national market. Information in SEC Reports. Information contained in reports filed with the SEC will be deemed to be public. Information in Brokerage Reports. Information published in bulletins and research reports disseminated by brokerage firms will, as a general matter, be deemed to be public. If Price Associates is in possession of material, non-public information with respect to a security before such information is disseminated to the public (i.e., such as being disclosed in one of the public media described above), Price Associates and its employees must wait a sufficient period of time after the information is first publicly released before trading or initiating transactions to allow the information to be fully disseminated. Concept of Possession. It is important to note that the SEC takes the position that the law regarding insider trading prohibits any person from trading in a security in violation of a duty of trust and confidence while in possession of material, non-public information regarding the security. This is in contrast to trading on the basis of the material, non-public information. To 4-5 illustrate the problems created by the use of the "possession" standard, as opposed to the "caused" standard, the following three examples are provided: First, if the investment committee to a Price mutual fund were to obtain material, non-public information about one of its portfolio companies from a Price equity research analyst, that fund would be prohibited from trading in the securities to which that information relates. The prohibition would last until the information is no longer material or non-public. Second, if the investment committee to a Price mutual fund obtained material, non-public information about a particular portfolio security but continued to trade in that security, then the committee members, Price Associates, and possibly management personnel might be liable for insider trading violations. Third, even if the investment committee to the Fund does not come into possession of the material, non-public information known to the equity research analyst, if it trades in the security, it may have a difficult burden of proving to the SEC or to a court that it was not in possession of such information. Tender Offers. Tender offers are subject to particularly strict regulation under the securities laws. Specifically, trading in securities which are the subject of an actual or impending tender offer by a person who is in possession of material, non-public information relating to the offer is illegal, regardless of whether there was a breach of fiduciary duty. Under no circumstances should you trade in securities while in possession of material, non-public information regarding a potential tender offer. Procedures to be Followed When Receiving Material, Non-Public Information. Whenever an employee comes into possession of material, non-public information, he or she should immediately contact the Legal Department and refrain from disclosing the information to anyone else, including persons within Price Associates, unless specifically advised to the contrary. Specifically, employees may not: . Trade in securities to which the material, non-public information relates; . Disclose the information to others; . Recommend purchases or sales of the securities to which the information relates. If the Legal Department determines that the information is material and non-public, it will decide whether to: . Place the security on a Watch List ("Watch List") and restrict the flow of the information to others within Price Associates in order to allow Price Associates' 4-6 investment personnel to continue their ordinary investment activities. This procedure is commonly referred to as a Chinese Wall; or . Place the security on a Restricted List ("Restricted List") in order to prohibit trading in the security by both clients and employees. The Watch List is highly confidential and should, under no circumstances, be disseminated to anyone except authorized personnel in the Legal Department. The Restricted List is also highly confidential and should, under no circumstances, be disseminated to anyone outside Price Associates. The employee whose possession of or access to inside information has caused the inclusion of an issuer on the Watch List may never trade or recommend the trade of the securities of that issuer without the specific prior approval of the Legal Department. If an employee receives a private placement memorandum and the existence of the private offering and/or the contents of the memorandum is material and non-public, the employee should contact the Legal Department for a determination of whether the issuer should be placed on the Watch or Restricted List. Specific Procedures Relating to the Safeguarding of Inside Information. To ensure the integrity of the Chinese Wall, and the confidentiality of the Restricted List, it is important that all employees take the following steps to safeguard the confidentiality of material, non-public information: . Do not discuss confidential information in public places such as elevators, hallways or social gatherings; . To the extent practical, limit access to the areas of the firm where confidential information could be observed or overheard to employees with a business need for being in the area; . Avoid using speaker phones in areas where unauthorized persons may overhear conversations; . Where appropriate, maintain the confidentiality of client identities by using code names or numbers for confidential projects; . Exercise care to avoid placing documents containing confidential information in areas where they may be read by unauthorized persons and store such documents in secure locations when they are not in use; and . Destroy copies of confidential documents no longer needed for a project. 4-7 Price Associates has adopted specific written procedures, Procedures Pertaining to the Administration of the Statement of Policy on Material, Inside (Non-Public) Information ("Procedures") to deal with those situations where employees of the firm are in possession of material, non-public information with respect to securities which may be in or are being considered for inclusion in the portfolios of clients managed by other areas of the firm and when tender offer financing information is received. These Procedures also describe the procedures for managing relationship conflicts in the municipal area. These Procedures have been designed to isolate and keep confidential material, non-public information known to one investment group or employee from the remainder of the firm. They are considered a part of this Statement and will be distributed to all appropriate personnel. Education Program. While the probability of research analysts and portfolio managers being exposed to material, non-public information with respect to companies considered for investment by clients is greater than that of other employees, it is imperative that all employees have a full understanding of this Statement, particularly since the insider trading restrictions also apply to transactions in the stock of Price Associates. To ensure that all employees are properly informed of and understand Price Associates' policy with respect to insider trading, the following program has been adopted. Initial Review for New Employees. All new employees will be given a copy of the Code, which includes this Statement, at the time of their employment and will be required to certify that they have read it. A representative of the Legal Department will review the Statement with each new portfolio manager, research analyst, and trader, as well as with any person who joins the firm as a vice president of Price Associates, promptly after his or her employment. Distribution of Statement. Any time this Statement is materially revised, copies will be distributed to all employees. Annual Review with Research Analysts, Counselors and Traders. A representative of the Legal Department will review this Statement at least annually with portfolio managers, research analysts, and traders. Annual Confirmation of Compliance. All employees will be asked to confirm their understanding of and adherence to this Statement on an annual basis. Questions. If you have any questions with respect to the interpretation or application of this Statement, you are encouraged to discuss them with your immediate supervisor or the Legal Department. March, 2000 4-8 T. ROWE PRICE ASSOCIATES, INC. STATEMENT OF POLICY ON SECURITIES TRANSACTIONS BACKGROUND INFORMATION. Legal Requirement. In accordance with the requirements of the Securities Exchange Act of 1934, the Investment Company Act of 1940, the Investment Advisers Act of 1940 and the Insider Trading and Securities Fraud Enforcement Act of 1988, T. Rowe Price Associates, Inc. ("Price Associates") and the mutual funds ("TRPA Funds") which it manages have adopted this Statement of Policy on Securities Transactions ("Statement"). Both Rowe Price-Fleming International, Inc. ("RPFI") and T. Rowe Fleming Asset Management Limited ("TRFAM") have also adopted Statements of Policy on Securities Transactions. Funds sponsored and managed by Price Associates or RPFI will be referred to as the "Price Funds." Price Associates' Fiduciary Position. As an investment adviser, Price Associates is in a fiduciary position which requires it to act with an eye only to the benefit of its clients, avoiding those situations which might place, or appear to place, the interests of Price Associates or its officers, directors and employees in conflict with the interests of clients. Purpose of Statement. The Statement was developed to help guide Price Associates' employees and independent directors and the independent directors of the Price Funds in the conduct of their personal investments and to: . eliminate the possibility of a transaction occurring that the Securities and Exchange Commission or other regulatory bodies would view as illegal, such as Front Running (see definition below); . avoid situations where it might appear that Price Associates or the Price Funds or any of their officers, directors or employees had personally benefited at the expense of a client or fund shareholder or taken inappropriate advantage of their fiduciary positions; and . prevent, as well as detect, the misuse of material, non-public information. Employees and the independent directors of Price Associates and the Price Funds are urged to consider the reasons for the adoption of this Statement. Price Associates' and the Price Funds' reputations could be adversely affected as the result of even a single transaction considered questionable in light of the fiduciary duties of Price Associates and the independent directors of the Price Funds. 4-1 Front Running. Front Running is illegal. It is generally defined as the purchase or sale of a security by an officer, director or employee of an investment adviser or mutual fund in anticipation of and prior to the adviser effecting similar transactions for its clients in order to take advantage of or avoid changes in market prices effected by client transactions. PERSONS SUBJECT TO STATEMENT. The provisions of this Statement apply as described below to the following persons and entities. Each person and entity is classified as either an Access Person or a Non-Access Person as described below. The provisions of this Statement may also apply to an Access Person's or Non-Access Person's spouse, minor children, and certain other relatives, as further described on page 4-4 of this Statement. Access Persons are subject to all provisions of this Statement. Non-Access Persons are subject to the general principles of the Statement and its reporting requirements, but are exempt from prior clearance requirements except for transactions in Price Associates' stock. The persons and entities covered by this Statement are: Price Associates. Price Associates, each of its subsidiaries and their retirement plans, and the Price Associates Employee Partnerships. Personnel. Each officer, inside director and employee of Price Associates and its subsidiaries, including T. Rowe Price Investment Services, Inc., the principal underwriter of the Price Funds. Certain Temporary Workers. These workers include: . All temporary workers hired on the Price Associates payroll ("TRPA Temporaries"); . All agency temporaries whose assignments at Price Associates exceed four weeks or whose cumulative assignments exceed eight weeks over a twelve-month period; . All independent or agency-provided consultants whose assignments exceed four weeks or whose cumulative assignments exceed eight weeks over a twelve-month period and whose work is closely related to the ongoing work of Price Associates' employees (versus project work that stands apart from ongoing work); and . Any contingent worker whose assignment is more than casual in nature or who will be exposed to the kinds of information and situations that would create conflicts on matters covered in the Code. RPFI Personnel. As stated in the first paragraph, a Statement of Policy on Securities Transactions has been adopted by RPFI. Under that Statement, all RPFI personnel (officers, directors and employees) stationed in Baltimore will be subject to this Statement. TRFAM Personnel. As stated in the first paragraph, a Statement of Policy on Securities Transactions has been adopted by TRFAM. Under that Statement, all TRFAM personnel 4-2 (officers, directors, and employees) stationed in Baltimore will be subject to this Statement. Retired Employees. Retired employees of Price Associates who continue to receive investment research information from Price Associates. INDEPENDENT DIRECTORS OF PRICE ASSOCIATES AND THE PRICE FUNDS. The independent directors of Price Associates include those directors of Price Associates who are neither officers nor employees of Price Associates. The independent directors of the Price Funds include those directors of the Price Funds who are not deemed to be "interested persons" of Price Associates. Although subject to the general principles of this Statement, including the definition of "beneficial ownership," independent directors are subject only to modified reporting requirements. The independent directors of the Price Funds are exempt from prior clearance requirements. The independent directors of Price Associates are exempt from the prior clearance requirements except for Price Associates' stock. ACCESS PERSONS. Certain persons and entities are classified as "Access Persons" under the Code. The term "Access Person" means: . Price Associates; . any officer (vice president or above) or director (excluding independent directors) of Price Associates or the Price Funds; . any employee of Price Associates or the Price Funds who, in connection with his or her regular functions or duties, makes, participates in, or obtains or has access to information regarding the purchase or sale of securities by a Price Fund or other advisory client, or whose functions relate to the making of any recommendations with respect to the purchases or sales; or . any person in a control relationship to Price Associates or a Price Fund who obtains or has access to information concerning recommendations made to a Price Fund or other advisory client with regard to the purchase or sale of securities by the Price Fund or advisory client. All Access Persons are notified of their status under the Code. Investment Personnel. An Access Person is further identified as "Investment Personnel" if, in connection with his or her regular functions or duties, he or she "makes or participates in making recommendations regarding the purchase or sale of securities" by a Price Fund or other advisory client. The term "Investment Personnel" includes, but is not limited to: 4-3 . those employees who are authorized to make investment decisions or to recommend securities transactions on behalf of the firm's clients (investment counselors and members of the mutual fund advisory committees); . research and credit analysts; and . traders who assist in the investment process. All Investment Personnel are deemed Access Persons under the Code. All Investment Personnel are notified of their status under the Code. Investment Personnel are prohibited from investing in initial public offerings. NON-ACCESS PERSONS. Persons who do not fall within the definition of Access Persons are deemed "Non-Access Persons". QUESTIONS ABOUT THE STATEMENT. You are urged to seek the advice of the Chairperson of the Ethics Committee when you have questions as to the application of this Statement to individual circumstances. TRANSACTIONS SUBJECT TO STATEMENT. Except as provided below, the provisions of this Statement apply to transactions that fall under either one of the following two conditions: First, you are a "beneficial owner" of the security under the Rule 16a-1 of the Securities Exchange Act of 1934 ("Exchange Act"), as defined below. Second, if you control or direct securities trading for another person or entity, those trades are subject to this Statement even if you are not a beneficial owner of the securities. For example, if you have an exercisable trading authorization of an unrelated person's or entity's brokerage account, or are directing another person's or entity's trades, those transactions will be subject to this Statement to the same extent your personal trades would be, unless exempted as described below. Definition of Beneficial Owner. A "beneficial owner" is any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, has or shares in the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the security. A person has beneficial ownership in: . securities held by members of the person's immediate family sharing the same household, although the presumption of beneficial ownership may be rebutted; . a person's interest in securities held by a trust, which may include both trust beneficiaries or trustees with investment control; 4-4 . a person's right to acquire securities through the exercise or conversion of any derivative security, whether or not presently exercisable; . a general partner's proportionate interest in the portfolio securities held by a general or limited partnership; . certain performance-related fees other than an asset-based fee, received by any broker, dealer, bank, insurance company, investment company, investment adviser, investment manager, trustee or person or entity performing a similar function; and . a person's right to dividends that is separated or separable from the underlying securities. Otherwise, right to dividends alone shall not represent beneficial ownership in the securities. A shareholder shall not be deemed to have beneficial ownership in the portfolio securities held by a corporation or similar entity in which the person owns securities if the shareholder is not a controlling shareholder of the entity and does not have or share investment control over the entity's portfolio. Requests for Exemptions. If you have beneficial ownership of a security, any transaction involving that security is presumed to be subject to the relevant requirements of this Statement, unless you have no control over the transaction. Such a situation may arise, for example, if you have delegated investment authority to an independent investment adviser, or your spouse has an independent trading program in which you have no input. Similarly, if your spouse has investment control over, but no beneficial ownership in, an unrelated account, an exemption may be appropriate. If you are involved in an investment account for a family situation, trust, partnership, corporation, etc., which you feel should not be subject to the Statement's relevant prior approval and/or reporting requirements, you should submit a written request for clarification or exemption to Baltimore Legal/Compliance (Attn. D. Jones). Any such request for clarification or exemption should name the account, your interest in the account, the persons or firms responsible for its management, and the basis upon which the exemption is being claimed. Exemptions are not self-executing; any exemption must be granted through Baltimore Legal/Compliance. TRANSACTIONS IN STOCK OF PRICE ASSOCIATES. Because Price Associates is a public company, ownership of its stock subjects its officers, inside and independent directors, and employees to special legal requirements under the Federal securities laws. Each officer, director and employee is responsible for his or her own compliance with these requirements. In connection with these legal requirements, Price Associates has adopted the following rules and procedures: 4-5 Independent Directors of Price Funds. The independent directors of the Price Funds are prohibited from owning the stock of Price Associates. Quarterly Earnings Report. Generally, all employees and independent directors of Price Associates must refrain from initiating transactions in Price Associates' stock in which they have a beneficial interest from the sixth trading day following the end of the quarter (or such other date as management shall from time to time determine) until the third trading day following the public release of earnings. Employees and independent directors will be notified in writing through the Office of the Secretary of Price Associates ("Secretary") from time to time as to the controlling dates. Prior Clearance. Employees and independent directors of Price Associates are required to obtain clearance prior to effecting any proposed transaction (including gifts and transfers) involving shares of Price Associates' stock owned beneficially or through the Employee Stock Purchase Plan. Requests for prior clearance must be in writing on the form entitled, "Notification of Proposed Transaction" (available from Corporate Records Department) and be submitted to the Secretary who is responsible for processing and maintaining the records of all such requests. This would include sales of stock purchased through Price Associates Employee Stock Purchase Plan ("ESPP"). Purchases effected through the ESPP are automatically reported to the Secretary. Receiving prior clearance does not relieve employees and independent directors of Price Associates from conducting their personal securities transactions in full compliance with the Code, including its prohibition on trading while in possession of material, inside information. Transactions in Price Associates' stock are subject to the 60-Day Rule except for transactions effected through the ESPP and certain options exercises. See p. 4-18. =================================================================== All employees and independent directors of Price Associates must obtain prior clearance of any transaction involving Price Associates' stock from the Office of the Secretary of Price Associates. =================================================================== Initial Disclosure of Holdings. Each new employee must report to the Secretary any shares of Price Associates' stock of which he or she has beneficial ownership no later than 10 days after his or her starting date of employment. Dividend Reinvestment Plans. Purchases of Price Associates' stock owned outside of the ESPP and effected through a dividend reinvestment plan need not receive prior clearance if the Secretary's office has been previously notified by the employee that he or she will be participating in that plan. Reporting of transactions effected through that plan need only be made quarterly, except that employees who are subject to Section 16 of the Securities Exchange Act of 1934 reporting must report such transactions monthly. Effectiveness of Prior Clearance. Prior clearance of transactions in Price Associates' stock is effective for five (5) business days from and including the date the clearance is 4-6 granted, unless (i) advised to the contrary by the Secretary prior to the proposed transaction, or (ii) the person receiving the approval comes into possession of material, non-public information concerning the firm. If the proposed transaction in Price Associates' stock is not executed within this time period, a new clearance must be obtained. Reporting of Disposition of Proposed Transaction. Covered persons must notify the Secretary of the disposition (whether the proposed transaction was effected or not) of each transaction involving shares of Price Associates' stock owned directly within two business days of its execution, or within seven business days of the date of prior clearance, if not executed. Insider Reporting and Liability. Under current rules, certain officers, directors and 10% stockholders of a publicly traded company ("Insiders") are subject to the requirements of Section 16. Insiders include the directors and certain managing directors of Price Associates. SEC Reporting. There are three reporting forms which insiders are required to file with the SEC to report their purchase, sale and transfer transactions in, and holdings of, Price Associates' stock. Although the Secretary will provide assistance in complying with these requirements as an accommodation to insiders, it remains the legal responsibility of each insider to assure that the applicable reports are filed in a timely manner. . Form 3. The initial ownership report by an insider is required to be filed on Form 3. This report must be filed within ten days after a person becomes an insider (i.e., is elected as a director or appointed as managing director) to report all current holdings of Price Associates' stock. Following the election or appointment of an insider, the Secretary will deliver to the insider a Form 3 for appropriate signatures and will file such Form with the SEC. . Form 4. Any change in the insider's ownership of Price Associates' stock must be reported on a Form 4 unless eligible for deferred reporting on year-end Form 5. The Form 4 is due by the 10th day following the end of the month in which the ownership change occurred. Following receipt of the Notice of Disposition of the proposed transaction, the Secretary will deliver to the insider a Form 4, as applicable, for appropriate signatures and will file such Form with the SEC. . Form 5. Any transaction or holding which is exempt from reporting on Form 4, such as option exercises, small purchases of stock, gifts, etc. may be reported on a deferred basis on Form 5 within 45 days after the end of the calendar year in which the transaction occurred. No Form 5 is necessary if all transactions and holdings were previously reported on Form 4. Liability for Short-Swing Profits. Under Federal securities laws, profit realized by certain officers, as well as directors and 10% stockholders of a company (including 4-7 Price Associates) as a result of a purchase and sale (or sale and purchase) of stock of the company within a period of less than six months must be returned to the firm upon request. Office of Thrift Supervision ("OTS") Reporting. Price Associates is the holding company of T. Rowe Price Savings Bank, which is regulated by the OTS. OTS regulations require that the Managing Directors of Price Associates, as well as any vice president in charge of any Price Associates' affiliate, file reports regarding their personal holdings of the stock of Price Associates and of the stock of any non-affiliated savings banks or savings and loan holding companies. Although the Secretary will provide assistance in complying with these requirements as an accommodation, it remains the responsibility of each person required to file such reports to ensure that such reports are filed in a timely manner. PRIOR CLEARANCE REQUIREMENTS (OTHER THAN PRICE ASSOCIATES' STOCK) FOR ACCESS PERSONS. All Access Persons must obtain prior clearance before directly or indirectly initiating, recommending, or in any way participating in, the purchase or sale of a security in which the Access Person has, or by reason of such transaction may acquire, any beneficial interest or which he or she controls, unless exempted below. Non-Access Persons are not required to obtain prior clearance before engaging in any securities transactions, except for transaction in Price Associates' stock. =================================================================== All employees and independent directors of Price Associates must obtain prior clearance of any transaction involving Price Associates' stock from the Office of the Secretary of Price Associates. =================================================================== Where required, prior clearance must be obtained regardless of whether the transaction is effected through TRP Brokerage or through an unaffiliated broker/dealer. Receiving prior clearance does not relieve Access Persons from conducting their personal securities transactions in full compliance with the Code, including its prohibition on trading while in possession of material, inside information, and with applicable law, including the prohibition on Front Running (see page 4-1 for definition of Front Running). Please note that the prior clearance procedures do not check compliance with the 60-Day Rule (p. 4-17). TRANSACTIONS (OTHER THAN IN PRICE ASSOCIATES' STOCK) EXEMPT FROM PRIOR CLEARANCE. The following transactions are exempt from the prior clearance requirements: Mutual Funds and Variable Insurance Products. Purchases or redemptions of shares of any open-end investment companies, including the Price Funds, and variable insurance products. 4-8 Unit Investment Trusts. Purchases or sales of shares in unit investment trusts. U.S. Government Obligations. Purchases or sales of direct obligations of the U.S. Government. Pro Rata Distributions. Purchases effected by the exercise of rights issued pro rata to all holders of a class of securities or the sale of rights so received. Mandatory Tenders. Purchases and sales of securities pursuant to a mandatory tender offer. Spousal Payroll Deduction Plans. Purchases by an Access Person's spouse pursuant to a payroll deduction plan, provided the Compliance Department has been previously notified by the Access Person that the spouse will be participating in the payroll deduction plan. Exercise of Stock Option of Corporate Employer by Spouse. Transactions involving the exercise by an Access Person's spouse of a stock option issued by the corporation employing the spouse. Dividend Reinvestment Plans. Purchases effected through an established Dividend Reinvestment Plan ("DRP"), provided the Compliance Department is first notified by the Access Person that he or she will be participating in the DRP. An Access Person's purchase of share(s) of the issuer to initiate participation in the DRP or an Access Person's purchase of shares in addition to those purchased with dividends (a "Connected Purchase") and any sale of shares from the DRP must receive prior clearance. Systematic Investment Plans. Purchases effected through a systematic investment plan involving the automatic investment of a set dollar amount on predetermined dates, provided the Compliance Department has been previously notified by the Access Person that he or she will be participating in the plan. An Access Person's purchase of securities of the issuer to initiate participation in the plan and any sale of shares from such a plan must receive prior clearance. Inheritances. The acquisition of securities through inheritance. Gifts. The giving of or receipt of a security as a gift. PROCEDURES FOR OBTAINING PRIOR CLEARANCE (OTHER THAN PRICE ASSOCIATES' STOCK) FOR ACCESS PERSONS. All Access Persons should follow the procedures set forth below before engaging in the transactions described. 4-9 Procedures For Obtaining Prior Clearance For Initial Public Offerings ("IPOs"): Non-Investment Personnel. Access Persons who are not Investment Personnel ("Non-Investment Personnel") may purchase securities that are the subject of an IPO only if prior written approval has been obtained from the Chairperson of the Ethics Committee or his or her designee ("Designee"), which may include N. Morris, S. McCafferty or A. Brooks. An IPO is an offering of securities registered under the Securities Act of 1933 when the issuer of the securities, immediately before the registration, was not subject to certain reporting requirements of the Securities Exchange Act of 1934. In considering such a request for approval, the Chairperson will determine whether the proposed transaction presents a conflict of interest with any of the firm's clients or otherwise violates the Code. The Chairperson will also determine whether the following conditions have been met: 1. The purchase is made through the Non-Investment Personnel's regular broker; 2. The number of shares to be purchased is commensurate with the normal size and activity of the Non-Investment Personnel's account; and 3. The transaction otherwise meets the requirements of the NASD's rules on free riding and withholding. Non-Investment Personnel will not be permitted to purchase shares in an IPO if any of the firm's clients are prohibited from doing so. Therefore, Non-Investment Personnel must check with the Equity Trading Desk the day the offering is priced before purchasing in the IPO. This prohibition will remain in effect until the firm's clients have had the opportunity to purchase in the secondary market once the underwriting is completed -- commonly referred to as the aftermarket. Investment Personnel. Investment Personnel may not purchase securities in an IPO. Non-Access Persons. Although Non-Access Persons are not required to receive prior clearance before purchasing shares in an IPO, any Non-Access Person who is a registered representative of Investment Services should be aware that NASD rules may restrict his or her ability to buy shares in a "hot issue," which is a new issue that trades at a premium in the secondary market whenever that trading commences. Procedures For Obtaining Prior Clearance For Private Placements. Access Persons may not invest in a private placement of securities, including the purchase of limited partnership interests, unless prior written approval has been obtained from the Chairperson of the Ethics Committee or a Designee. In considering such a request for approval, the Chairperson will determine whether the investment opportunity (private placement) should be reserved for the firm's clients, and whether the opportunity is being offered to the 4-10 Access Person by virtue of his or her position with the firm. The Chairperson will also secure, if appropriate, the approval of the proposed transaction from the chairperson of the applicable investment steering committee. Continuing Obligation. An Access Person who has received approval to invest in a private placement of securities and who, at a later date, anticipates participating in the firm's investment decision process regarding the purchase or sale of securities of the issuer of that private placement on behalf of any client, must immediately disclose his or her prior investment in the private placement to the Chairperson of the Ethics Committee and to the chairperson of the appropriate investment steering committee. Procedures For Obtaining Prior Clearance For All Other Securities Transactions. Requests for prior clearance by Access Persons for all other securities transactions requiring prior clearance may be made orally, in writing, or by electronic mail (e-mail address "Personal Trades," which appears under "Trades" in the electronic mail address book) to the Equity Trading Department of Price Associates, which will be responsible for processing and maintaining the records of all such requests. All requests must include the name of the security, the number of shares or amount of bond involved, whether a foreign security is involved, and the nature of the transaction, i.e., whether the transaction is a purchase, sale or short sale. Responses to all requests will be made by the Trading Department documenting the request and its approval/disapproval. Requests will normally be processed on the same day; however, additional time may be required for prior clearance of transactions in foreign securities. Effectiveness of Prior Clearance. Prior clearance of a securities transaction is effective for three (3) business days from and including the date the clearance is granted, regardless of the time of day when clearance is granted. If the proposed securities transaction is not executed within this time, a new clearance must be obtained REASONS FOR DISALLOWING ANY PROPOSED TRANSACTION. A proposed securities transaction will be disapproved by the Trading Department and/or the Chairperson of the Ethics Committee if: Pending Client Orders. Orders have been placed by Price Associates or RPFI to purchase or sell the security. Purchases and Sales Within Seven (7) Calendar Days. The security has been purchased or sold by any client of Price Associates or, in the case of a foreign security, for any client of either Price Associates or RPFI, within seven calendar days immediately prior to the date of the proposed transaction. For example, if a client transaction occurs on Monday, an Access Person may not purchase or sell that security until Tuesday of the following week. If all clients have eliminated their holdings in a particular security, the seven-day restriction is not applicable to an Access Person's transactions in that security. 4-11 Approved Company Rating Changes. A change in the rating of an approved company as reported in the firm's Daily Research News has occurred within seven (7) calendar days immediately prior to the date of the proposed transaction. Accordingly, trading would not be permitted until the eighth (8) calendar day. Securities Subject to Internal Trading Restrictions. The security is limited or restricted by Price Associates or RPFI as to purchase or sale for client accounts. Requests for Waivers of Prior Clearance Denials. If an Access Person's request for prior clearance has been denied, he or she may apply to the Chairperson of the Ethics Committee for a waiver. All such requests must be in writing and must fully describe the basis upon which the waiver is being requested. Waivers are not routinely granted. BROKERAGE CONFIRMATIONS AND PERIODIC ACCOUNT STATEMENTS. All Access Persons and Non-Access Persons must request broker-dealers executing their transactions to send to the attention of Compliance, Legal Department, T. Rowe Price Associates, Inc., P.O. Box 17218, Baltimore, Maryland 21297-1218 a duplicate confirmation with respect to each and every reportable transaction, including Price Associates' stock, and a copy of all periodic statements for all securities accounts in which the Access Person or Non-Access Person is considered to have beneficial ownership and/or control (see Page 4-4 for a discussion of beneficial ownership and control concepts). NOTIFICATION OF BROKER/DEALER ACCOUNTS. All Access Persons and Non-Access Persons must give written notice to Baltimore Legal/Compliance before opening or trading in a securities account with any broker/dealer, including TRP Brokerage. New Employees. New employees must give written notice to Baltimore Legal/Compliance of any existing securities accounts maintained with any broker/dealer when joining the firm (no later than 10 days after the starting date). Officers, Directors and Registered Representatives of Investment Services. The NASD requires each associated person of T. Rowe Price Investment Services, Inc. to: . Obtain approval from Investment Services (request should be in writing and be directed to Baltimore Legal/Compliance) before opening or placing the initial trade in a securities account with any broker/dealer; and . Provide the broker/dealer with written notice of his or her association with Investment Services. TRANSACTION REPORTING REQUIREMENTS (OTHER THAN PRICE ASSOCIATES' STOCK TRANSACTIONS). All Access Persons and Non-Access Persons must report all securities transactions unless the transaction is exempted from reporting below. 4-12 Transactions Exempt From Reporting. The following transactions are exempt from the reporting requirements: Mutual Funds and Variable Insurance Products. The purchase or redemption of shares of any open-end investment companies, including the Price Funds, and variable insurance products, except that any employee who serves as the president or executive vice president of a Price Fund must report his or her beneficial ownership or control of shares in that Fund to Baltimore Legal/Compliance through electronic mail to Dottie Jones. Stock Splits and Similar Acquisitions. The acquisition of additional shares of existing corporate holdings through the reinvestment of income dividends and capital gains in mutual funds, stock splits, stock dividends, exercise of rights, exchange or conversion. U.S. Government Obligations. Purchases or redemptions of direct obligations of the U.S. Government. Dividend Reinvestment Plans. The purchase of securities with dividends effected through an established DRP. If, however, a Connected Purchase or a sale must receive prior clearance (see p. 4-9), that transaction must also be reported. Transactions That Must Be Reported. Other than the transactions specified above as exempt, all Access Persons and Non-Access Persons are required to file a report of the following securities transactions: Cleared Transactions. Any transaction that is subject to the prior clearance requirements, including purchases in initial public offerings and private placement transactions. Although Non-Access Persons are not required to receive prior clearance for securities transactions (other than Price Associates' stock), they must report any transaction that would have been required to be prior cleared by an Access Person. Unit Investment Trusts. The purchase or sale of shares of a Unit Investment Trust. Pro Rata Distributions. Purchase effected by the exercise of rights issued pro rata to all holders of a class of securities or the sale of rights so received. Inheritances. Acquisition of securities through inheritance. Gifts. Acquisition or disposition of securities by gift. Mandatory Tenders. Purchases and sales of securities pursuant to a mandatory tender offer. 4-13 Spousal Payroll Deduction Plans/Spousal Stock Option. Transactions involving the purchase or exchange of securities by the spouse of an Access Person or Non-Access Person pursuant to a payroll deduction plan or the exercise by the spouse of an Access Person or Non-Access Person of a stock option issued by the spouse's employer. Reporting of spousal payroll deduction plan transactions need only be made quarterly; reporting of a spousal Stock Option exercise must be made within ten days of the exercise. Systematic Investment Plans. Transactions involving the purchase of securities by an Access Person or Non-Access Person pursuant to a systematic investment plan. Reporting of Systematic Investment Plan transactions need only be made quarterly. Report Form. If the executing broker/dealer provides a confirmation or similar statement directly to Baltimore Legal/Compliance, you do not need to make a further report. All other transactions must be reported on the form designated "T. Rowe Price Associates, Inc. Employee's Report of Securities Transactions," a supply of which is available from Baltimore Legal/Compliance. When Reports are Due. You must report a securities transaction within ten (10) days after the trade date or within (10) days after the date on which you first gain knowledge of the transaction (for example, a bequest) if this is later. Reporting of transactions involving either systematic investment plans or the purchase of securities by a spouse pursuant to a payroll deduction plan, however, may be reported quarterly. TRANSACTION REPORTING REQUIREMENTS FOR THE INDEPENDENT DIRECTORS OF PRICE ASSOCIATES AND THE INDEPENDENT DIRECTORS OF THE PRICE FUNDS. The independent directors of Price Associates and the independent directors of the Price Funds are subject to the same reporting requirements as Access Persons and Non-Access Persons except that reports need only be filed quarterly. Specifically: (1) a report for each securities transaction must be filed with Baltimore/Legal Compliance no later than ten (10) days after the end of the calendar quarter in which the transaction was effected; and (2) a report must be filed for each quarter, regardless of whether there have been any reportable transactions. Baltimore/Legal Compliance will send the independent directors of Price Associates and the Price Funds a reminder letter and reporting form approximately ten days prior to the end of each calendar quarter. MISCELLANEOUS RULES REGARDING PERSONAL SECURITIES TRANSACTIONS. These rules vary in their applicability depending upon whether you are an Access Person. The following rules apply to all Access Persons and Non-Access Persons and, where indicated, to the independent directors of Price Associates and the Price Funds. Dealing with Clients. Access Persons, Non-Access Persons and the independent directors of Price Associates and the Price Funds may not, directly or indirectly, sell to or purchase 4-14 from a client any security. This prohibition does not preclude the purchase or redemption of shares of any mutual fund that is a client of Price Associates. Client Investment Partnerships. Co-Investing. Access Persons and Non-Access Persons, including employee partnerships, and the independent directors of Price Associates and the Price Funds are not permitted to co-invest in client investment partnerships of Price Associates, RPFI, or their affiliates, such as Strategic Partners, Threshold, and International Partners. Direct Investment. The independent directors of the Price Funds are not permitted to invest as limited partners in client investment partnerships of Price Associates, RPFI, or their affiliates. Investment Clubs. These restrictions vary depending upon the person's status, as follows: Non-Access Persons. A Non-Access Person may form or participate in a stock or investment club without approval of the Chairperson of the Ethics Committee. Only transactions in Price Associates' stock are subject to prior clearance requirements. Club transactions must be reported just as the Non-Access Person's individual trades are reported. Access Persons. An Access Person may not form or participate in a stock or investment club unless prior written approval has been obtained from the Chairperson of the Ethics Committee. All transactions by such a stock or investment club in which an Access Person has beneficial ownership or control are subject to the same prior clearance and reporting requirements applicable to an individual Access Person's trades. However, if the Access Person has beneficial ownership solely by virtue of his or her spouse's participation in the club and has no investment control or input into decisions regarding the club's securities transactions, he or she may request the waiver of prior clearance requirements of the club's transactions (except for transactions in Price Associates' stock) from the Chairperson of the Ethics Committee as part of the approval process. Margin Accounts. While brokerage margin accounts are discouraged, you may open and maintain margin accounts for the purchase of securities provided such accounts are with brokerage firms with which you maintain a regular brokerage account. Trading Activity. You are discouraged from engaging in a pattern of securities transactions which either: . Is so excessively frequent as to potentially impact your ability to carry out your assigned responsibilities, or . Involves securities positions that are disproportionate to your net assets. 4-15 At the discretion of the Chairperson of the Ethics Committee, written notification of excessive trading may be sent to your supervisor. The following rules apply only to Access Persons: Large Company Exemption. Although subject to prior clearance, transactions involving securities in certain large companies, within the parameters set by the Ethics Committee (the "Exempt List"), will be approved under normal circumstances, as follows: Transactions Involving Exempt List Securities. This exemption applies to transactions involving no more than $20,000 or the nearest round lot (even if the amount of the transaction marginally exceeds $20,000) per security per week in securities of companies with market capitalizations of $5 billion or more, unless the rating on the security as reported in the firm's Daily Research News has been changed to a 1 or a 5 within the seven (7) calendar days immediately prior to the date of the proposed transaction. If such a rating change has occurred, the exemption is not available. Transactions Involving Options on Exempt List Securities. Access Persons may not purchase uncovered put options or sell uncovered call options unless otherwise permitted under the "Options and Futures" discussion on p. 4-16. Otherwise, in the case of options on an individual security on the Exempt List (if it has not had a prohibited rating change), an Access Person may trade the greater of 5 contracts or sufficient option contracts to control $20,000 in the underlying security; thus an Access Person may trade 5 contracts even if this permits the Access Person to control more than $20,000 in the underlying security. Similarly, the Access Person may trade more than 5 contracts as long as the number of contracts does not permit him or her to control more than $20,000 in the underlying security. These parameters are subject to change by the Ethics Committee. Exchange-Traded Index Options. Although subject to prior clearance, an Access Person's transactions involving exchange-traded index options, within the parameters set by the Ethics Committee, will be approved under normal circumstances. Generally, an Access Person may trade the greater of 5 contracts or sufficient contracts to control $20,000 in the underlying securities; thus an Access Person may trade 5 contracts even if this permits the Access Person to control more than $20,000 in the underlying securities. Similarly, the Access Person may trade more than 5 contracts as long as the number of contracts does not permit him or her to control more than $20,000 in the underlying security. These parameters are subject to change by the Ethics Committee. Client Limit Orders. The Equity Trading Desk may approve an Access Person's proposed trade even if a limit order has been entered for a client for the same security, if: 4-16 . The Access Person's trade will be entered as a market order; and . The client's limit order is 10% or more away from the market at the time of approval of the Access Person's trade. Options and Futures. Please consult the specific section on Exchange- Traded Index Options (p. 4-16) for transactions in those options. ======================================================================= Before engaging in options and future transactions, Access Persons should understand the impact that the 60-Day Rule may have upon their ability to close out a position with a profit (see page 4-17). ======================================================================= Options and Futures on Securities and Indices Not Held by Price Associates' or RPFI's Clients. There are no specific restrictions with respect to the purchase, sale or writing of put or call options or any other option or futures activity, such as multiple writings, spreads and straddles, on securities of companies (and options or futures on such securities) which are not held by any of Price Associates' or RPFI's clients. Options on Securities of Companies Held by Price Associates' or RPFI's Clients. With respect to options on securities of companies which are held by any of Price Associates' or RPFI's clients, it is the firm's policy that an Access Person should not profit from a price decline of a security owned by a client (other than an Index account). Therefore, an Access Person may: (i) purchase call options and sell covered call options and (ii) purchase covered put options and sell put options. An Access Person may not purchase uncovered put options or sell uncovered call options, even if the issuer of the underlying securities is included on the Exempt List, unless purchased in connection with other options on the same security as part of a straddle, combination or spread strategy which is designed to result in a profit to the Access Person if the underlying security rises in or does not change in value. The purchase, sale and exercise of options are subject to the same restrictions as those set forth with respect to securities, i.e., the option should be treated as if it were the common stock itself. Other Options and Futures Held by Price Associates' or RPFI's Clients. Any other option or futures transaction with respect to domestic or foreign securities held by any of Price Associates' clients or with respect to foreign securities held by RPFI's clients will be approved or disapproved on a case-by-case basis after due consideration is given as to whether the proposed transaction or series of transactions might appear to or actually create a conflict with the interests of any of Price Associates' or RPFI's clients. Such transactions include transactions in futures and options on futures involving financial instruments regulated solely by the CFTC. 4-17 Short Sales. Short sales by Access Persons are subject to prior clearance. In addition, Access Persons may not sell any security short which is owned by any client of Price Associates or RPFI, except that short sales may be made "against the box" for tax purposes. A short sale "against the box" is one in which the seller owns an amount of securities equivalent to the number he or she sells short. All short sales, including short sales against the box, are subject to the 60-Day Rule described below. The 60-Day Rule. Access Persons are prohibited from profiting from the purchase and sale or sale and purchase of the same (or equivalent) securities within 60 calendar days. An "equivalent" security means any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege at a price related to the subject security, or similar securities with a value derived from the value of the subject security. Thus, for example, the rule prohibits options transactions on or short sales of a security within 60 days of its purchase. In addition, the rule applies regardless of the Access Person's other holdings of the same security or whether the Access Person has split his or her holdings into tax lots. For example, if an Access Person buys 100 shares of XYZ stock on March 1, 1998 and another 100 shares of XYZ stock on March 1, 2000, he or she may not sell any shares of XYZ stock at a profit for 60 days following March 1, 2000. The 60-Day Rule "clock" restarts each time the Access Person trades in that security. Exemptions from the 60-Day Rule. The 60-Day Rule does not apply to: . any transaction by a Non-Access Person except for transactions in Price Associates' stock not exempted below; . any transaction exempt from prior clearance (see p. 4-8); . the purchase and sale or sale and purchase of exchange traded index options; . any transaction in Price Associates' stock effected through the ESPP; and . the exercise of "in the money" Price Associates' stock options and the subsequent sale of the derivative shares. Prior clearance procedures do not check compliance with the 60-Day Rule when considering a trading request. Access Persons are responsible for checking their compliance with this rule before entering a trade. Access Persons may request a waiver from the 60-Day Rule. Such requests should be directed in writing to the Chairperson of the Ethics Committee. These waivers are not routinely granted. Investments in Non-Listed Securities Firms. Access Persons may not purchase or sell the shares of a broker/dealer, underwriter or federally registered investment adviser unless 4-18 that entity is traded on an exchange or listed as a NASDAQ stock or permission is given under the Private Placement Procedures (see p. 4- 10). OWNERSHIP REPORTING REQUIREMENTS - ONE-HALF OF ONE PERCENT OWNERSHIP. If an employee or an independent director of Price Associates or an independent director of the Price Funds owns more than 1/2 of 1% of the total outstanding shares of a public or private company, he or she must immediately report in writing such fact to Baltimore Legal/Compliance, providing the name of the company and the total number of such company's shares beneficially owned. DISCLOSURE OF PERSONAL SECURITIES HOLDINGS BY ACCESS PERSONS. Upon commencement of employment, appointment or promotion (no later than 10 days after the starting date), each Access Person must disclose in writing all current securities holdings in which he or she is considered to have beneficial ownership and control ("Securities Holdings Report") (see page 4-4 for definition of the term Beneficial Owner). The form to provide the Securities Holding Report will be provided upon commencement of employment, appointment or promotion and should be submitted to Baltimore Legal/Compliance. All Investment Personnel and Managing Directors are also required to file a Securities Holding Report on an annual basis, in conjunction with the annual verification process. Effective January 2001, this requirement will be extended to all Access Persons, pursuant to federal law. CONFIDENTIALITY OF RECORDS. Price Associates makes every effort to protect the privacy of all persons and entities in connection with their Securities Holdings Reports and Reports of Securities Transactions. SANCTIONS. Strict compliance with the provisions of this Statement is considered a basic provision of association with Price Associates and the Price Funds. The Ethics Committee and Baltimore Legal/Compliance are primarily responsible for administering this Statement. In fulfilling this function, the Ethics Committee will institute such procedures as it deems reasonably necessary to monitor each person's and entity's compliance with this Statement and to otherwise prevent and detect violations. Violations by Access Persons, Non-Access Persons and Directors of Price Associates. Upon discovering a material violation of this Statement by any person or entity other than an independent director of a Price Fund, the Ethics Committee will impose such sanctions as it deems appropriate and as are approved by the Management Committee or the Board of Directors including, inter alia, a letter of censure or suspension, a fine, a suspension of trading privileges or termination of employment and/or officership of the violator. In addition, the violator may be required to surrender to Price Associates, or to the party or parties it may designate, any profit realized from any transaction that is in violation of this Statement. All material violations of this Statement shall be reported to the Board of Directors of Price Associates and to the Board of Directors of any Price Fund with respect to whose securities such violations may have been involved. 4-19 Violations by Independent Directors of Price Funds. Upon discovering a material violation of this Statement by an independent director of a Price Fund, the Ethics Committee shall report such violation to the Board on which the director serves. The Price Fund Boards will impose such sanctions as they deem appropriate. Violations by Baltimore Employees of RPFI or TRFAM. Upon discovering a material violation of this Statement by a Baltimore-based employee of RPFI or TRFAM, the Ethics Committee shall report such violation to the Board of Directors of RPFI or TRFAM, as appropriate. A material violation by a Baltimore-based employee of RPFI shall also be reported to the Board of Directors of any RPFI Fund with respect to whose securities such violations may have been involved. March, 2000 4-20 T. ROWE PRICE ASSOCIATES, INC. STATEMENT OF POLICY ON CORPORATE RESPONSIBILITY Price Associates' Fiduciary Position. As an investment adviser, T. Rowe Price Associates, Inc. ("Price Associates") is in a fiduciary relationship with each of its clients. This fiduciary duty obligates Price Associates to act with an eye only to the benefit of its clients. Accordingly, when managing its client accounts (whether private counsel clients, mutual funds, limited partnerships, or otherwise), Price Associates' primary responsibility is to optimize the financial returns of its clients consistent with their objectives and investment program. Definition of Corporate Responsibility Issues. Concern over the behavior of corporations has been present since the Industrial Revolution. Each generation has focused its attention on specific issues. Concern over the abuses of the use of child labor in the 1800's was primarily addressed by legislative action which mandated corporate America to adhere to new laws restricting and otherwise governing the employment of children. In other instances, reform has been achieved through shareholder action -- namely, the adoption of shareholder proposals. The corporate responsibility issues most often addressed during the past decade have involved: . Ecological issues, including toxic hazards and pollution of the air and water; . Employment practices, such as the hiring of women and minority groups; . Product quality and safety; . Advertising practices; . Animal testing; . Military and nuclear issues; and . International politics and operations, including the world debt crisis, infant formula, and child labor laws. Corporate Responsibility Issues in the Investment Process. Price Associates recognizes the legitimacy of public concern over the behavior of business with respect to issues of corporate responsibility. Price Associates' policy is to carefully review the merits of such issues that pertain to any issuer which is held in a client portfolio or which is being considered for investment. Price Associates believes that a corporate management's record of identifying and resolving issues of corporate responsibility is a legitimate criteria for evaluating the investment merits of the issuer. Enlightened corporate responsibility can enhance a issuer's long term prospects for business success. The absence of such a policy can have the converse effect. 5-1 Corporate Responsibility Committee. Since 1971, Price Associates has had a Corporate Responsibility Committee, which is responsible for: . Reviewing and establishing positions with respect to corporate responsibility issues that are presented in the proxy statements of portfolio companies; and . Reviewing questions and inquiries received from clients and mutual fund shareholders pertaining to issues of corporate responsibility. Questions Regarding Corporate Responsibility. Should an employee have any questions regarding Price Associates' policy with respect to a corporate responsibility issue or the manner in which Price Associates has voted or intends to vote on a proxy matter, he or she should contact a member of the Corporate Responsibility Committee or Price Associates' Proxy Administrator. March, 2000 5-2 T. ROWE PRICE ASSOCIATES, INC. STATEMENT OF POLICY WITH RESPECT TO COMPLIANCE WITH COPYRIGHT LAWS Purpose of Statement of Policy. To protect the interests of Price Associates and its employees, Price Associates has adopted this Statement of Policy with Respect to Compliance with Copyright Laws ("Statement" to: (1) inform its employees regarding the legal principles governing copyrights, trademarks, and service marks; and (2) ensure that Price Associates' various copyrights, trademarks, and service marks are protected from infringement. Definition of Trademark, Service Mark, and Copyright Trademark. A trademark is normally a word, phrase, or symbol used to identify and distinguish a product or a company. For example, Kleenex is a trademark for a particular brand of facial tissues. Service Mark. A service mark is normally a word, phrase, or symbol used to identify and distinguish a service or the provider of a service. For example, Invest With Confidence is a registered service mark which identifies and distinguishes the mutual fund management services offered by Price Associates. The words "trademark" and "service mark" are often used interchangeably, but as a general rule a trademark is for a tangible product, whereas a service mark is for an intangible good or service. Because most of Price Associates' business activities involve providing services (e.g., investment management; transaction processing and account maintenance; information, etc.), most of Price Associates' registered marks are service marks. Copyright. In order to protect the authors and owners of books, articles, drawings, music, or computer programs and software, the U.S. copyright law makes it a crime to reproduce, in any manner, any copyrighted material without the express written permission of the author or publisher. Under current law, all original works are copyrighted at the moment of creation; it is no longer necessary to register a copyright. Copyright infringements may result in judgments of actual damages (i.e., the cost of additional subscriptions), as well as punitive damages, which can be as high as $100,000 per infringement. Registered Trademarks and Service Marks. Once Price Associates has registered a trademark or service mark with the U.S. Patent and Trademark Office, it has the exclusive right to use that mark. In order to preserve rights to a registered trademark or service mark, Price Associates must (1) use the mark on a continuous basis and in a manner consistent with the Certificate of Registration; (2) place an encircled "R" ((R)) next to the mark in the first, or most prominent, occurrence in all publicly distributed media; and (3) take action against any party infringing upon the mark. Establishing a Trademark or Service Mark. The Legal Department has the responsibility to register and maintain all trademarks and service marks and protect them against any infringement. If Price Associates or a subsidiary wishes to utilize a particular word, phrase, or symbol as a trademark or service mark, the Legal Department must be notified as far in advance as possible so that a search may be conducted to determine if the proposed mark has already been registered or used by another entity. 6-1 Until clearance is obtained from the Legal Department, no new mark should be used. This procedure has been adopted to ensure that Price Associates does not unknowingly infringe upon another company's mark. Once a proposed mark is cleared for use, it must be accompanied by the abbreviations "TM" or "SM," as appropriate, until it has been registered. All trademarks and service marks which have been registered with the U.S. Patent and Trademark Office must be accompanied by an encircled "R" when used in any public document. These symbols need only accompany the mark in the first or most prominent place it is used in each publicly circulated document. Subsequent use of the same trademark or service mark in such material does not need to be marked. The Legal Department maintains a written summary of all Price Associates' registered and pending trademarks and service marks. All registered and pending trademarks and service marks are also listed in the T. Rowe Price Style Guide. If you have any questions regarding the status of a trademark or service mark, you should contact the Legal Department. Infringement of Price Associates' Registered Marks. If an employee notices that another entity is using a mark similar to one which Price Associates has registered, the Legal Department should be notified immediately so that appropriate action can be taken to protect Price Associates' interests in the mark. Reproduction of Articles and Similar Materials for Internal Distribution, or for Distribution to Shareholders, Clients and Others Outside the Firm. In general, the reproduction of copyrighted material is a federal offense. Exceptions under the "fair use" doctrine include reproduction for scholarly purposes, criticism, or commentary, which ordinarily do not apply in a business environment. Occasional copying of a relatively small portion of a newsletter or magazine to keep in a file, circulate to colleagues with commentary, or send to a client with commentary is generally permissible under the "fair use" doctrine. Written permission from the author or publisher must be obtained by any employee wishing to reproduce copyrighted material for internal or external distribution, including distribution via the Internet or the T. Rowe Price Associates' intranet. It is the responsibility of each employee to obtain permission to reproduce copyrighted material. Such permission must be in writing and forwarded to the Legal Department. If the publisher will not grant permission to reproduce copyrighted material, then the requestor must purchase from the publisher either additional subscriptions to the periodical or the reprints of specific articles. The original article or periodical may be circulated as an alternative to purchasing additional subscriptions or reprints. Personal Computer Software Programs. Software products and on-line information services purchased for use on Price Associates' personal computers are generally copyrighted material and may not be reproduced without proper authorization from the software vendor. See the T. Rowe Price Associates, Inc. Statement of Policy With Respect to Computer Security and Related Issues for more information. March, 2000 6-2 T. ROWE PRICE ASSOCIATES, INC. STATEMENT OF POLICY WITH RESPECT TO COMPUTER SECURITY AND RELATED ISSUES PURPOSE OF STATEMENT OF POLICY. The central and critical role of computer systems in our firm's operations underscores the importance of ensuring the integrity of these systems. The data stored on our firm's computers, as well as the specialized software programs and systems developed for the firm's use, are extremely valuable assets and very confidential. This Statement of Policy ("Statement") establishes a comprehensive computer security program which has been designed to: . prevent the unauthorized use of or access to our firm's computer systems (collectively the "Systems"), including the firm's electronic mail ("e-mail") and voice mail systems; . prevent breaches in computer security; . maintain the integrity of confidential information; and . prevent the introduction of computer viruses into our Systems that could imperil the firm's operations. In addition, the Statement describes various issues that arise in connection with the application of U.S. Copyright Law to computer software. Any material violation of this Statement may lead to sanctions, which may include dismissal of the employee or employees involved. CONFIDENTIALITY OF SYSTEMS ACTIVITIES AND INFORMATION. Systems activities and information stored on our firm's computers (including e-mail and voice mail) may be subject to monitoring by firm personnel or others. All such information, including messages on the firm's e-mail and voice mail systems, are records of the firm and the sole property of the firm. The firm reserves the right to monitor, access, and disclose for any purpose all information, including all messages sent, received, or stored through the Systems. The use of the firm's computer Systems is for the transaction of firm business and is for authorized users only. All firm policies apply to the use of the Systems. See Employee Handbook. By using the firm's Systems, you agree to be bound by this Statement and consent to the access to and disclosure of all information, including e-mail and voice mail messages, by the firm. Employees do not have any expectation of privacy in connection with the use of the Systems, or with the transmission, receipt, or storage of information in the Systems. Information entered into our firm's computers but later deleted from the Systems may continue to be maintained permanently on our firm's back-up tapes. Employees should take care so that they do not create documents or communications that might later be embarrassing to them or to our 7-1 firm. This policy applies to e-mail and voice mail, as well to any other communication on a System. SECURITY ADMINISTRATION. Enterprise Security in T. Rowe Price Investment Technologies, Inc. ("TRPIT") is responsible for identifying security needs and overseeing the maintenance of computer security, including Internet-related security issues. AUTHORIZED SYSTEMS USERS. In general, access to any type of System is restricted to authorized users who need access in order to support their business activities. Access for mainframe, LAN and external Systems must be requested on a "Systems Access Request" form. A hard copy can be printed from the Enterprise Security intranet site or obtained from Enterprise Security. Access requests and changes must be approved by the appropriate supervisor or manager in the user's department. AUTHORIZED APPLICATION USERS. Access to specific computer applications (i.e., Finance, Retirement Plan Services systems, etc.) can also be requested. Many application systems have an additional level of security, such as extra passwords. If a user wants access to an application or data that is outside the normal scope of his or her business activity, additional approval may be required from the "Owner" of such application or data. The "Owner" is the employee who is responsible for making judgments and decisions on behalf of the firm with regard to the application or data, including the authority to decide who may have access. USER-IDS, PASSWORDS, AND OTHER SECURITY ISSUES. Once a request for access is approved, a unique "User-ID" will be assigned the user. Each User-ID has a password that must be kept confidential by the user. For most systems, passwords must be changed on a regular schedule and Enterprise security has the authority to determine the password policy. User-IDs and passwords may not be shared. Users can be held accountable for work performed with their User-IDs. Personal computers must not be left logged on and unattended unless screen savers with passwords or software-based keyboard locks are utilized. Enterprise Security recommends that GroupWise e-mail accounts be password protected. EXTERNAL COMPUTER SYSTEMS. Our data processing environment includes access to data stored not only on our firm's computers, but also on external systems, such as DST. Although the security practices governing these outside systems are established by the providers of these external systems, requests for access to such systems should be directed to Enterprise Security. User-IDs and passwords to these systems must be kept confidential by the user. ACCESS TO THE INTERNET AND OTHER ON-LINE SERVICES. Access to the Internet (including, but not limited to, e-mail, remote FTP, Telnet, World Wide Web, Gopher, remote administration, secure shell, and using IP tunneling software to remotely control Internet servers) presents special security considerations due to the world-wide nature of the connection and the security weaknesses present in Internet protocols and services. The firm can provide authorized employees and other staff with access to Internet e-mail and other Internet services (such as the World Wide Web) through a direct connection from the firm's network. Access to the Internet or Internet services from our firm's computers, including the firm's e-mail system, is permitted only for legitimate business purposes. Such access must be requested 7-2 through Enterprise Security, approved by the employee's supervisor, and provided only through firm approved connections. All firm policies apply to the use of the Internet or Internet services. See Employee Handbook. Use of Internet. In accordance with firm policies, employees are prohibited from accessing inappropriate sites, including, but not limited to, adult and gambling sites. Firm personnel monitor Internet use for visits to inappropriate sites and for inappropriate use. Should employees have questions regarding what constitutes an inappropriate site or inappropriate use, they should discuss it first with their manager who may refer the question to Human Resources. Inappropriate use of the Internet, or accessing inappropriate sites, may lead to sanctions, which may include dismissal of the employee or employees involved. Dial-Out Access. Using a modem or an Internet connection on a firm computer housed at any of the firm's offices to access an Internet service provider using one's home or personal account is prohibited, unless this account is being used by authorized personnel to service Price Associates' connection to the Internet. When Internet access is granted, the employee will be asked to reaffirm his or her understanding of this Statement. Unauthorized modems are not permitted. Dial-out access that circumvents the Internet firewall or proxy server, except by authorized personnel in the business of Price Associates, is prohibited. On-line Services. Access to America OnLine ("AOL"), CompuServe, or other commercial on-line service providers is not permitted from a firm computer except for a legitimate business purpose approved by the employee's supervisor and with software obtained through the Help Desk at x4357 (select menu option 1). Participation on Bulletin Boards. Because communications by our firm or any of its employees on on-line service bulletin boards are subject to federal, state and NASD advertising regulations, unsupervised participation can result in serious securities violations. Certain designated employees have been authorized to use AOL to monitor and respond to inquiries about our firm and its investment services and products. Any employee other than those assigned to this special group must first receive the authorization of a member of the Board of T. Rowe Price Investment Services, Inc. and the Legal Department before initiating or responding to a message on any computer bulletin board relating to the firm, a Price Fund or any investment or brokerage option or service. This policy applies whether or not the employee intends to disclose his or her relationship to the firm, whether or not our firm sponsors the bulletin board, and whether or not the firm is the principal focus of the bulletin board. E-mail Use. Access to the firm's e-mail system is permitted only for legitimate business purposes. All firm policies apply to the use of e-mail. Firm personnel may monitor e-mail usage for inappropriate use. Should employees have questions regarding what constitutes inappropriate use, they should discuss it first with their manager who may refer the question to Human Resources. Inappropriate use of e-mail may lead to sanctions, which may include dismissal of the employee or employees involved. 7-3 E-mail services, other than those provided or approved by Price Associates, may not be used for business purposes. In addition, accessing e-mail services not provided or approved by Price Associates from firm equipment for any reason could allow the introduction of viruses or malicious code into the network, or lead to the compromise of confidential data. Employees should understand that e-mail sent through the Internet is not secure and could be intercepted by a third party. DIAL-IN ACCESS. The ability to access our firm's computer Systems from a remote location is also limited to authorized users. Phone numbers used to access our firm's computer Systems are confidential. A security system that uses a one-time password or other strong authentication method must be employed when accessing our firm's network from a remote computer. Authorization for remote access can be requested by completing a "Systems Access Request" form. Any employee who requires remote access should contact the Help Desk at x4357 (select menu option 1) for desktop setup. VIRUS PROTECTION. A computer virus is a program designed to damage or impair software or data on a computer system. Software from any outside source may contain a computer virus or similar malicious code. Types of carriers and transmission methods increase daily and currently include diskettes, CDs, file downloads, executables, and e-mail attachments. A comprehensive malicious code prevention and control program is in place throughout Price Associates. This program provides policy and procedures for anti-virus controls on all systems. More information about the anti-virus program can be found on the TRPIT Intranet. Introducing a virus or similar malicious code into the Price Associates Systems by engaging in prohibited actions, such as downloading non-business related software, or by failing to implement recommended precautions, such as updating virus scanning software on remote machines, may lead to sanctions, which may include dismissal of the employee or employees involved. Virus Scanning Software. As part of the TRPIT's anti-virus program, virus scanning software is installed on the majority of applicable platforms. This software is designed to detect and eradicate malicious code and viruses. All desktop computers have the corporate standard anti-virus scanning software installed and running. This software is installed and configured by the Distributed Processing Support Group and runs constantly. Virus scanning software updates are automatically distributed to the desktops as they become available. Desktop virus scanning software can also be used by the employee to scan diskettes, CDs, directories, and attachments "on demand". Contact the Help Desk at x4357 (select menu option 3) for assistance. E-mail. An e-mail anti-virus gateway scans the content of inbound and outbound e-mail for viruses. Infected e-mail and attachments will be cleaned when possible and quarantined when not cleanable. Updating of the e-mail gateway anti-virus software and pattern files is done automatically. 7-4 Portable and Remote Computers. Laptops and other computers that remotely access the TRPIT network are also required to have the latest anti-virus software and pattern files. It is the responsibility of each user to ensure that his or her portable computer's anti-virus software is regularly updated. The Help Desk has instructions available. Contact the Help Desk at x4357 (select menu option 3) to obtain further information. Downloading or Copying. The user of a PC with a modem or with an Internet connection has the ability to connect to other computers or on-line services outside of the firm's network and there may be business reasons to download or copy software from those sources. Downloading or copying software, which includes documents, graphics, programs and other computer- based materials, from any outside source is not permitted unless it is for a legitimate business purpose because downloads and copies could introduce viruses and malicious code into the Systems. Other Considerations. Users must log off the System each night. Unless the user logs off, virus software on each workstation cannot pick up the most current virus scanning downloads or the most current software updates for the user's System. Employees must call the Help Desk at x4357 (select menu option 3) when viruses are detected so that it can ensure that appropriate tracking and follow-up take place. Do not forward any "virus warning" mail received to other staff until you have contacted the Help Desk, since many of these warnings are hoaxes. When notified that a user has received "virus warning" mail, the Help Desk will contact Enterprise Security, whose personnel will check to determine the validity of the virus warning. APPLICATION OF U.S. COPYRIGHT LAW TO SOFTWARE PROGRAMS. Software products and on-line information services purchased for use on Price Associates' personal computers are generally copyrighted material and may not be reproduced without proper authorization from the software vendor. This includes the software on CDs or diskettes, any program manuals or documentation, and data or software retrievable from on-line information systems. Unauthorized reproduction of such material or information, or downloading or printing such material, is a federal offense, and the software vendor can sue to protect the developer's rights. In addition to criminal penalties such as fines and imprisonment, civil damages can be awarded in excess of $50,000. GUIDELINES FOR USING PERSONAL COMPUTER SOFTWARE Acquisition and Installation of Software. Only Distributed Processing Support Group approved and installed software is authorized. Any software program that is to be used by an employee of Price Associates in connection with the business of the firm must be ordered through the Help Desk at x4357 (select menu option 1) and installed by the Distributed Processing Support Group of TRPIT. Licensing. Software residing on firm LAN servers will be either: (1) maintained at an appropriate license level for the number of users, or (2) made accessible only for those for whom it is licensed. 7-5 Original CDs, Diskettes and Copies. In most cases, software is installed by the Distributed Processing Support Group and original software CDs and diskettes are not provided to the user. In the event that original CDs or diskettes are provided, they must be stored properly to reduce the possibility of damage or theft. CDs and diskettes should be protected from extreme heat, cold, and contact with anything that may act as a magnet or otherwise damage them. Employees may not make additional copies of software or software manuals obtained through the firm. Recommendations, Upgrades, and Enhancements. All recommendations regarding computer hardware and software programs are to be forwarded to the Help Desk at x4357 (select menu option 1), which will coordinate upgrades and enhancements. QUESTIONS REGARDING THIS STATEMENT. Any questions regarding this Statement should be directed to Enterprise Security in TRPIT. March, 2000 7-6 T. ROWE PRICE ASSOCIATES, INC. STATEMENT OF POLICY ON COMPLIANCE WITH ANTITRUST LAWS Purpose To protect the interests of the company and its employees, Price Associates has adopted this Statement of Policy on Compliance with Antitrust Laws ("Statement") to: (1) Inform employees about the legal principles governing prohibited anticompetitive activity in the conduct of Price Associates' business; and (2) Establish guidelines for contacts with other members of the investment management industry to avoid violations of the antitrust laws. The Basic Anticompetitive Activity Prohibition Section 1 of the Sherman Antitrust Act (the "Act") prohibits agreements, understandings, or joint actions between companies that constitute a "restraint of trade," i.e., reduce or eliminate competition. This prohibition is triggered only by an agreement or action among two or more companies; unilateral action never violates the Act. To constitute an illegal agreement, however, an understanding does not need to be formal or written. Comments made in conversations, casual comments at meetings, or even as little as "a knowing wink," as one case says, may be sufficient to establish an illegal agreement under the Act. The agreed upon action must be anticompetitive. Some actions are "per se" anticompetitive, while others are judged according to a "rule of reason." . Some activities have been found to be so inherently anticompetitive that a court will not even permit the argument that they have a procompetitive component. Examples of such per se illegal activities are agreements between competitors to fix prices or divide up markets in any way, such as exclusive territories. . Other joint agreements or activities will be examined by a court using the rule of reason approach to see if the procompetitive results of the arrangement outweigh the anticompetitive effects. Permissible agreements among competitors may include a buyers' cooperative, or a syndicate of buyers for an initial public offering of securities. In rare instances, an association of sellers (such as ASCAP) may be permissible. 8-1 There is also an exception for joint activity designed to influence government action. Such activity is protected by the First Amendment to the U.S. Constitution. For example, members of an industry may agree to lobby Congress jointly to enact legislation that may be manifestly anticompetitive. Penalties for Violating the Sherman Act A charge that the Act has been violated can be brought as a civil or a criminal action. Civil damages can include treble damages, plus attorneys fees. Criminal penalties for individuals can include fines of up to $350,000 and three years in jail, and $100 million or more for corporations. Situations in Which Antitrust Issues May Arise To avoid violating the Act, any agreement with other members of the investment management industry regarding which securities to buy or sell and under what circumstances we buy or sell them, or about the manner in which we market our mutual funds and investment and retirement services, must be made with the prohibitions of the Act in mind. Trade Association Meetings and Activities. A trade association is a group of competitors who join together to share common interests and seek common solutions to common problems. Such associations are at a high risk for anticompetitive activity and are closely scrutinized by regulators. Attorneys for trade associations, such as the Investment Company Institute, are typically present at meetings of members to assist in avoiding violations. Permissible Activities: . Discussion of how to make the industry more competitive. . An exchange of information or ideas that have procompetitive or competitively neutral effects, such as: methods of protecting the health or safety of workers; methods of educating customers and preventing abuses; and information regarding how to design and operate training programs. . Collective action to petition government entities. Activities to be Avoided: . Any discussion or direct exchange of current information about prices, salaries, fees, or terms and conditions of sales. Even if such information is publicly available, problems can arise if the information available to the public is difficult to compile or not as current as that being exchanged. 8-2 Exception: A third party consultant can, with appropriate safeguards, collect, aggregate and disseminate some of this information, such as salary information. . Discussion of future business plans, strategies, or arrangements that might be considered to involve competitively sensitive information. . Discussion of specific customers, markets, or territories. . Negative discussions of service providers that could give rise to an inference of a joint refusal to deal with the provider (a "boycott"). Investment-Related Discussions Permissible Activities: Buyers or sellers with a common economic interest may join together to facilitate securities transactions that might otherwise not occur, such as the formation of a syndicate to buy in a private placement or initial public offering of a issuer's stock, or negotiations among creditors of an insolvent or bankrupt company. Competing investment managers are permitted to serve on creditors committees together and engage in other similar activities in connection with bankruptcies and other judicial proceedings. Activities to be Avoided: It is important to avoid anything that suggests involvement with any other firm in any threats to "boycott" or "blackball" new offerings, including making any ambiguous statement that, taken out of context, might be misunderstood to imply such joint action. Avoid careless or unguarded comments that a hostile or suspicious listener might interpret as suggesting prohibited coordinated behavior between T. Rowe Price and any other potential buyer. Example: After an Illinois municipal bond default where the state legislature retroactively abrogated some of the bondholders' rights, several investment management complexes organized to protest the state's action. In doing so, there was arguably an implied threat that members of the group would boycott future Illinois municipal bond offerings. Such a boycott would be a violation of the Act. The investment management firms' action led to an 18-month Department of Justice investigation. Although the investigation did not lead to any legal action, it was extremely expensive and time consuming for the firms and individual managers involved. 8-3 If you are present when anyone outside of T. Rowe Price suggests that two or more investors with a grievance against an issuer coordinate future purchasing decisions, you should immediately reject any such suggestion. As soon as possible thereafter, you should notify the Legal Department, which will take whatever further steps are necessary. Benchmarking. Benchmarking is the process of measuring and comparing an organization's processes, and services to those of industry leaders for the purpose of adopting innovative practices for improvement. . Because benchmarking usually involves the direct exchange of information with competitors, it is particularly subject to the risk of violating the antitrust laws. . The list of issues that may and should not be discussed in the context of a trade association also applies in the benchmarking process. . All proposed benchmarking agreements must be reviewed by the T. Rowe Price Legal Department before T. Rowe Price agrees to participate in such a survey. March, 2000 8-4 EX-99.(P)(2)(F) 25 0025.txt CREDIT SUISSE CODE OF ETHICS EXHIBIT(p)(2)(f) CREDIT SUISSE ASSET MANAGEMENT, LLC CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC. WSW CAPITAL, INC. WARBURG PINCUS FUNDS, CREDIT SUISSE INSTITUTIONAL FUNDS, CSAM CLOSED-END FUNDS, DLJ MUTUAL FUNDS, DLJ HIGH YIELD BOND FUND CODE OF ETHICS I. Applicability ------------- This Code of Ethics establishes rules of conduct for "Access Persons" (as defined below) of Credit Suisse Asset Management, LLC, Credit Suisse Asset Management Securities, Inc., and WSW Capital, Inc. (collectively referred to as "CSAM") and each U.S. registered investment company that adopts this Code ("Covered Fund") (CSAM and the Covered Funds are collectively referred to as the "Covered Companies"). For purposes of this Code, "Access Person" shall mean: . any "Advisory Person" -- any employee or officer of CSAM and any natural person in a control relationship to a Covered Company (except for a natural person who, but for his or her holdings in a Covered Fund, would not be considered an Advisory Person, unless he or she obtains information concerning recommendations made to the Covered Fund with regard to the purchase or sale of securities by the Covered Fund, in which case such person shall be considered an Advisory Person only with respect to the Covered Fund); or . any director, trustee or officer of a Covered Fund, whether or not such person is an Advisory Person, in which case such person shall be considered an Access Person only with respect to the Covered Fund. For purposes of this Code: . the term "security" shall include any option to purchase or sell, any security that is convertible or exchangeable for, and any other derivative interest relating to the security; . the terms "purchase" and "sale" of a security shall include, among other things, the writing of an option to purchase or sell a security; and . all other terms shall have the same meanings as under the Investment Company Act of 1940 ("1940 Act"), unless indicated otherwise. II. Statement of General Principles ------------------------------- In conducting personal investment activities, all Access Persons are required to act consistent with the following general fiduciary principles: . the interests of CSAM clients, including Covered Funds, must always be placed first, provided, however, that persons who are Access Persons only with respect to certain Covered Funds shall place the interests of such Covered Funds first; . all personal securities transactions must be conducted in such a manner as to avoid any actual or potential conflict of interest or any abuse of an individual's position of trust and responsibility; and . Access Persons must not take inappropriate advantage of their positions. CSAM has a separate policy and procedures designed to detect and prevent insider trading, which should be read together with this Code. Nothing contained in this Code should be interpreted as relieving any Access Person from the obligation to act in accordance with any applicable law, rule or regulation or any other statement of policy or procedure adopted by any Covered Company. III. Prohibitions ------------ The following prohibitions and related requirements apply to Advisory Persons and/or Access Persons (as stated) and accounts in which they have "Beneficial Ownership" (as defined in Exhibit 1). A. Short Term Trading. CSAM discourages Advisory Persons from short-term ------------------ trading (i.e., purchases and sales within a 60 day period), as such activity could be viewed as being in conflict with CSAM's general fiduciary principles. In no event, however, may an Advisory Person make a purchase and sale (or sale and purchase) of a security, including shares of Covered Funds and other U.S. registered investment companies (other than money market funds), within five "Business Days" (meaning days on which the New York Stock Exchange is open for trading). CSAM reserves the right to extend this prohibition period for the short-term trading activities of any or all Advisory Persons if CSAM determines that such activities are being conducted in a manner that may be perceived to be in conflict with CSAM's general fiduciary principles. B. Side-by-Side Trading. No Access Person may purchase or sell (directly or -------------------- indirectly) any security for which there is a "buy" or "sell" order pending for a CSAM client (except that this restriction does not apply to any Access Person who is neither an Advisory Person nor an officer of a Covered Fund, unless he or she knows, or in the ordinary course of fulfilling official duties with a Covered Fund should know, that there is a "buy" or "sell" order pending with respect to such security for a CSAM client), or that such Access Person knows (or should know) at the time of such purchase or sale: . is being considered for purchase or sale by or for any CSAM client; or . is being purchased or sold by or for any CSAM client. C. Blackout Periods. No Advisory Person may execute a securities transaction ---------------- within five Business Days before and one Business Day after a transaction in that security for a CSAM client. D. Public Offerings. No Advisory Person may directly or indirectly acquire ---------------- Beneficial Ownership in any security in a public offering in the primary securities market. E. Private Placements. No Advisory Person may directly or indirectly acquire ------------------ or dispose of any Beneficial Ownership in any privately placed security without the express prior written approval of a supervisory person designated in Section IX of this Code ("Designated Supervisory Person"). Approval will take into account, among other factors, whether the investment opportunity should be 2 reserved for a CSAM client, whether the opportunity is being offered to the Advisory Person because of his or her position with CSAM or as a reward for past transactions and whether the investment creates or may in the future create a conflict of interest. F. Short Selling. Advisory Persons are only permitted to engage in short ------------- selling for hedging purposes. No Advisory Person may engage in any transaction that has the effect of creating any net "short exposure" in an individual security. G. Futures Contracts. No Advisory Person may invest in futures contracts, ----------------- except through the purchase of options on futures contracts. H. Options. No Advisory Person may write (i.e., sell) any options except for ------- hedging purposes and only if the option is fully covered. I. Trading, Hedging and Speculation in Credit Suisse Group Securities. ------------------------------------------------------------------ Employees, officers and directors of CSAM may only hedge vested positions in CSG ------ stock through short sales or derivative instruments. Uncovered short exposure, through short sales or otherwise, is not permitted without the express prior written approval of a Designated Supervisory Person. J. Investment Clubs. No Advisory Person may participate in an "investment ---------------- club" or similar activity. K. Disclosure of Interest. No Advisory Person may recommend to or effect for ---------------------- any CSAM client any securities transaction without having disclosed his or her personal interest (actual or potential), if any, in the issuer of the securities, including without limitation: . any ownership or contemplated ownership of any privately placed securities of the issuer or any of its affiliates; . any employment, management or official position with the issuer or any of its affiliates; . any present or proposed business relationship between the Advisory Person and the issuer or any of its affiliates; and . any additional factors that may be relevant to a conflict of interest analysis. Where the Advisory Person has a personal interest in an issuer, a decision to purchase or sell securities of the issuer or any of its affiliates by or for a CSAM client shall be subject to an independent review by a Designated Supervisory Person. L. Gifts. No Advisory Person may seek or accept any gift of more than a de ----- minimis value (approximately $250 per year) from any person or entity that does business with or on behalf of a CSAM client, other than reasonable, business- related meals and tickets to sporting events, theater and similar activities. If any Advisory Person is unsure of the appropriateness of any gift, a Designated Supervisory Person should be consulted. M. Directorships and Other Outside Business Activities. No Advisory Person may --------------------------------------------------- serve on the board of directors/trustees of any issuer without the express prior written approval of a Designated Supervisory Person. Approval will be based upon a determination that the board 3 service would be consistent with the interests of CSAM clients. Where board service is authorized, Advisory Persons serving as directors will be isolated from those making investment decisions regarding the securities of that issuer through "informational barrier" or other procedures specified by a Designated Supervisory Person. No Advisory Person may be employed (either for compensation or in a voluntary capacity) outside his or her regular position with CSAM or its affiliated companies without the written approval of a Designated Supervisory Person. IV. Exempt Transactions ------------------- A. Exemptions from Prohibitions. ---------------------------- 1. Purchases and sales of securities issued or guaranteed by the U.S. government or any agencies or instrumentalities of the U.S. government, municipal securities, and other non-convertible fixed income securities, which are in each case rated investment grade, are exempt from the prohibitions described in paragraphs C and D of Section III if such transactions are made in compliance with the preclearance requirements of Section V(A) below. 2. Any securities transaction, or series of related transactions, which, because of the amount of securities involved and the market capitalization of the issuer, appear to present no reasonable likelihood of harm to, or conflict with, a CSAM Client, is exempt from the prohibition described in paragraph C of Section III if such transaction is made in compliance with the preclearance requirements of Section V(A) below. B. Exemptions from Prohibitions and Preclearance. The prohibitions described ---------------------------------------------- in paragraphs B through E of Section III and the preclearance requirements of Section V(A) shall not apply to: . purchases and sales of securities that are direct obligations of the U.S. government; . purchases and sales of securities of U.S. registered open-end investment companies; . purchases and sales of bankers' acceptances, bank certificates of deposit, and commercial paper; . purchases that are part of an automatic dividend reinvestment plan; . purchases and sales that are non-volitional on the part of either the Access Person or the CSAM client; . purchases and sales in any account maintained with a party that has no affiliation with the Covered Companies and over which no Advisory Person has, in the judgment of a Designated Supervisory Person after reviewing the terms and circumstances, direct or indirect influence or control over the investment or trading of the account; and . purchases by the exercise of rights offered by an issuer pro rata to all holders of a class of its securities, to the extent that such rights were acquired from the issuer. 4 . purchases of securities whereby the acquisition is a result of an entity converting from a mutual ownership to a stock ownership. . purchases and sales of debt securities of the following U.S. government agencies or U.S. government sponsored enterprises, excluding any form of mortgage-backed securities: FFCB, FHLB, FHLMC, FNMA, GNMA, SBA and SLMA. C. Further Exemptions. Express prior written approval may be granted by a ------------------ Designated Supervisory Person if a purchase or sale of securities or other outside activity is consistent with the purposes of this Code and Section 17(j) of the 1940 Act and rules thereunder (attached as Attachment A is a form to request such approval). For example, a purchase or sale may be considered consistent with those purposes if the purchase or sale is not harmful to a CSAM client because such purchase or sale would be unlikely to affect a highly institutional market, or because such purchase or sale is clearly not related economically to the securities held, purchased or sold by the CSAM client. V. Trading, Preclearance, Reporting and Other Compliance Procedures ---------------------------------------------------------------- A. Preclearance. Except as provided in Section IV, before any Advisory Person ------------ purchases or sells any security for any account in which he or she has Beneficial Ownership, preclearance shall be obtained in writing from a Designated Supervisory Person (attached as Attachment B is a form to request such approval). If clearance is given for a purchase or sale and the transaction is not effected on that Business Day, a new preclearance request must be made. B. Reporting. --------- 1. Initial Certification. Within 10 days after the commencement of his or her --------------------- employment with CSAM or his or her affiliation with any Covered Fund, each Access Person shall submit to a Designated Supervisory Person an initial certification in the form of Attachment C to certify that: . he or she has read and understood this Code of Ethics and recognizes that he or she is subject to its requirements; and . he or she has disclosed or reported all personal securities holdings in which he or she has any direct or indirect Beneficial Ownership and all accounts in which any securities are held for his or her direct or indirect benefit. 2. Annual Certification. In addition, each Access Person shall submit to a -------------------- Designated Supervisory Person an annual certification in the form of Attachment D to certify that: . he or she has read and understood this Code of Ethics and recognizes that he or she is subject to its requirements; . he or she has complied with all requirements of this Code of Ethics; and . he or she has disclosed or reported (a) all personal securities transactions for the previous year and (b) all personal securities holdings in which he or she has any direct or indirect 5 Beneficial Ownership and accounts in which any securities are held for his or her direct or indirect benefit as of a date no more than 30 days before the annual certification is submitted. Access Persons may comply with the initial and annual reporting requirements by submitting account statements and/or Attachment E to a Designated Supervisory Person within the prescribed periods. An Access Person who is not an Advisory Person is not required to submit initial or annual certifications, unless such Access Person is an officer of a Covered Fund. Each Advisory Person shall annually disclose all directorships and outside business activities (attached as Attachment F is a form for such disclosure). 3. Quarterly Reporting. All Advisory Persons and each Access Person who is an ------------------- officer of a Covered Fund shall also supply a Designated Supervisory Person, on a timely basis, with duplicate copies of confirmations of all personal securities transactions and copies of periodic statements for all securities accounts, including confirmations and statements for transactions and accounts described in Section IV(B) above (exempt from prohibitions and preclearance). Additionally, all Advisory Persons and each Access Person who is an officer of a Covered Fund shall also file a transaction report for all securities that were acquired or disposed of through gift or acquired through inheritance. This information must be supplied at least once per calendar quarter, within 10 days after the end of the calendar quarter. Each Access Person who is neither an Advisory Person nor an officer of a Covered Fund is required to report a transaction only if he or she, at the time of that transaction, knew (or in the ordinary course of fulfilling official duties with a Covered Fund should have known) that during the 15-day period immediately before or after the date of the transaction the security such person purchased or sold was purchased or sold by the Covered Fund or was being considered for purchase or sale by the Covered Fund. VI. Compliance Monitoring and Supervisory Review -------------------------------------------- A Designated Supervisory Person will periodically review confirmations from brokers to assure that all transactions effected by Access Persons for accounts in which they have Beneficial Ownership are in compliance with this Code and Rule 17j-1 under the 1940 Act. Material violations of this Code and any sanctions imposed shall be reported not less frequently than quarterly to the board of directors of each relevant Covered Fund and to the senior management of CSAM. At least annually, each Covered Company shall prepare a written report to the board of directors/trustees of each Covered Fund, and to the senior management of CSAM, that: . describes issues that have arisen under the Code since the last report, including, but not limited to, material violations of the Code or procedures that implement the Code and any sanctions imposed in response to those violations; and . certifies that each Covered Company has adopted procedures reasonably necessary to prevent Access Persons from violating the Code. 6 Material changes to this Code of Ethics must be approved by the Board of Directors of each Covered Fund no later than six months after the change is adopted. That approval must be based on a determination that the changes are reasonably necessary to prevent Access Persons from engaging in any conduct prohibited by the Code and Rule 17j-1 under the 1940 Act. Board approval must include a separate vote of a majority of the independent directors. VII. Sanctions --------- Upon discovering that an Access Person has not complied with the requirements of this Code, the senior management of the relevant Covered Company may impose on that person whatever sanctions are deemed appropriate, including censure; fine; reversal of transactions and disgorgement of profits; suspension; or termination of employment. VIII. Confidentiality --------------- All information obtained from any Access Person under this Code shall be kept in strict confidence, except that reports of transactions will be made available to the Securities and Exchange Commission or any other regulatory or self- regulatory organization to the extent required by law or regulation. IX. Further Information ------------------- The Designated Supervisory Persons are Hal Liebes and James W. Bernaiche or their designees in CSAM's legal and compliance department. Any questions regarding the Code of Ethics should be directed to a Designated Supervisory Person. Dated: December 1, 2000 7 EXHIBIT 1 CREDIT SUISSE ASSET MANAGEMENT, LLC CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC. WSW CAPITAL, INC. WARBURG PINCUS FUNDS, CREDIT SUISSE INSTITUTIONAL FUNDS, CSAM CLOSED-END FUNDS, DLJ MUTUAL FUNDS, DLJ HIGH YIELD BOND FUND CODE OF ETHICS Definition of Beneficial Ownership The term "Beneficial Ownership" as used in the attached Code of Ethics is to be interpreted by reference to Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 ("Rule"). Under the Rule, a person is generally deemed to have Beneficial Ownership of securities if the person (directly or indirectly), through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in the securities. The term "pecuniary interest" is generally defined in the Rule to mean the opportunity (directly or indirectly) to profit or share in any profit derived from a transaction in the securities. A person is deemed to have an "indirect pecuniary interest" within the meaning of the Rule: . in any securities held by members of the person's immediate family sharing the same household; the term "immediate family" includes any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, as well as adoptive relationships; . a general partner's proportionate interest in the portfolio securities held by a general or limited partnership; . a person's right to dividends that is separated or separable from the underlying securities; . a person's interest in certain trusts; and . a person's right to acquire equity securities through the exercise or conversion of any derivative security, whether or not presently exercisable./1/ For purposes of the Rule, a person who is a shareholder of a corporation or similar entity is not deemed to have a pecuniary interest in portfolio --- securities held by the corporation or entity, so long as the shareholder is not a controlling shareholder of the corporation or the entity and does not have or share investment control over the corporation's or the entity's portfolio. The term "control" means the power to exercise a controlling influence over management or policies, unless the power is solely the result of an official position with the company. __________________ /1/ The term "derivative security" is defined as any option, warrant, convertible security, stock appreciation right or similar right with an exercise or conversion privilege at a price related to an equity security (or similar securities) with a value derived from the value of an equity security. ATTACHMENT A CREDIT SUISSE ASSET MANAGEMENT, LLC CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC. WSW CAPITAL, INC WARBURG PINCUS FUNDS, CREDIT SUISSE INSTITUTIONAL FUNDS, CSAM CLOSED-END FUNDS, DLJ MUTUAL FUNDS, DLJ HIGH YIELD BOND FUND CODE OF ETHICS SPECIAL APPROVAL FORM 1. The following is a private placement of securities or other investment requiring special approval in which I want to acquire or dispose of Beneficial Ownership:
Name of Private --------------- Security or Other Date to be Amount to Record Purchase How Acquired ---------------- ---------- --------- ------ -------- ------------ Investment Acquired be Held Owner Price (Broker/Issuer) ---------- -------- ------- ----- ----- --------------- - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------
Would this investment opportunity be appropriate for a CSAM client? ___ Yes ___ No 2. I want to engage in the following outside business activity: ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ I certify, as applicable, that I (a) am not aware of any non-public information about the issuer, (b) have made all disclosures required by the Code of Ethics and (c) will comply with all reporting requirements of the Code. ______________________________ ________________________________ Signature Date ______________________________ Print Name ___ Approved ___ Not Approved ______________________________ _______________________________ Designated Supervisory Person Date ATTACHMENT B CREDIT SUISSE ASSET MANAGEMENT, LLC CODE OF ETHICS Personal Trading Preclearance Form This form should be filled out completely to expedite approval. ---------- 1. Security: _______________________________________ Ticker:__________________________________________ ____ Purchase ____ Sale 2. Number of shares/bonds/units/contracts: _________________________ 3. Account Name/Short name: _________________________ 4. Brokerage Firm and Account Number: _________________________ 5. Why do you want to purchase or sell? Is this an opportunity appropriate for CSAM clients? __________________________________________________________________________ 6. Are you aware of a CSAM Advisory Person who is buying or selling or who plans to buy or sell this security for his or her personal accounts or CSAM clients? ___ Yes ___ No If yes, who? __________________________________________________________________________ 7. If the amount is less than ___1000 shares, is the issuer market capitalization greater than $2.5 billion? ____ Yes ____ No I certify that I (a) am not aware of any non-public information about the issuer, (b) have made all disclosures required by the Code of Ethics and this trade otherwise complies with the Code, including the prohibition on investments in initial public offerings, and (c) will comply with all reporting requirements of the Code. ______________________________________ ___________________________________ Signature of Advisory Person Date ______________________________________ Print Name ___ Approved ___ Not Approved ______________________________________ ___________________________________ Designated Supervisory Person Date - Valid this Business Day only ATTACHMENT C CREDIT SUISSE ASSET MANAGEMENT, LLC CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC. WSW CAPITAL, INC WARBURG PINCUS FUNDS, CREDIT SUISSE INSTITUTIONAL FUNDS, CSAM CLOSED-END FUNDS, DLJ MUTUAL FUNDS, DLJ HIGH YIELD BOND FUND CODE OF ETHICS Initial Certification I certify that I: . have read and understood (1) the Code of Ethics, (2) the Legal and Compliance Manual for Credit Suisse Asset Management, LLC, (3) the Global Compliance Policy Manual for Credit Suisse Asset Management and (4) the Credit Suisse Asset Management, LLC Policy and Procedures Designed to Detect and Prevent Insider Trading and recognize that I am subject to their requirements; and . have disclosed or reported all personal securities holdings in which I had any direct or indirect Beneficial Ownership and accounts in which any securities were held for my direct or indirect benefit as of the date I commenced employment with CSAM or the date I became affiliated with a Covered Fund. __________________________________ _____________________________ Signature of Access Person Date __________________________________ Print Name ATTACHMENT D CREDIT SUISSE ASSET MANAGEMENT, LLC CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC. WSW CAPITAL, INC. WARBURG PINCUS FUNDS, CREDIT SUISSE INSTITUTIONAL FUNDS, CSAM CLOSED-END FUNDS, DLJ MUTUAL FUNDS, DLJ HIGH YIELD BOND FUND CODE OF ETHICS Annual Certification I certify that I: . have read and understood (1) the Code of Ethics, (2) the Legal and Compliance Manual for Credit Suisse Asset Management, LLC, (3) the Global Compliance Policy Manual for Credit Suisse Asset Management and (4) the Credit Suisse Asset Management, LLC Policy and Procedures Designed to Detect and Prevent Insider Trading (collectively, the "Compliance Policies") and recognize that I am subject to their requirements; . have complied with all requirements of the Compliance Policies in effect during the year ended December 31, 2___; and . have disclosed or reported all personal securities transactions for the year ended December 31, 2___ and all personal securities holdings in which I had any direct or indirect Beneficial Ownership and all accounts in which any securities were held for my direct or indirect benefit as of December 31, 2___. _________________________________ ______________________________ Signature of Access Person Date _________________________________ Print Name ATTACHMENT E CREDIT SUISSE ASSET MANAGEMENT, LLC - Personal Securities Account Declaration All Access Persons must complete each applicable item (1, 2, 3 or 4) and sign below. 1. The following is a list of securities/commodities accounts or open-ended mutual funds in which I have Beneficial Ownership: Broker/Dealer Account Title and Number - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2. The following is a list of securities/commodities accounts in which I had Beneficial Ownership that have been opened in the past year: Broker/Dealer Account Title and Number - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The following is a list of securities/commodities accounts in which I had Beneficial Ownership that have been closed in the past year: Broker/Dealer Account Title and Number - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3. The following is a list of any other securities or other investment holdings (securities acquired in a private placement or securities held in physical form) in which I have Beneficial Ownership (for securities held in accounts other than those disclosed in response to items 1 and 2):
Name of Private --------------- Security or ----------- Other Date Amount Record Purchase How Acquired ----- ---- ------ ------ -------- ------------ Investment Acquired Held Owner Price (Broker/Issuer) ---------- -------- ---- ----- ----- --------------- - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------
4. I do not have Beneficial Ownership in any securities/commodities (brokerage) accounts or otherwise have Beneficial Ownership of any securities or other instruments subject to the Code of Ethics. (Please initial.) _____________ Initials I declare that the information given above is true and accurate: ________________________________ _______________________________ Signature of Access Person Date _____________________ Print Name ATTACHMENT F CREDIT SUISSE ASSET MANAGEMENT, LLC CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC. WSW CAPITAL, INC WARBURG PINCUS FUNDS, CREDIT SUISSE INSTITUTIONAL FUNDS, CSAM CLOSED-END FUNDS, DLJ MUTUAL FUNDS, DLJ HIGH YIELD BOND FUND CODE OF ETHICS Outside Business Activities Outside business activities include, but are not limited to, the following: . self-employment; . receiving compensation from another person or company; . serving as an officer, director, partner, or consultant of another business organization (including a family owned company); and . becoming a general or limited partner in a partnership or owning any stock in a business, unless the stock is publicly traded and no control relationship exists. Outside business activities include serving with a governmental (federal, state or local) or charitable organization whether or not for compensation. All Advisory Persons must complete at least one choice (1 or 2) and sign below. 1. The following are my outside business activities:
Outside Description of Approved By Designated Supervisory Business Activity Activity Person (Yes/No) - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
2. I am not involved in any outside business activities. (Please initial) __________________ Initials I declare that the information given above is true and accurate: ________________________________ _____________________________ Signature of Advisory Person Date ________________________________ Print Name EX-99.(P)(2)(G) 26 0026.txt AMERICAN GENERAL CODE OF ETHICS EXHIBIT (p)(2)(g) American General Investment Management, L.P. American General Asset Management Corporation North American Funds CODE OF ETHICS AMERICAN GENERAL INVESTMENT MANAGEMENT, L.P. AMERICAN GENERAL ASSET MANAGEMENT CORPORATION NORTH AMERICAN FUNDS INVESTMENT COMPANY CODE OF ETHICS I. Applicability This Code of Ethics (the "Code") is applicable to all persons designated as "Access Persons" as defined herein of the subsidiary firms of American General Corporation ("AGC") that are registered as investment advisers ("AGC Investment Advisers") with the Securities and Exchange Commission (the "SEC"), and Access Persons of any Investment Company advised by such AGC Investment Advisers (collectively, "Covered Persons"). This Code is supplemented by a number of other AGC published compliance policies, including the Insider Trading Policy as discussed below. II. Overview of Regulatory Framework The AGC Investment Advisers supervise the investment portfolios of registered investment company accounts ("Investment Companies") and other investment advisory client accounts (collectively, "Advisory Clients"). Pursuant to investment advisory agreements with the Advisory Clients, the AGC Investment Advisers are authorized to take all actions necessary and appropriate to carry out the investment objectives and investment policies established for each Advisory Client, including, but not limited to, the purchase and sale of securities on each Advisory Client's behalf. In carrying out these contractual obligations, the AGC Investment Advisers acknowledge that they have a fiduciary duty to the Advisory Clients and that this duty is recognized under federal securities laws and regulations. In particular, the Investment Advisers Act of 1940, as amended (the "Advisers Act"), establishes as a matter of federal law the fiduciary status of investment advisers and regulates the relationship between investment advisers and their advisory clients. The Advisers Act, among other things, prohibits advisers from engaging in practices that constitute fraud or deceit upon advisory clients, including the practice of an adviser or an employee of an adviser trading privately in securities for personal benefit at the same time that its advisory clients are caused to trade in the same securities. The Investment Company Act of 1940, as amended (the "1940 Act"), regulates and controls the relationship between the AGC Investment Advisers and the Investment Companies that they manage. The 1940 Act specifically prohibits certain types of financial transactions, either directly or indirectly, involving both the Investment Company and the Investment Adviser, or officers and employees of the adviser, unless prior written approval is obtained from the SEC. The 1940 Act also requires every investment company and each investment adviser for such investment company to adopt a written code of ethics. The AGC Investment Advisers and each Investment Company have adopted this Code in compliance with both the Advisers Act and the 1940 Act. This Code, together with the compliance policies of the AGC Investment Advisers, is designed to detect and prevent violations of the Advisers Act, the 1940 Act and the rules thereunder. The Insider Trading and Securities Fraud Enforcement Act of 1988 (the "Insider Trading Act") requires all investment advisers to establish, maintain and enforce written policies and procedures designed to detect and prevent both insider trading and the misuse of material, nonpublic information. The AGC Investment Advisers have adopted policies and procedures designed to detect and prevent insider trading pursuant to the Insider Trading Act. Covered Persons should examine this Code in conjunction with the provisions of the Insider Trading Policy adopted by the AGC Investment Advisers. All personal securities transactions must be conducted consistent with the Code of Ethics and in a manner to avoid any actual or potential conflict of interest or any abuse of a Covered Person's position of trust and responsibility. In conducting personal securities transactions, Covered Persons must not take inappropriate advantage of their positions and must at all times place the interest of Advisory Clients first. Although the AGC Investment Advisers respect the personal freedom and privacy of their Covered Persons, they believe that, in the regulatory environment in which they operate, these considerations are outweighed in certain circumstances by the need to carry out their fiduciary duties to the fullest extent possible. Therefore, the AGC Investment Advisers have adopted the standards outlined below to prevent potential conflicts of interest between Covered Persons' personal business activities and the investment activities of Advisory Clients. III. Definitions The following definitions are applicable to terms used in the Code: 1. Access Person. Means (i) any director, trustee, officer or general partner of an AGC Investment Adviser or Advisory Client, (ii) any employee of an AGC Investment or Advisory Client (or of any company in a control relationship to such AGC Investment Adviser or Advisory Client) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a Security by an Advisory Client, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (iii) any natural person in a control relationship to an AGC Investment Adviser or an Advisory Client who obtains information concerning recommendations made to such Advisory Client with regard to the purchase or sale of a Security by such Advisory Client. 2 2. Beneficial Ownership. The term "Beneficial Ownership" includes accounts of a spouse or domestic partner, minor children and relatives living in an Access Person's home, as well as accounts of any other person if by reason of any contract, understanding, relationship, agreement or other arrangement the Access Person obtains benefits substantially equivalent to those of ownership, including benefits associated with survivorship or inheritance. For purposes of this Code, a prohibition or requirement applicable to any Access Person applies also to transactions in securities for any account for which the Access Person has a Beneficial Ownership, including transactions executed by the Access Person's spouse or relatives living in the Access Person's household, unless such account is specifically exempted from such requirement by the Chief Compliance Officer. A copy of a Release issued by the SEC on the meaning of the term "Beneficial Ownership" is available upon request, and should be studied carefully by any Access Person concerned with this definition before preparing any report. 3. Compliance Officer. The term "Compliance Officer" means a member of the Compliance Department of an AGC Investment Adviser who is responsible for monitoring compliance with regulatory requirements and this Code of Ethics, and any person designated by the Chief Compliance Officer who assists in performing the above described duties. 4. Considered for Purchase or Sale. A security is being considered for Purchase or Sale when a recommendation to purchase or sell the security has been made and communicated by an authorized Access Person in the course of his or her duties. With respect to the person making the recommendation, a security is being considered for Purchase or Sale when the person seriously considers making such a recommendation. 5. Control. The term "Control" has the same meaning as in Section 2(a)(9) of the 1940 Act (i.e., the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company). Any person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the voting securities of a company shall be presumed to control such company. 6. Exempt Officers, Directors and Trustees. The phrase "Exempt Officers, Directors and Trustees" means an officer, director or trustee who is not an "interested person" of an Investment Company within the meaning of Section 2(a)(19) of the 1940 Act. The determination as to the exempt status of any officer, director, or trustee shall be made by the Chief Compliance Officer. 7. Investment Company. The term "Investment Company" means an investment company affiliate of AGC which is registered with the SEC. 8. Investment Personnel. Means (i) any employee of an AGC Investment Adviser or Advisory Client (or of any company in a control relationship to such AGC Investment Adviser or Advisory Client) who, in connection with his or her regular 3 functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by such an Advisory Client, or (ii) any natural person who controls an AGC Investment Adviser or Advisory Client and who obtains information concerning recommendations made to such Advisory Client regarding the purchase or sale of securities by such Advisory Client. 9. Portfolio Manager. The term "Portfolio Manager" means a person with the direct responsibility and authority to make investment decisions affecting an Advisory Client, including, but not limited to, private placement, Investment Company and private account Portfolio Managers. 10. Security or Securities. The term "Security" shall have the same meaning as set forth in Section 2(a)(36) of the 1940 Act, except that it shall not include shares of registered open-end investment companies, securities issued or guaranteed by the U.S. Government, banker's acceptances, bank certificates of deposit, and commercial paper. Any prohibition or reporting obligation relating to a Security shall apply equally to any option, warrant or right to purchase or sell the Security and to any Security convertible into or exchangeable for such Security (i.e., a "Related Security"). IV. Standards of Conduct 1. Consistent with Rule 17j-1 under the 1940 Act, Access Persons, Investment Personnel and other affiliated persons of any Advisory Client shall not, in connection with the purchase or sale by such persons of a security held or to be acquired by any Advisory Client: (1) Employ a device, scheme or artifice to defraud the Advisory Client; (2) Make any untrue statement of a material fact to the Advisory Client or omit to state a material fact necessary in order to make the statements made to the Advisory Client, in light of the circumstances under which they are made, not misleading; (3) Engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon the Advisory Client; or (4) Engage in any manipulative practice with respect to the Advisory Client. 2. No Covered Person may engage, directly or indirectly, in any business transaction or arrangement for personal profit that is inconsistent with the best interests of Advisory Clients; nor shall he or she make use of any confidential information gained by reason of his or her affiliation with the AGC Investment Advisers or their affiliates in order to derive a personal profit for himself or herself or for any beneficial interest, in violation of the fiduciary duty owed by the AGC Investment Advisers and their affiliates to Advisory Clients. 3. No Access Person shall purchase or sell, directly or indirectly, any Security (or Related Security) in which he or she has, or by reason of the transaction acquires, any direct or indirect beneficial ownership and that he or she knows or should have 4 known, at the time of purchase or sale: (i) is being Considered for Purchase or Sale for an Advisory Client; or (ii) is being purchased or sold for an Advisory Client. Securities purchased or sold through basket trades for index-based accounts may be exempted from this prohibition with the approval of a Compliance Officer. 4. Access Persons and any other AGC employee may not trade in market options (puts or calls), warrants or other derivative instruments of AGC securities. Options granted to employees by AGC are not considered market options. 5. Access Persons who are senior officers (i.e., senior vice presidents and above) of an AGC Investment Adviser may not engage in market transactions involving AGC securities (including stock and stock options) from the last day of each fiscal quarter until three business days after AGC releases its earnings for that quarter. 6. When a Security in which a Portfolio Manager has Beneficial Ownership is recommended to his/her client for purchase, the Portfolio Manager's interest (including dates of acquisition and costs) must be disclosed to a Compliance Officer prior to the recommendation being made. Securities purchased or sold through basket trades for index-based accounts may be exempted from this requirement with the approval of a Compliance Officer. 7. No Covered Person may use material, nonpublic information when engaging in Securities transactions. For example, Covered Persons who are directors of closed-end Investment Companies may not purchase the closed-end Investment Company's Securities prior to a dividend distribution of which he or she has knowledge. Any Access Person who obtains material, confidential information (a) by reason of his or her employment; (b) by entering into a special confidential relationship in the conduct of his or her duties; or (c) inadvertently, shall immediately report the receipt of such information to a Compliance Officer. A person trades on the basis of material, nonpublic information if he is "aware" of the material, nonpublic information when making the purchase or sale. It is also possible for a person to trade on the basis of material, nonpublic information by breaching a family or other nonpublic relationship. These types of circumstances should be brought to the attention of a Compliance Officer. 8. Without obtaining prior written approval from a Compliance Officer, no Access Person shall dispense any reports, recommendations, or other information concerning Securities holdings or Securities transactions for Advisory Clients to anyone outside or inside the AGC Investment Advisers, unless such persons have a business need for this information as a part of their normal duties and activities. However, Access Persons may disclose this information (a) where there is a public report containing the same information; 5 (b) when the information is dispensed in accordance with compliance procedures established to prevent conflicts of interest between the AGC Investment Advisers and their Advisory Clients; or (c) when the information is reported to directors or trustees of Advisory Clients or to administrators or other fiduciaries of Advisory Clients and when these persons receive the information in the course of carrying out their fiduciary duties. Note: No such information may be dispensed without the prior approval of a Compliance Officer. 9. No Access Person shall accept directly or indirectly from a broker/dealer or any other person who transacts business with the AGC Investment Advisers or their Advisory Clients gifts, gratuities, preferential treatment, valuable consideration or favors that are excessive in value or frequency which might reasonably be expected to interfere with or influence the exercise of independent and objective judgment in carrying out such Access Person's duties as a fiduciary. Additional limitations and prohibitions on the receipt of gifts or entertainment can be found in AGC's Gift and Entertainment Policy. 10. No Access Person shall join an investment club, or enter into an investment partnership (including hedge funds) without obtaining prior written approval from a Compliance Officer. 11. Portfolio Managers are prohibited from buying or selling a Security, directly or indirectly, within seven calendar days before and after any Advisory Client trades in that same Security. All Access Persons are prohibited from buying or selling a Security, directly or indirectly, within seven calendar days after any Advisory Client trade and seven calendar days before any anticipated trade for an Advisory Client in that same Security. With the prior written approval of the Chief Compliance Officer, securities purchased or sold through basket trades for index- based accounts may be exempted from this prohibition. 12. Access Persons are prohibited from profiting, directly or indirectly, in the purchase and sale, or selling short and reselling, the same (or equivalent) Securities within 60 calendar days. Securities exempted from the prior clearance requirement as outlined in Section 1 of Article V below are also exempt from this prohibition. 13. Access Persons shall not purchase, directly or indirectly, any Securities, or by reason of a transaction, acquire direct or indirect beneficial ownership of Securities, in an initial public offering. 14. Research Analysts are required to obtain prior approval from a Compliance Officer prior to purchasing or selling an equity Security in an industry he or she follows unless the analyst has communicated his or her idea to the appropriate Portfolio Manager or Trader. 6 Note: The prohibitions outlined in sections 2, 10, 11, and 12 above do not apply to accounts over which a broker or Power of Attorney has full investment discretion, although the Compliance Department must be notified of such accounts in writing and must receive duplicate account statements and confirmations. V. Prior Clearance Requirements 1. No Access Person shall purchase or sell any Security without obtaining prior written clearance from a Compliance Officer. This includes direct or indirect purchases of the Security (e.g., purchases by an Access Person's spouse, purchases for investment club accounts, etc.). The following Securities are exempt from the prior clearance requirements (but not from personal trading reporting requirements): commodities and commodity futures, DRIPs or stock purchase plans sponsored by AGC or USLIFE Income Fund, Inc., other corporate DRIPs, index-based securities, transactions for thrift and/or incentive plans sponsored by AGC and (subject to applicable blackout periods) common stock of AGC. Any Exempt Officer, Director or Trustee may at his or her option request preclearance for any proposed purchase or sale. 2. Preclearance is effective only until the close of trading on the day it is granted, although "after-hours" Internet trades are permitted with proper pre-clearance, provided that the transaction is effected prior to midnight on the day it is granted. 3. Limit Orders must be pre-cleared on the day the order is placed with a broker, prior to the opening of the order. Limit orders are required to be pre-cleared on subsequent days so long as the order remains open. 4. No Access Person shall acquire directly or indirectly any Beneficial Ownership of Securities in a private placement without obtaining prior written approval of the Chief Compliance Officer. 5. No Access Person shall serve on the board of directors of a publicly traded company without obtaining prior written clearance from a Compliance Officer. 6. No Access Person shall: (i) act as an investment adviser to any other person or entity for compensation; or (ii) obtain a significant interest in a broker/dealer. VI. Exempt Purchases and Sales The prohibitions of Article V shall not apply to: 1. Purchases or sales effected in any account over which the Access Person has no direct or indirect influence or control. 2. Transactions in employee benefit plans or employer-sponsored investment programs. 3. Purchases which are part of an automatic dividend reinvestment plan. 4. Purchases or sales effected upon the exercise of rights issued by the issuer pro rata to all holders of a class of its Securities, to the extent the rights were acquired from such issuer. 7 5. Purchases or sales effected for accounts for which a broker or Power of Attorney has full investment discretion. The Compliance Department must be notified of such accounts in writing and must receive duplicate account statements and confirmations. 6. Other purchases or sales which are non-volitional (e.g., inherited securities or Corporate Actions). VII. Exceptions 1. Exceptions to this Code of Ethics will be granted only in rare circumstances, and then only with the prior written approval of the Chief Compliance Officer. Exceptions may be granted only when the Chief Compliance Officer believes that the potential for conflict is remote. Copies of all written approvals will be maintained by the Compliance Department and will describe the circumstances surrounding and the justification for granting the exception. For exceptions involving Covered Persons of an Investment Company, the Board of Directors of the Investment Company will be notified at least annually regarding any exceptions that have been granted pursuant to this provision. 2. The exceptions to the policies and procedures described in this Code of Ethics should not be viewed as necessarily applicable to the other codes or written standards of business conduct adopted by AGC or its subsidiaries which may also be applicable to Access Persons covered under this Code. Exceptions to these other requirements must be obtained independently. VIII. Reporting 1. Reporting Obligation. Every Access Person shall report to a Compliance Officer the information described in Section 3 below with respect to transactions in any Security in which such Access Person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership in the Security (e.g., purchases or sales by an Access Person's spouse). 2. Exempt Officers, Directors and Trustees. An Exempt Officer, Director or Trustee shall report a transaction in a Security if such Officer, Director or Trustee, at the time of the transaction, knew or, in the ordinary course of fulfilling his or her official duties as an Exempt Officer, Director or Trustee, should have known that, during the 15-day period immediately preceding or after the date of the transaction in a Security by the Officer, Director or Trustee, such Security was purchased or sold for an Advisory Client or was considered by such Advisory Client for purchase or sale. 3. Reporting. A. Subject to the exceptions provided by Section 2, each Access Person shall file with the Comnliance Officer the following reports: 8 i. Initial Holdings Report. No later than 10 days after the person becomes an Access Person, the Access Person shall file a report (an "Initial Holdings Report") with the Compliance Officer including the following information: (1) The title, number of shares and principal amount of each Security in which the Access Person had any direct or indirect beneficial ownership when the person became an Access Person; (2) The name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of the Access Person as of the date the person became an Access Person; and (3) The date that the report is submitted by the Access Person. ii Quarterly Report of Securities Transactions. No later than 10 days after the end of a calendar quarter, the Access Person shall file a report (a "Quarterly Report of Securities Transactions") with the Compliance Officer including the following information: (1) With respect to any transaction during the quarter in a Security in which the Access Person had any direct or indirect beneficial ownership: (a) The date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each Security involved; (b) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); (c) The price of the Security at which the transaction was effected; (d) The name of the broker, dealer or bank with or through whom the transaction was effected; and (e) The date that the report is submitted by the Access Person. (2) With respect to any account established by the Access Person in which Securities were held during the quarter for the direct or indirect benefit of the Access Person: (a) The name of the broker, dealer or bank with whom the Access Person established the account; (b) The date the account was established; and (c) The date the report is submitted by the Access Person. 9 iii. Annual Holding Reports. Annually, each Access Person shall provide a report (a "Personal Securities Holdings Disclosure") to the Compliance Officer including the following information (which information must be current as of a date no more than 30 days before the report is submitted): (1) The title, number of shares and principal amount of each Security in which the Access Person had any direct or indirect beneficial ownership; (2) The name of any broker, dealer or bank with whom the Access Person maintains an account in which any securities are held for the direct or indirect benefit of the Access Person; and (3) The date the report is submitted by the Access Person. 4. Disclaimer of Beneficial Ownership. Quarterly reports of securities transactions shall not be construed as an admission by the person making the report that he or she has any direct or indirect Beneficial Ownership in the Security to which the report relates. 5. Notification of Reporting Obligation. The quarterly report of securities transactions is designed to comply with the requirements of the SEC under the Advisers Act and the 1940 Act. Every Access Person has a continuing obligation to file such reports in a timely manner. Information supplied on the reports is available for inspection by the SEC at any time. 6. Disclosure of Personal Holdings. All Access Persons must disclose all personal Securities holdings upon commencement of employment and thereafter on an annual basis. 7. Disclosure of Interest in Transaction. No Covered Person shall recommend any securities transaction for any Advisory Client without having disclosed his or her interest, if any, in such Securities or the issuer thereof, including without limitation: (a) his or her direct or indirect Beneficial Ownership of any Securities of such issuer; (b) any contemplated transaction by such person in such Securities; (c) any position with the issuer or its affiliates; (d) any present or proposed business rela- tionship between the issuer or its affiliates and such person or any party in which such person has a significant interest; and (e) any factors about the transaction that are potentially relevant to a conflicts of interest analysis. 8. Confidentiality. All information obtained from any Covered Persons hereunder shall be kept in strict confidence, except that reports of securities transactions will be made available to the SEC or any other regulatory or self-regulatory organization to the extent required by law or regulation. 9. The Compliance Officer shall, with respect to each Investment Company, annually furnish a written report to the board of trustees of such Investment Company (i) describing rising under this Code since the last report to the board, including infor- mation about material violations of the Code, sanctions imposed in response to 10 such material violations, changes made to the Code, and any proposed changes to the Code; and (ii) certifying that the AGC Investment Adviser has adopted such procedures as are reasonably necessary to prevent Access Persons from violating the Code. In addition, all material changes to this Code shall be submitted for approval to the board of trustees of each Investment Company no later than three months after such material change has been adopted by the AGC Investment Adviser, which approval must be obtained no later than six months after such adoption. IX Certifications 1. All Access Persons, within 10 days of becoming an Access Person, shall certify that they have: (a) received a copy of this Code; (b) read and understood the provisions of this Code; and (c) agreed to serve the Advisory Clients in accordance with the terms of this Code. 2. All Access Persons shall annually certify that they have: (a) read and understood this Code; (b) complied with the principles of this Code; and (c) disclosed or reported all personal securities transactions which are required by the Code to be disclosed or reported. X. Records of Securities Transactions Every Access Person shall direct his or her broker to supply the Chief Compliance Officer, on a timely basis, with duplicate copies of confirmations of all personal Securities transactions and copies of periodic statements for brokerage accounts. Records A. Each AGC Investment Adviser shall maintain records in the manner and to the extent set forth below, which records shall be available for appropriate examination by representatives of the Securities and Exchange Commission. i. A copy of this Code and any other Code which is, or at any time within the past five years has been, in effect shall be maintained in an easily accessible place. ii. A record of any violation of this Code and of any action taken as a result of such violation shall be maintained in an easily accessible place for a period of not less than five years following the end of the fiscal year in which the violation occurs. iii. A copy of each report made pursuant to this Code by any Access Person shall be maintained for a period of not less than five years from the end of the fiscal year in which it is made, the first two years in an easily accessible place. 11 iv. A list of all persons who are, or within the past five years have been, required to make reports pursuant to this Code, or who are or were responsible for reviewing these reports, shall be maintained in an easily accessible place. V. A copy of each report furnished to an Investment Company shall be maintained for a period of not less than five years following the end of the fiscal year in which the violation occurred, the first two years in an easily accessible place. vi. A record of any decision, and the reasons supporting such decision, to approve the acquisition by Investment Personnel of any Security for a period of not less than five years following the end of the fiscal year in which such approval is granted. XI. Sanctions 1. Any violation of this Code of Ethics shall be reported to and considered by the Chief Compliance Officer and, in his or her discretion, by senior management of the relevant AGC Investment Adviser. Such individuals or bodies shall impose sanctions as deemed appropriate in the circumstances, and may include disgorging of profits and termination of employment of the violator. 2. With respect to any Investment Company, the Chief Compliance Officer shall furnish annually to the Investment Company's Board of Directors/Trustees a report regarding the administration of this Code of Ethics, including any material violations, and summarizing any reports filed hereunder. If the report indicates that any changes are advisable, the Board of Directors/Trustees shall make an appropriate recommendation to the Chief Compliance Officer. 12 EX-99.(P)(2)(H) 27 0027.txt JOSEPHTHAL CODE OF ETHICS EXHIBIT (P)(2)(h) JOSEPHTHAL & CO. INC. INVESTMENT ADVISOR CODE OF ETHICS I. Applicability This Code of Ethics (the "Code") is applicable to all persons designated as "Access Persons" of Josephthal & Co., Inc. ("Josephthal") that are registered as investment advisers ("Josephthal Investment Advisors") with the Securities and Exchange Commission (the "SEC") and any Portfolio Manager or Investment Personnel. II. Overview of Regulatory Framework Josephthal supervises the investment portfolio of registered investment company accounts ("Investment Companies") and other investment advisory client accounts (collectively, "Advisory Clients"). Pursuant to investment advisory agreements with the Advisory Clients, Josephthal is authorized to take all actions necessary and appropriate to carry out the investment objectives and investment policies established for each Advisory Client, including, but not limited to, the purchase and sale of securities on each Advisory Client's behalf. In carrying out these contractual obligations, Josephthal acknowledges that they have a fiduciary duty to the Advisory Clients and that this duty is recognized under federal securities laws and regulations. In particular, the Investment Advisers Act of 1940, as amended (the "Advisers Act"), establishes as a matter of federal law the fiduciary status of investment advisers and regulates the relationship between investment advisers and their advisory clients. The Advisers Act, among other things, prohibits advisers from engaging in practices that constitute fraud or deceit upon advisory clients, including the practice of an adviser or an employee of an adviser trading privately insecurities for personal benefit at the same time that its advisory clients are caused to trade in the same securities. The Investment Company Act of 1940, as amended (the "1940 Act"), regulates and controls Josephthal as an investment adviser. The 1940 Act specifically prohibits certain types of financial transactions, either directly or indirectly, involving Josephthal or its officers and employees, unless prior written approval is obtained from the SEC. The 1940 Act also requires every investment company and each investment adviser for such investment company to adopt a written code of ethics. Josephthal has adopted this Code in compliance with both the Advisers Act and the 1940 Act. This Code, together with the compliance policies and written supervisory procedures, is designed to detect and prevent violations of the Adviser's Act and the 1940 Act. All personal securities transactions must be conducted consistent with the Code and in a manner to avoid any actual or potential conflict of interest or any abuse of an Access Person's position of trust and responsibility. In conducting personal securities transactions, Access Persons must not take inappropriate advantage of their positions and must at all times place the interest of Advisory Clients first. Josephthal has adopted the standards outlined below to prevent potential conflicts of interest between Access Person's personal business activities and the investment activities of Advisory Clients. III. Definitions The following definitions are applicable to terms used in the Code: 1. Access Person. The term "Access Person" means any individual ------------- affiliated with Josephthal or its Advisory Client in a control relationship who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security for an Advisory Client, or whose functions relate to the making of any recommendations with respect to these purchases or sales. 2. Adviser Supervisor. The term "Adviser Supervisor" means a qualified ------------------ individual, designated by Josephthal to supervise Access Persons and monitor compliance with the firm's policies and procedures and regulatory requirements. 3. Beneficial Ownership. The term "Beneficial Ownership" includes -------------------- accounts of a spouse or domestic partner, minor children and relatives living in an Access Person's home, as well as accounts of any other person if by reason of any contract, understanding, relationship, agreement or other arrangement the Access Person obtains benefits substantially equivalent to those of ownership, including benefits associated with survivorship or inheritance. For purposes of this Code, a prohibition or requirement applicable to any Access Person applies also to transactions in securities for any account for which the Access Person has a Beneficial Ownership, including transactions executed by the Access Person's spouse or relatives living in the Access Person's household, unless such account is specifically exempted from such requirement by the Adviser Supervisor. A copy of a Release issued by the SEC on the meaning of the term "Beneficial Ownership" is available upon request, and should be studied by any Access Person concerned with this definition before preparing any report. 4. Considered for Purchase or Sale. A security is being "Considered for ------------------------------- Purchase or Sale" when a recommendation to purchase or sell the security has been made and communicated by an authorized Access Person in the course of his or her duties. With respect to the person making the recommendation, a security is being "Considered for Purchase or Sale" when the person seriously considers making such a recommendation. 5. Control. The term "Control" has the same meaning as in Section 2 ------- (a)(9) of the 1940 Act (i. e., the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company). Any person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the voting securities of a company shall be presumed to control such company. 6. Exempt Officers, Directors and Trustees. The phrase "Exempt Officers, --------------------------------------- Directors and Trustees" means an officer, director, or trustee who is not an "interested person" of an Investment Company within the meaning of Section 2(a)(19) of the 1940 Act. The Adviser Supervisor shall make the determination as to the exempt status of any officer, director, or trustee. 7. Investment Personnel. The term "Investment Personnel" includes those -------------------- employees who are authorized to make investment decisions or to recommend securities transactions on behalf of clients, research analysts, and employees who work directly with portfolio managers and traders in an assistant capacity. 8. Portfolio Manager. The term "Portfolio Manager" means a person with ----------------- the direct responsibility and authority to make investment decisions affecting an Advisory Client, including, but not limited to, private placement and private account Portfolio Managers. 9. Security or Securities. The term "Security" shall have the same ---------------------- meaning as set fourth I Section 2(a)(36) of the 1940 Act, except that it shall not include securities issued or guaranteed by the U. S. Government, banker's acceptances, bank certificates of deposit, and commercial paper. Any prohibition or reporting obligation relating to a Security shall apply equally to any option, warrant, or right to purchase or sell the Security and to any Security convertible into or exchangeable for such Security (i. e., a "Related Security"). IV. Standards of Conduct 1. No Access Person may engage, directly or indirectly, in any business transaction or arrangement for personal profit that is inconsistent with the best interests of Advisory Clients; nor shall he or she make use of any confidential information gained by reason of his or her affiliation with the Josephthal Investment Adviser or its affiliate in order to derive a personal profit for himself or herself or for any beneficial interest, in violation of the fiduciary duty owed by Josephthal and its affiliates to Advisory Clients. 2. No Access Person shall purchase or sell, directly or indirectly, any Security (or Related Security) in which he or she has, or by reason of the transaction acquires, any direct or indirect beneficial ownership and that he or she knows or should have known, at the time of purchase or sale: (i) is being Considered for Purchase or Sale for an Advisory Client; or (ii) is being purchased or sold for an Advisory Client. Securities purchased or sold through basket trades for index-based accounts may be exempted from this prohibition with the approval of the Adviser Supervisor. 3. When a Security in which a Portfolio Manager has Beneficial Ownership is recommended to his/her client for purchase, the Portfolio Manager's interest (including dates of acquisition and costs) must be disclosed to the Adviser Supervisor prior to the recommendation being made. Securities purchased or sold through basket trades for index-based accounts may be exempted from this requirement with the approval of the Adviser Supervisor. 4. No Access Person may use material, nonpublic information when engaging in Securities transactions. Any Access Person who obtains Material, confidential information (a) by reason of his or her employment; (b) by entering into a special confidential relationship in the conduct of his or her duties; or (b) inadvertently, shall immediately report the receipt of such information to the Adviser Supervisor. 5. Without obtaining prior written approval from the Adviser Supervisor, no Access Person shall dispense any reports, recommendations, or other information concerning Securities holdings or Securities transactions for Advisory Clients to anyone outside or inside Josephthal, unless such persons have a business need for this information as a part of their normal duties and activities. However, Access Persons may disclose this information (a) where there is a public report containing the same information; (b) when the information is dispensed in accordance with compliance procedures established to prevent conflicts of interest between Josephthal and its Advisory Clients; or (c) when the information is reported to directors or trustees of Advisory Clients or to administrators or other fiduciaries of Advisory Clients and when these persons receive the information in the course of carrying out their fiduciary duties. Note: No such information may be dispensed without the prior approval of the Advisor Supervisor. 6. No Access Person shall accept directly or indirectly from a broker /dealer or any other person who transacts business with Josephthal or its Advisory Clients gifts, gratuities, preferential treatment, valuable consideration or favors that are excessive in value or frequency which might reasonably be expected to interfere with or influence the exercise of independent and objective judgment in carrying out such Access Person's duties as a fiduciary. Additional limitations and prohibitions on the receipt of gifts or entertainment can be found in Josephthal's Policy Handbook. 7. No Access Person shall join an investment club, or enter into an investment partnership (including hedge funds) without first obtaining written approval from the Adviser Supervisor and Chief Compliance officer. 8. Portfolio Managers are prohibited from buying or selling a Security, directly or indirectly in a personal or beneficially owned account, within seven calendar days before and after an Advisory Client trades in that same Security. All Access Persons are prohibited from buying or selling a Security, directly or indirectly in a personal or beneficially owned account, within seven calendar days before any anticipated trade for an Advisory Client in that same Security. Securities purchased or sold through basket trades for index-based accounts may be exempted from this prohibition upon the prior written consent of the Adviser Supervisor. 9. Access Persons are prohibited from profiting, directly or indirectly, in the purchase and sale, or sale and purchase, of the same (or equivalent) Securities within 60 calendar days. Securities exempted from the prior clearance requirement as outlined in (Article V) below are also exempt for this prohibition. 10. Access Persons shall not purchase, directly or indirectly, any Securities in a personal or beneficially owned account, or by reason of a transaction, acquire direct or indirect beneficial ownership of Securities, in an initial public offering without the prior approval of the Adviser Supervisor and the Chief Compliance officer. V. Pre-Clearance Requirements 1. No Access Person shall purchase or sell any Security in a personal or beneficially owned account without obtaining prior approval from the Adviser Supervisor. The Adviser Supervisor will document such approval by initialing the order ticket. This requirement included direct or indirect purchases of the Security except Securities issued by the government of the United States, bankers acceptances, bank certificates of deposit, commercial paper, shares of registered open- ended mutual funds, and high quality short term debt instruments, including repurchase agreements. "High quality short-term debt instrument" means any instrument that has a maturity at issuance of less than 366 days and that is rated in one of the two highest rating categories by a national recognized rating organization (NRRO). 2. Access Persons (not including Fund Managers) who are Department Heads, Managing Directors, or corporate officers of Josephthal are not required to have their purchases or sales pre-cleared. The Compliance Department monitors the purchases and sales of these individuals and will recommend appropriate action in the event it detects possible Code of Conduct violations. 3. Pre-clearance is effective only until the close of trading on the day it is granted, although "after-hours" Internet trades are permitted with proper pre-clearance, provided that the transaction is effected prior to midnight on the day it is granted. 4. Limit Orders must be pre-cleared on the day the order is placed with a broker, prior to the opening of the order. Limit orders are to be pre-cleared on subsequent days so long as the order remains open. 5. No Access Person shall acquire directly or indirectly any Beneficial Ownership of Securities in a private placement without obtaining prior written approval of the Adviser Supervisor. 6. No Access Person shall serve on the board of directors of a publicly traded company without obtaining prior clearance from the Adviser Supervisor and General Counsel. The Chief Compliance Officer must be advised of any approvals. 7. No Access Person shall (i) act as an investment adviser to any other person or entity for compensation; or (ii) obtain a significant interest in a broker/dealer. VI. Exempt Purchases and Sales The prohibitions of Articles IV and V shall not apply to: 1. Purchases or sales effected in any account over which the Access Person has no direct or indirect influence or control. 2. Transactions in employee benefit plans or employer-sponsored investment programs. 3. Purchases, which are part of an automatic dividend reinvestment plan. 4. Purchases or sales effected upon the exercise of rights issued by the issuer pro rata to all holders of a class of its Securities, to the extent the rights were acquired from such issuer. 5. Other purchases or sales which are non-volitional (e. g., inherited securities or Corporate Actions). VII. Exceptions 1. Exceptions to this Code will be granted only in rare circumstances, and then only with the prior written approval of the Advisor Supervisor. Exceptions may be granted only when the Advisor Supervisor believes that the potential for conflict is remote. Copies of all written approvals will be maintained by the Advisor Supervisor and will describe the circumstances surrounding and the justification for granting the exception. 2. The exceptions to the policies and procedures described in this Code should not be viewed as necessarily applicable to the other codes or written standards of business conduct adopted by Josephthal or its subsidiaries or affiliates which may also be applicable to Access Persons covered under this Code. Exceptions to these other requirements must be obtained independently. VIII. Reporting 1. Reporting Obligation. Every Access Person shall report to the Adviser -------------------- Supervisor, the information described in Section 3 below with respect to transactions in any Security in which such Access Person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership in the Security (e. g., purchases or sales by an Access Person's spouse). 2. Exempt Officers, Directors, and Trustees. An Exempt Officer, Director ---------------------------------------- or Trustee shall report a transaction in a Security if such Officer, Director, or Trustee, at the time of the transaction, knew or, in the ordinary course of fulfilling his or her official duties as an Exempt Officer, Director, or Trustee, should have known that, during the 15- day period immediately preceding or after the date of the transaction in a Security by the Officer, Director, or Trustee, such Security was purchased or sold or an Advisory Client or was considered by such Advisory Client for purchase or sale. 3. Form of Report. Quarterly reports of securities transactions shall be made no later than 10 calendar days after the end of the calendar quarter in which the transaction to which the report relates was effected, and shall contain the following information: (a) The date of the transaction, the issuer's name and the number of shares, and/or the principal amount of the shares involved; (b) The nature of the transaction, i. e., purchase, sale or any other type of acquisition or disposition; (c) The price at which the transaction was effected; and (d) the name of the broker, dealer, or bank with or through whom the transaction was affected. All reports shall be made on an appropriate form, as distributed by the Advisor Supervisor. Originals (or duplicate copies) of brokerage statements may be attached to a signed report in lieu of setting forth the information otherwise required. 4. Disclaimer of Beneficial Ownership. Quarterly reports of securities ---------------------------------- transactions shall not be construed as an admission by the person making the report that he or she has any direct or indirect Beneficial Ownership in the Security to which the report relates. 5. Notification of Reporting Obligation. The quarterly report of ------------------------------------ securities transactions is designed to comply with the requirements of the SEC under the Advisors Act and the 1940 Act. Every Access Person has a continuing obligation to file such reports in a timely manner. Information supplied on the reports is available for inspection by the SEC at any time. 6. Disclosure of Personal Holdings. All Access Persons must disclose all ------------------------------- personal Securities holdings upon commencement of employment and thereafter on any annual basis. 7. Disclosure of Interest in Transaction. No Access Person shall ------------------------------------- recommend any securities transaction for any Advisory Client without having disclosed his or her interest, if any, in such Securities or the issuer thereof, including without limitation: (a) his or her direct or indirect Beneficial Ownership of any Securities of such issuer; (b) any contemplated transaction by such person in such Securities; (c) any position with the issuer or its affiliates; (d) any present or proposed business relationship between the issuer or its affiliates and such person or any party in which such person has a significant interest; and (e) any factors about the transaction that are potentially relevant to a conflicts of interest analysis. 8. Confidentiality. All information obtained from any Access Persons --------------- hereunder shall be kept in strict confidence, except that reports of securities transactions will be made available to the SEC or any other regulatory or self-regulatory organization to the extent required by law or regulation. IX. Certifications 1. All Access Persons, within 10 days of becoming an Access Person, shall certify that they have: (a) received a copy of this Code; (b) read and understood the provisions of this Code; and (c) agreed to serve the Advisory Clients in accordance with the terms of this Code. 2. All Access Persons shall annually certify that they have: (a) read and understood this Code; (b) complied with the principles of this Code; and (c) disclosed or reported all personal securities transactions, which are required by the Code to be disclosed or reported. X. Records of Securities Transactions Every Access Person shall direct his or her broker to supply the Adviser Supervisor, on a timely basis, with duplicate copies of confirmations of all personal Securities transactions and copies of periodic statements for brokerage accounts in cases where personal or beneficially owned accounts are held outside of the Firm. XI. Sanctions Any violation of this Code shall be reported to and considered by the Chief Compliance Officer and, in his or her discretion, by senior management of Josephthal. Such individuals or bodies shall impose sanctions as deemed appropriate in the circumstances, and may include disgorging of profits and termination of employment of the violator. EX-99.(P)(2)(I) 28 0028.txt MORGAN STANLEY CODE OF ETHICS EXHIBIT (p)(2)(i) MORGAN STANLEY DEAN WITTER ASSET MANAGEMENT CODE OF ETHICS - ----------------------- (Print Name) MORGAN STANLEY DEAN WITTER ADVISORS INC. MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC. MORGAN STANLEY DEAN WITTER INVESTMENT GROUP INC. MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT LIMITED MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT COMPANY MORGAN STANLEY ASSET & INVESTMENT TRUST MANAGEMENT CO., LIMITED MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT PRIVATE LIMITED MORGAN STANLEY DEAN WITTER DISTRIBUTORS INC. MILLER ANDERSON & SHERRERD, LLP MORGAN STANLEY & CO. INCORPORATED MAS FUND DISTRIBUTION, INC. MORGAN STANLEY DEAN WITTER SERVICES COMPANY INC. Effective January 29, 2001 I. Introduction Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors"), Morgan Stanley Dean Witter Investment Management Inc. ("MSDWIM"), Morgan Stanley Dean Witter Investment Group Inc. ("MSDWIG"), Morgan Stanley Dean Witter Investment Management Limited ("MSDWIM-Ltd"), Morgan Stanley Dean Witter Investment Management Company ("MSDWIM-Singapore"), Morgan Stanley Asset & Investment Trust Management Co., Limited ("MSAITM-Tokyo"), Morgan Stanley Dean Witter Investment Management Private Limited ("MSDWIM-Mumbai") and Miller Anderson & Sherrerd, LLP ("MAS") (each, an "MSDW Affiliated Adviser" and collectively, the "MSDW Affiliated Advisers") are subsidiaries of Morgan Stanley Dean Witter & Co. ("MSDW"). Each MSDW Affiliated Adviser, except for MSDWIG, is an investment adviser or manager of certain registered investment companies (each a "Fund", and collectively, the "Funds"). The MSDW Affiliated Advisers also serve as investment advisers to other clients, including institutional clients and individuals (each, a "Managed Account" and collectively, the "Managed Accounts"). This Code of Ethics (the "Code") is adopted by each MSDW Affiliated Adviser in keeping with the general principles and objectives set forth in Sections II. and III. below, and to enforce the highest legal and ethical standards in light of their fiduciary obligations to the shareholders of the Funds and the Managed Accounts. It has also been adopted by: (i) Morgan Stanley Dean Witter Services Company Inc. ("Services"), a wholly owned subsidiary of MSDW Advisors; and (ii) Morgan Stanley Dean Witter Distributors Inc., and Morgan Stanley & Co. Incorporated, each 1 a wholly-owned subsidiary of MSDW, and MAS Fund Distribution, Inc., a wholly- owned subsidiary of MAS (each, a "Distributor" and collectively, the "Distributors"), to apply to their directors, officers and employees who are Access Persons or Covered Employees (as those terms are defined in Section IV. below). The directors, officers and employees of each MSDW Affiliated Adviser, Services and the Distributors are also referred to the "Morgan Stanley Dean Witter Code of Conduct - Securities and Asset Management Businesses" (the "Code of Conduct"), the requirements of which all Employees are subject to. II. General Principles A. Shareholder and Client Interests Come First Every Employee (as defined in Section IV. below) of an MSDW Affiliated Adviser, Services and the Distributors owes a fiduciary duty to the shareholders of the Funds and to the Managed Accounts. This means that in every decision relating to investments, every Employee must recognize the needs and interests of the Fund shareholders and the Managed Accounts, and be certain that at all times the interests of the shareholders and other clients are placed ahead of any personal interest. B. Avoid Actual and Potential Conflicts of Interest The restrictions and requirements of this Code are designed to prevent behavior which actually or potentially conflicts, or raises the appearance of actual or potential conflict, with the interests of the Fund shareholders or the Managed Accounts. It is of the utmost importance that the Personal Securities Transactions (as defined in Section VI., sub-section A., below) of Employees of each MSDW Affiliated Adviser, Services and the Distributors be conducted in a manner consistent with both the letter and spirit of this Code, including these principles, to ensure the avoidance of any such conflict of interest, or abuse of an individual's position of trust and responsibility. C. Avoid Undue Personal Benefit Employees of each MSDW Affiliated Adviser, Services and the Distributors must ensure that they do not acquire undue personal benefit or advantage as a result of the performance of their duties as they relate to the Funds or the Managed Accounts. III. Objective Rule 17j-1 under the Investment Company Act of 1940, as amended (the "1940 Act"), makes it unlawful for certain persons associated with investment advisers or principal underwriters of investment companies to engage in conduct which is deceitful, 2 fraudulent, or manipulative, or which involves false or misleading statements, in connection with the purchase or sale of a security held or proposed to be acquired by a registered investment company. In addition, Section 204A of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), requires investment advisers to establish, maintain and enforce written policies and procedures designed to prevent misuse of material non-public information. The objective of this Code is to maintain the behavior of Employees within the general principles set forth above, as well as to prevent such persons from engaging in conduct proscribed by Rule 17j-1 under the 1940 Act and Section 204A of the Advisers Act. The designated Compliance Group for each MSDW Affiliated Adviser (each, a "Local Compliance Group") will identify all Access Persons and Covered Employees and notify them of their pre-clearance and reporting obligations at the time they become an Access Person or a Covered Employee. IV. Access Persons and Covered Employees "Access Persons" include all directors, officers and employees of an MSDW Affiliated Adviser, Services or the Distributors, and such other persons that may be so deemed by the Local Compliance Group from time to time, except those individuals who meet the following criteria: (i) directors and officers of the Distributors that do not devote substantially all of their working time to the activities of an MSDW Affiliated Adviser or Services; (ii) directors and officers of the Distributors that do not, in connection with their regular functions and duties, participate in, obtain information with respect to, or make recommendations as to, the purchase and sale of securities on behalf of a Fund or Managed Account; and (iii) directors and officers of Distributors that do not have access to information regarding the day-to-day investment activities of an MSDW Affiliated Adviser; such persons are, however, subject to the Code of Conduct. In addition, any Employee of MSDWIM, MSDWIG, MSDWIM-Ltd., MSDWIM-Singapore, MSAITM-Tokyo, MSDWIM-Mumbai or MAS who is not an officer and does not in connection with their regular functions and duties, participate in, obtain information with respect to, or make recommendations as to, the purchase and sale of securities on behalf of a Fund or Managed Account (a "Covered Employee") shall be exempt from the requirements contained in Section VI., sub-section D.2.(a) (Initial Listing of Securities Holdings and Brokerage Accounts Report), but shall otherwise remain subject to all other provisions contained herein pertaining to Access Persons. Access Persons and Covered Employees of each MSDW Affiliated Adviser, Services or the Distributors on leave of absence will not be subject to the pre-clearance and reporting provisions of the Code, provided that during the leave period the Access Person or Covered Employee does not engage in activities of the nature described in (ii) and (iii) above. Access Persons and Covered Employees will be referred to collectively as "Employees" throughout this Code to the extent they are subject to the same requirements or restrictions. V. Grounds for Disqualification from Employment Pursuant to the terms of Section 9 of the 1940 Act, no director, officer or employee of an MSDW Affiliated Adviser, Services or the Distributors may become, or continue to 3 remain, an officer, director or employee without an exemptive order issued by the Securities and Exchange Commission if such director, officer or employee: A. within the past ten years has been convicted of any felony or misdemeanor (i) involving the purchase or sale of any security; or (ii) arising out of their conduct as an affiliated person, salesman or employee of any investment company, bank, insurance company or entity or person required to be registered under the Commodity Exchange Act; or B. is or becomes permanently or temporarily enjoined by any court from: (i) acting as an affiliated person, salesman or employee of any investment company, bank, insurance company or entity or person required to be registered under the Commodity Exchange Act; or (ii) engaging in or continuing any conduct or practice in connection with any such activity or in connection with the purchase or sale of any security. It is your obligation to immediately report any conviction or injunction falling within the foregoing provisions to the Chief Legal Officer of MSDW Asset Management. VI. Personal Securities Transactions A. Prohibited Conduct No Employee shall buy or sell any "Covered Security" (defined as all securities with the exception of those described in sub-section C.3.) for his/her own account or for an account in which the individual has, or as a result of the transaction acquires, any direct or indirect "beneficial ownership" (as defined in sub-section C. 4.) (referred to herein as a "Personal Securities Transaction") unless: 1. pre-clearance of the transaction has been obtained; and 2. the transaction is reported in writing to the Local Compliance Group in accordance with the requirements of sub-section D. below. B. Restrictions and Limitations on Personal Securities Transactions Except where otherwise indicated, the following restrictions and limitations govern investments and personal securities transactions by Employees: 1. Securities purchased may not be sold until at least 30 calendar days from the purchase trade date and may not be sold at a profit until at least 60 calendar days from the purchase trade date. Securities sold may not be repurchased until at least 30 calendar days from the sale trade date. In addition, securities sold may not be purchased at a lower price until at least 60 calendar days from the sale trade date. Any violation may result in 4 disgorgement of all profits from the transactions as well as other possible sanctions. 2. No short sales are permitted. 3. No transactions in options or futures are permitted, except that listed options may be purchased, and covered calls written. No option may be purchased or written if the expiration date is less than 60 calendar days from the date of purchase. No option position may be closed at a profit less than 60 calendar days from the date it is established. 4. No Employee may acquire any security in an initial public offering (IPO) or any other public underwriting. 5a. Private placements of any kind may only be acquired with special permission from the Code of Ethics Review Committee (described in Section VII. below) and, if approved, will be subject to continuous monitoring by the Local Compliance Group for possible future conflict. Any Employee wishing to request approval for private placements must complete a Private Placement Approval Request Form and submit the form to the Local Compliance Group. A copy of the Private Placement Approval Request Form, which may be revised from time to time, is attached as Exhibit A. Where the Code of Ethics Review Committee approves any acquisition of a private placement, its decision and reasons for supporting the decision will be documented in a written report, which is to be kept for five years by the Local Compliance Group after the end of the fiscal year in which the approval was granted. 5b. Any Employee who has a personal position in an issuer through a private placement must affirmatively disclose that interest if such person is involved in consideration of any subsequent investment decision by a Fund or Managed Account regarding any security of that issuer or its affiliate. In such event, the President or Chief Investment Officer of MSDW Asset Management shall independently determine the final investment decision. Written records of any such circumstance shall be sent to the Local Compliance Group and maintained for a period of five years after the end of the fiscal year in which the approval was granted. 6. U.S. Employees are permitted to trade only between the hours of 9:30 a.m. and 4:00 p.m. (Eastern Standard Time). Employees outside the U.S. may execute trades (i) only during the time markets in the jurisdiction in which they are located are open if the trade is being executed in that market, or another market that has overlapping trading hours or (ii) in markets which open after the close of the market in which the Employee is located, by the next close of trading in that other market. 5 Restriction 7a. applies only to MSDW Affiliated Advisers' portfolio managers and research analysts (and all persons reporting to portfolio managers and research analysts). Restriction 7b. applies only to personnel in the trading department of each MSDW Affiliated Adviser. 7a. No purchase or sale transaction may be made in any security or related security by any portfolio manager or research analyst (or person reporting to a portfolio manager or research analyst) for a period of seven (7) calendar days before or after that security is bought or sold by any Fund (other than Morgan Stanley Dean Witter Value-Added Market Series, Morgan Stanley Dean Witter Select Dimensions Investment Series--Value-Added Market Portfolio, and Morgan Stanley Dean Witter index funds, or Portfolios) or any Managed Account for which such portfolio manager or research analyst (or person reporting to a portfolio manager or research analyst) serves in that capacity. 7b. No purchase or sale transaction may be made in any security or related security traded through the appropriate MSDW Affiliated Adviser's trading desk(s) (as determined by the Local Compliance Group) by any person on that trading desk on the same day that any Fund (other than Morgan Stanley Dean Witter Value-Added Market Series, Morgan Stanley Dean Witter Select Dimensions Investment Series--Value-Added Market Portfolio, and Morgan Stanley Dean Witter index funds, or Portfolios) or any Managed Account has a pending purchase or sale order in that same security or related security. 7c. Any transaction by persons described in sub-sections 7a. and 7b. above within such enumerated period may be required to be reversed, if applicable, and any profits or, at the discretion of the Code of Ethics Review Committee, any differential between the sale price of the individual security transaction and the subsequent purchase or sale price by a relevant Fund or Managed Account during the enumerated period, will be subject to disgorgement; other sanctions may also be applied. 8. No Employee of an MSDW Affiliated Adviser shall purchase or sell any Covered Security which to their knowledge at the time of such purchase or sale: (i) is being considered for purchase or sale by a Fund or a Managed Account; or (ii) is being purchased or sold by a Fund or a Managed Account. IMPORTANT: Regardless of the limited applicability of Restrictions 7.a., and 7.b., each MSDW Affiliated Adviser's Compliance Group monitors all transactions by its Employees in all locations in order to ascertain any pattern of conduct that may evidence actual or potential conflicts with the principles and objectives of this Code, including a pattern of frontrunning. Each MSDW Affiliated Adviser's Compliance Group: (i) on a quarterly basis, will provide the Boards of 6 Directors/Trustees of the Funds it manages with a written report that describes any issues that arose during the previous quarter under this Code and, if applicable, any Funds' Sub-Adviser's Code of Ethics, including but not limited to, information about material violations and sanctions imposed in response to the material violations; and (ii) on an annual basis, will certify that the MSDW Affiliated Adviser has adopted procedures reasonably necessary to prevent its Employees from violating this Code. Also, as stated elsewhere in this Code, any violation of the foregoing restrictions may result in disgorgement of all profits from the transactions as well as other possible sanctions. C. Pre-Clearance Requirement 1. Procedures (a) From Whom Obtained Subject to the limitations and restrictions set forth in sub- section B. above, all Employees are required to obtain pre- clearance of a Personal Securities Transaction by: (i) confirming that no open orders exist in the same or related security with the appropriate trading desk(s) (as determined by the Local Compliance Group); and (ii) having the transaction approved by the Local Compliance Group. Portfolio managers and research analysts (or persons reporting to portfolio managers or research analysts) seeking approval for a Personal Securities Transaction must obtain an additional approval signature from a designated Senior Portfolio Manager. Trading desk personnel at any MSDW Affiliated Adviser seeking approval for a Personal Securities Transaction must obtain an additional approval signature from their immediate supervisor. A copy of the Personal Securities Transaction Approval Form, which may be revised from time to time, is attached as Exhibit B. Each Local Compliance Group has implemented procedures reasonably designed to monitor purchases and sales effected pursuant to the aforementioned pre-clearance procedures. (b) Time of Pre-clearance All approved securities transactions, whether executed through an MSDW brokerage account (as defined below) or an MSDW Online account, must take place: (i) for U.S. employees, prior to 4:00 p.m. (Eastern Standard Time) on the same day that the complete pre-clearance is obtained and (ii) for Employees located outside the 7 U.S., as described in Section VI., sub-section B.6. If the transaction is not completed on such date, a new pre-clearance must be obtained, including one for any uncompleted portion of a transaction. Post-approval is not permitted under the Code. Any trade that is determined to have been completed before approval will be considered a violation of this Code. (c) Permitted Brokerage Accounts All securities transactions must be made through a Morgan Stanley Dean Witter brokerage account/1/ (an "MSDW brokerage account") or an MSDW Online account. No other brokerage accounts are permitted unless special permission is obtained from the Local Compliance Group. If you maintain accounts outside of MSDW, you must transfer your accounts to an MSDW brokerage account or an MSDW Online account as soon as practical (generally thirty days or less). Failure to do so will be considered a significant violation of the Code. In the event permission to maintain an outside brokerage account is granted by the Local Compliance Group, it is the responsibility of the Employee to arrange for duplicate confirmations of all securities transactions and monthly brokerage statements to be sent to the Local Compliance Group. Prior to opening an MSDW brokerage account or an MSDW Online account, Employees must obtain approval from their Local Compliance Group. No Employee may open a brokerage account unless a completed and signed copy of an MSDW Employee Account Request Form is submitted to the Local Compliance Group for approval. No Employee may open an MSDW Online account unless a completed and signed copy of an MSDW Employee Account Request Form is submitted to the Local Compliance Group for approval. In addition, no Employee may apply electronically for an MSDW Online Account. A copy of the MSDW Employee Account Request Form, which may be revised from time to time, is attached as Exhibit C. (d) Personal Securities Transaction Approval Form Pre-clearance must be obtained by completing and signing the Personal Securities Transaction Approval Form provided for that purpose and obtaining the proper pre-clearance signatures, as indicated in sub-section C.1.(a). The form must also indicate, as applicable, the name of the individual's Financial Advisor, the - ------------- 1 MSDW brokerage account shall mean an account with an affiliated MSDW broker in the Employee's local jurisdiction. 8 Branch Office Number, or whether the account is an MSDW Online Account, as well as other required information. If you have more than one account under your control, you must indicate on the approval sheet for which account the trade is intended. Additionally, unless your Local Compliance Group has informed you that it will obtain information directly from the MSDW affiliate(s) where you maintain your account or MSDW Online containing substantially the same information as trade confirms and account statements, please advise the MSDW affiliate(s) where you maintain your account or MSDW Online to have duplicate copies of your trade confirms and account statements sent to the Local Compliance Group for each account an Employee has, or as a result of the transaction acquires, any direct or indirect beneficial ownership. (as defined in sub-section C.4.) (e) Filing After all required signatures are obtained, the Personal Securities Transaction Approval Form must be filed with the Local Compliance Group by noon of the day following execution of the trade for filing in the respective individual's Code of Ethics file. The Employee should retain a copy for his/her records. (The Local Compliance Group will also retain a copy of the form if a pre-clearance request is denied.) 2. Factors Considered in Pre-Clearance of Personal Securities Transactions In addition to the requirements set forth under sub-section C.1.(a) above, the Local Compliance Group and/or, if applicable, designated Senior Portfolio Manager/immediate trading room supervisor (as appropriate), in keeping with the general principles and objectives of this Code, may refuse to grant pre-clearance of a Personal Securities Transaction in their sole discretion without being required to specify any reason for the refusal. Generally, the following factors, among others, will be considered in determining whether or not to clear a proposed transaction: (a) Whether the amount or the nature of the transaction, or the person making it, is likely to affect the price or market of security that is held by a Fund or a Managed Account. (b) Whether the individual making the proposed purchase or sale is likely to benefit from purchases or sales being made or considered on behalf of any Fund or Managed Account. (c) Whether the transaction is non-volitional on the part of the individual. 9 3. Exempt Securities (a) The securities listed below are exempt from: (i) the restrictions of Section VI., sub-sections B.1., B.7. and B.8.; (ii) the pre- clearance requirements of sub-section C.; and (iii) the initial, quarterly and annual reporting requirements of sub-section D. Accordingly, it is not necessary to obtain pre-clearance for Personal Securities Transactions in any of the following securities, nor is it necessary to report such securities in the quarterly transaction reports or the initial and annual securities holdings list: (i) U.S. Government Securities/2/ (ii) Bank Certificates of Deposit; (iii) Bankers' Acceptances; (iv) Commercial Paper; (v) High Quality Short-Term Debt Instruments (including repurchase agreements); (vi) U.S. Government Agency Securities/2/; and (vii) Open-end investment companies (mutual funds.) (Closed-end funds must be pre-approved.) (b) Transactions in redeemable Unit Investment Trusts and purchases under an issuer's direct stock purchase plan or automatic dividend reinvestment plan are exempt from the restrictions contained in sub-sections B.1., B.7. and B.8 and the pre-clearance requirement of sub-section C., but are subject to the initial, quarterly and annual reporting requirements of sub-section D. (All Employees wishing to utilize these types of plans must submit a memorandum to the Local Compliance Group stating the name and the amount to be invested in the plan. Any sale transactions from an automatic dividend reinvestment plan must be pre-approved.) (c) Due to the fact that Morgan Stanley Dean Witter & Co. stock ("MWD") may not be purchased by any actively managed Fund (other than index-type funds) or any Managed Account, transactions in such stock (including exercise of stock option grants) are exempt from the restrictions of sub-section B.7. However, MWD stock holdings and transactions in MWD stock/3/ remain subject to the quarterly and annual reporting requirements of sub-section D. as well as the 30-day holding period restriction and the 60-day short swing profit restriction in Section B.1. (except in connection with the sale of MWD stock acquired through the exercise of employee stock - ------------------ 2 For foreign offices, the equivalent shares in fixed income securities issued by the government of their respective jurisdiction; however, such securities are subject to the initial and annual reporting requirements of sub-section D. 3 In connection with the sale of MWD stock, periodic purchases through employer sponsored equity purchase plans shall not be looked to in calculating the 30-day holding period restriction or the 60-day short swing profit restriction, provided that stock in an amount greater than or equal to the amount being sold was held prior to the beginning of the applicable 30-day/ 60-day period. 10 options) and the pre-clearance requirements of sub-section C. The restrictions imposed by MSDW on Senior Management and other persons in connection with transactions in MWD stock are not affected by the exemption of MWD stock from the pre-clearance requirements of this Code, and continue in effect to the extent applicable. 4. Accounts Covered An Employee must obtain pre-clearance for any Personal Securities Transaction if such Employee has, or as a result of the transaction acquires, any direct or indirect beneficial ownership in the security. The term "beneficial ownership" shall be interpreted with reference to the definition contained in the provisions of Section 16 of the Securities Exchange Act of 1934. Generally, a person is regarded as having beneficial ownership of securities held in the name of: (a) the individual; or (b) a husband, wife or a minor child; or (c) a relative sharing the same house; or (d) other person if the Employee: (i) obtains benefits substantially equivalent to ownership of the securities; (ii) can obtain ownership of the securities immediately or at some future time; or (iii) can have investment discretion or otherwise can exercise control. The final determination of beneficial ownership is a question to be determined in light of the facts of each particular case and the above is not an exclusive list of examples. If there are any questions as to beneficial ownership, please contact your Local Compliance Group. 5. Exemption from Pre-clearance Requirement Pre-clearance is not required for any account where the Employee does not have direct or indirect beneficial ownership. In case of doubt as to whether an account is covered by this Code, Employees must consult with their Local Compliance Group. 11 D. Report of Transactions 1. Transactions and Accounts Covered (a) All Personal Securities Transactions in Covered Securities must be reported in the next quarterly transaction report after the transaction is effected. The quarterly report shall contain the following information: (i) The date of the transaction, the title, interest rate and maturity date (if applicable), number of shares and principal amount of each security involved; (ii) The nature of the transaction (i.e., purchase, sale, or any other type of acquisition or disposition); (iii) The price at which the purchase or sale was effected; (iv) The name of the broker, dealer, or bank with, or through which, the purchase or sale was effected; and (v) The date the report was submitted to the Local Compliance Group by such person. In addition, any new brokerage account(s) opened during the quarter without approval from the Local Compliance Group as well as the date(s) the account(s) was (were) opened must be reported. The report must contain the following information: (i) The name of the broker, dealer, or bank with whom the account was established; (ii) The date the account was established; and (iii) The date the report was submitted to the Local Compliance Group. (b) An Employee need not make a quarterly transaction report if he/she: (i) maintains only an MSDW brokerage account or an MSDW Online Account and the report would duplicate information contained in the broker trade confirms, system generated reports or account statements received by the Local Compliance Group; and (ii) has not opened any new brokerage accounts or mutual fund accounts with brokerage facilities without obtaining approval from their Local Compliance Group during the quarter. 12 2. Time of Reporting (a) Initial Listing of Securities Holdings and Brokerage Accounts Report Each Access Person must, at the time of becoming an Access Person, provide an Initial Listing of Securities Holdings and Brokerage Accounts Report to their Local Compliance Group disclosing: (i) all Covered Securities, including private placement securities, beneficially owned by the Access Person listing the title of the security, number of shares held, and principal amount of the security; (ii) the name of the broker dealer or financial institution where the Access Person maintains a personal account; and (iii) the date the report is submitted by the Access Person. New Access Persons will be required to provide a listing of all holdings in Covered Securities as of the date of commencement of employment as well as a listing of all outside brokerage accounts and mutual fund accounts with brokerage facilities. This report must be provided no later than 10 calendar days after a person becomes an Access Person. (b) Quarterly Securities Transactions and New Brokerage Account(s) Reports Quarterly Securities Transactions and New Brokerage Account(s) Reports must be submitted by Employees within 10 calendar days after the end of each calendar quarter. Any new brokerage account(s) opened during the quarter without their Local Compliance Group's prior approval, as well as the date(s) the account(s) was (were) opened, must be reported within 10 calendar days after the end of each calendar quarter. (c) Annual Listing of Securities Holdings Reports and Certification of Compliance The Annual Listing of Securities Holdings Report and Certification of Compliance requires all Employees to provide an annual listing of holdings of: (i) all Covered Securities beneficially owned, listing the title of the security, number of shares held, and principal amount of the security as of December 31 of the preceding year, (ii) the name of any broker dealer or financial institution where the account(s) in which Covered Securities were maintained, as of December 31 of the preceding year (a current listing will also be required upon the effectiveness of this Code); and (iii) the date the report is submitted. The information must be current as of a date not more than 30 calendar days before the report is submitted. In the case of Employees maintaining MSDW brokerage accounts or MSDW Online Accounts for which broker trade confirms, system 13 generated reports or account statements are already received on a quarterly basis by the Local Compliance Group, an annual certification (Annual Certification of Compliance) that the holdings information already provided to the Local Compliance Group accurately reflects all such holdings will satisfy the aforementioned requirement. 3. Form of Reporting The Initial Listing of Securities Holdings and Brokerage Accounts Report, Quarterly Securities Transactions and New Brokerage Account(s) Reports, and the Annual Listing of Securities Holdings Report and Certification of Compliance must be completed on the appropriate forms provided by each Local Compliance Group. By not submitting a quarterly transaction report form, an Employee will be deemed to have represented, that such person has: (i) only executed reportable transactions in an account as defined in Section VI., sub-section D.1. (b) above; or (ii) only traded securities exempt from the reporting requirements defined in Section VI., sub-section C.3.(a) above. Copies of the Initial Holdings Report, Quarterly Securities Transactions and New Brokerage Account(s) Reports, and the Annual Listing of Securities Holdings Report, which may be revised from time to time, are attached as Exhibits D. E, and F, respectively. 4. Responsibility to Report The responsibility for reporting is imposed on each individual required to make a report. Any effort by an MSDW Affiliated Adviser, Services and/or the Distributors to facilitate the reporting process does not change or alter that individual's responsibility. 5. Leave of Absence Employees of each MSDW Affiliated Adviser, Services or the Distributors on leave of absence may not be subject to the pre-clearance and reporting provisions of the Code, provided they meet the requirements for such exception specified in Section IV. above. 6. Where to File Report All reports must be filed by Employees with their Local Compliance Group. 7. Responsibility to Review Each Local Compliance Group will review all Initial Listing of Securities Holdings and Brokerage Accounts Reports, Quarterly Securities Transactions and New Brokerage Account(s) Reports, and Annual Listing 14 of Securities Holdings Reports and Certification of Compliance, filed by Employees, as well as broker confirmations, system generated reports, and account statements. VII. Review Committee A Code of Ethics Review Committee, consisting of the President/Chief Operating Officer, Chief Investment Officer, Chief Legal Officer, Chief Operations Officer, Chief Strategic Officer, Chief Sales and Marketing Officer, and the Chief Administrative Officer--Investments of MSDW Asset Management will review and consider any proper request of an Employee for relief or exemption from any restriction, limitation or procedure contained herein consistent with the principles and objectives outlined in Sections II. and III. of this Code. The Committee shall meet on an ad hoc basis, as it deems necessary upon written request by an Employee stating the basis for the requested relief. The Committee's decision is within its sole discretion. VIII. Service as a Director No Employee may serve on the board of any company without prior approval of the Code of Ethics Review Committee. If such approval is granted, it will be subject to the implementation of information barrier procedures to isolate any such person from making investment decisions for Funds or Managed Accounts concerning the company in question. IX. Gifts No Employee shall accept directly or indirectly anything of value, including gifts and gratuities, in excess of $100 per year from any person or entity that does business with any Fund or Managed Account, not including occasional meals or tickets to theater or sporting events or other similar entertainment./4/ X. Sanctions Upon discovering a violation of this Code, any of MSDW Affiliated Advisers, Services or the Distributors may impose such sanctions as they deem appropriate, including a reprimand (orally or in writing), demotion, suspension or termination of employment and/or other possible sanctions. The President/Chief Operating Officer of MSDW Asset Management, in his sole discretion, is authorized to determine the choice of sanctions to be imposed in specific cases, including termination of employment. - ---------------- 4 For MSAITM-Tokyo, the receipt of gifts shall not be in excess of (Yen)20,000 per year. 15 XI. Employee Certification All Employees of each MSDW Affiliated Adviser, Services and the Distributors are required to sign a copy of this Code indicating their understanding of, and their agreement to abide by the terms of this Code. In addition, all Employees of each MSDW Affiliated Adviser, Services and the Distributors will be required to certify annually that: (i) they have read and understand the terms of this Code and recognize the responsibilities and obligations incurred by their being subject to this Code; and (ii) they are in compliance with the requirements of this Code, including but not limited to the reporting of all brokerage accounts, and the pre-clearance of all non-exempt Personal Securities Transactions in accordance with this Code. 16 I have read and understand the terms of the above Code. I recognize the responsibilities and obligations, including but not limited to my quarterly transaction, annual listing of holdings, and initial holdings reporting obligations (as applicable), incurred by me as a result of my being subject to this Code. I hereby agree to abide by the above Code. - ------------------------------ ----------------------- (Signature) (Date) - ------------------------------ (Print name) MORGAN STANLEY DEAN WITTER ASSET MANAGEMENT CODE OF ETHICS Dated: January 29, 2001 17 EXHIBIT A MORGAN STANLEY DEAN WITTER ASSET MANAGEMENT ("MSDWAM") PRIVATE PLACEMENT APPROVAL REQUEST FORM (attach a copy of the private placement memorandum, offering memorandum or any other relevant documents) Name: Employee ID #: ----------------------------------- ------------------ Office Phone Number: E-Mail: -------------------- ------------------------- Department/Job Title: Cost Center: ------------------- -------------------- 1. Name of the sponsor's corporation, partnership or other entity: ------------------------------------------------------------------------- Name of the private placement: ------------------------------------------- 2. Is the sponsor's corporation, partnership or other entity: [ ] Public [ ] Private 3. Type of security or fund: 4. Nature of participation (e.g., stockholder, selling agent, general partner, limited partner). Indicate all applicable: ------------------------------------------------------------------------- 5. Have you received or will you receive "selling compensation"/1/ in connection with the transaction? [ ] Yes [ ] No If yes, describe nature of compensation: --------------------------------- Amount of compensation: -------------------------------------------------- 6. Planned date of transaction: --------------------------------------------- 7. Size of offering (if a fund, size of fund): ------------------------------ 8. Size of your participation (number of units/shares and total dollar amount): ------------------------------------------------------------------------- 9. Your participation as a percentage of total shares or units outstanding: 10. Does/Will the investment carry limited or unlimited liability? [ ] Limited [ ] Unlimited 11. Will the investment require any use of MSDWAM's or any of its affiliates' premises, facilities or materials? [ ] Yes [ ] No If "yes," please describe: ----------------------------------------------- 12. Have you or do you intend to recommend, refer or solicit others in any way in connection with this investment? [ ] Yes [ ] No 13. Is MSDWAM or any of its affiliates involved? [ ] Yes [ ] No If "Yes," please describe: ----------------------------------------------- 14. Describe the business to be conducted by the issuer of the private placement: 15. If the private placement is a fund, describe its investment objectives (e.g. value, growth, core or specialty): -------------------------------- 16. Has this private placement been made available to any MSDWAM Fund or any Managed Account where either you or the person you report to exercises investment discretion? [ ] Yes [ ] No If no, state why: 17. If the answer to question 16 is "Yes," please describe which fund or managed account: 18. Do you participate or do you plan to participate in any investment decisions for the private placement? [ ] Yes [ ] No If "Yes," please describe: ----------------------------------------------- 19. Do you participate or do you plan to participate in the management of the sponsor? [ ] Yes [ ] No If "Yes," state title and give description of duties: 20. Describe how you became aware of this private placement: --------------- 21. To the best of your knowledge, will this private placement result in an initial public offering within the next 12 to 18 months? [ ] Yes [ ] No - ---------------- 1 "Selling compensation" means any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions, finders fees, securities or rights to acquire securities, rights to participate in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise, or expense reimbursements. Note: You must also file an Outside Business Activities Form in advance with your Local Compliance Department if you intend to act as an officer, director or hold a management position in any business or entity other than MSDWAM or any of its affiliates. I understand that approval, if granted, is based upon the completeness and accuracy of the information provided herein and I agree to observe any conditions imposed upon such approval. I will notify my Local Compliance Group in writing if any aspect of the private placement is proposed to be changed (e.g., investment focus of fund, compensation, involvement in organization's management) and I hereby acknowledge that such changes may require further approvals or disinvestment by me. I represent that (i) I have read and understand the MSDWAM Code of Ethics (the "Code") and recognize that I am subject thereto; (ii) the above trade is in compliance with the Code; (iii) to the best of my knowledge, the above proposed trade does not represent a conflict of interest, or the appearance of a conflict of interest, with any MSDWAM Fund or Managed Account; (iv) I have no knowledge of any pending client orders in this security, nor is the above proposed trade in a related security which indirectly would result in a transaction in a security in which there are pending client orders; and (v) I have read and understand the private placement policy contained in the Code. Furthermore, I acknowledge that no action should be taken by me to effect the trade(s) listed above until I have received formal approval. By signing below I certify that my responses to this Private Placement Approval Request Form are complete, true and accurate to the best of my knowledge. I hereby confirm that any private securities transaction described in this questionnaire is unrelated to and beyond the scope of my employment by MSDWAM or any of its affiliates. Notwithstanding the immediately preceding sentence, I understand that I must obtain consent to any private securities transaction, and I acknowledge that such consent, if granted, is revocable at any time and is subject to my understanding and acknowledgement that such private securities transaction is in no way sponsored by MSDWAM or any of its affiliates and shall give rise to no liability on the part of MSDWAM or any of its affiliates whatsoever, whether by way of indemnification, insurance or otherwise. - -------------------------------- --------------------------------- -------- (Employee-Signature) (Employee-Print Name) (Date) - -------------------------------- --------------------------------- -------- (Employee's Supervisor-Signature) (Employee's Supervisor-Print Name) (Date) Date Received by the Local Compliance Group: ---------------------------------- Code of Ethics Review Committee: [ ] Approved [ ] Not Approved Name: Title: ------------------------------------------ ---------------------- (Please Print) Signature Date: -------------------------------------- ---------------------- EXHIBIT B MSDWAM PERSONAL SECURITIES TRANSACTION APPROVAL FORM - ------------------------------------------------------------------------------- PRINT NAME DEPARTMENT NAME OF THE PORTFOLIO MANAGER TO WHOM YOU REPORT (INVESTMENT DEPARTMENT PERSONNEL ONLY) - ------------------------------------------------------------------------------- MSDW BROKERAGE ACCOUNT NO./ NAME OF FINANCIAL ADVISOR MSDW ONLINE ACCOUNT NO. (IF ANY): - ------------------------------------------------------------------------------- I hereby request permission to effect a transaction in the security as indicated below for my own account or other account in which I have a beneficial interest or legal title. The approval will be effective only for a transaction completed prior to the close of business on the day of approval. Any transaction, or portion thereof, not so completed will require a new approval. A separate form must be used for each security transaction. I understand that I am required to instruct my Financial Advisor/MSDW online to supply duplicate confirms and statements or other records containing the same information on all transactions to my Local Compliance Group. I understand and agree to abide by the requirements set forth in the Morgan Stanley Dean Witter Asset Management Code of Ethics (the "Code") and the following: 1. In the case of a purchase, I agree that I will not sell the security within thirty days from the date of the purchase and/or sell the security at a profit within of sixty days from the date of the purchase transaction. In the case of a sale, I agree that I will not repurchase the security until at least thirty days from the sale trade date and/or purchase the security at a lower price for a minimum of sixty days from the date of the sale transaction. Any violation may result in disgorgement of all profits from the transaction. 2. I represent that this security: (A) is not involved in an Initial Public Offering (IPO) or any other public underwriting and (B) does not involve a short sale, or futures transaction. 3. For any private placement, I am aware that separate pre-approval must be obtained from the Morgan Stanley Dean Witter Asset Management Code of Ethics Review Committee. 4. For portfolio managers, research analysts and persons reporting to such persons, and all personnel in the Trading Department: (A) I hereby certify that: (i) in the case of a purchase, the availability of the security or securities being purchased is in no way related to my position with an MSDW Affiliated Adviser and that the purchase of the securities by me will not take precedence over an investment in such security or securities by a client account, and (ii) the security or securities being purchased or sold are not currently being considered for purchase or sale by any client account with respect to which I, or any person who reports to me, has, or should have, knowledge. (B) If I am an individual who reports to a portfolio manager, a research analyst, or someone reporting to a portfolio manager or research analyst, I understand that I must obtain a signature from a designated senior portfolio manager as part of the pre-clearance requirement. If I am an individual who works in the trading room, I understand that I must obtain a signature from my immediate supervisor as part of the pre-clearance requirement. (C) If I am an individual who reports to a portfolio manager, a research analyst, or someone reporting to a portfolio manager or research analyst, I understand that in certain cases I may be required to disgorge any profits from a transaction if a Fund or Managed Account buys or sells the same or related security within seven days preceding or subsequent to my transaction (see Section VI., sub-section B. 7) of the Code for a complete description of the scope of this restriction). 5. I hereby certify that I have not obtained access to any material, non-public information. I understand that if I receive oral or written material, non- public information, I must discuss the situation immediately with my Local Compliance Group or Chief Legal Officer of MSDWAM. 6. I hereby certify that to the best of my knowledge, this security is not being purchased or sold and/or is not being considered for purchase or sale by any Fund or Managed Account. ================================================================================ A. PURCHASE - ------------------------------------------------------------------------------------------------------------------------------- NAME OF SECURITY/SYMBOL NUMBER OF SHARES OR CUSIP NUMBER FOR ACQUISITION PRICE TOTAL PRICE PRINCIPAL AMOUNT FIXED INCOME SECURITIES ONLY - ------------------------------------------------------------------------------------------------------------------------------- HAVE YOU SOLD ANY SHARES OF THIS SECURITY WITHIN THE PAST THIRTY DAYS? NO [ ] YES [ ] IF YES, SEE YOUR LOCAL COMPLIANCE GROUP. - ------------------------------------------------------------------------------------------------------------------------------- HAVE YOU SOLD ANY SHARES OF THIS SECURITY WITHIN THE PAST SIXTY DAYS? NO [ ] YES [ ] IF YES, STATE THE PRICE PER SHARE: $___ - ------------------------------------------------------------------------------------------------------------------------------- B. SALE - ------------------------------------------------------------------------------------------------------------------------------- NAME OF SECURITY/SYMBOL CUSIP NUMBER FOR FIXED INCOME SECURITIES ONLY - ------------------------------------------------------------------------------------------------------------------------------- NUMBER OF SHARES OR PRINCIPAL AMOUNT DISPOSITION PRICE TOTAL PRICE DATE ACQUIRED UNIT PRICE AT ACQUISITION - ------------------------------------------------------------------------------------------------------------------------------- CHECK BOX IF THE SECURITY IS OFFERED THROUGH A PRIVATE PLACEMENT. IF SO, CONTACT YOUR LOCAL COMPLIANCE GROUP FIRST. [ ] =============================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------- HAVE YOU PURCHARSED ANY SHARES OF THIS SECURITY WITHIN THE PAST THIRTY DAYS? NO [ ] YES [ ] IF YES, SEE YOUR LOCAL COMPLIANCE GROUP. - ------------------------------------------------------------------------------------------------------------------------------- HAVE YOU PURCHASED ANY SHARES OF THIS SECURITY WITHIN THE PAST SIXTY DAYS? NO [ ] YES [ ] IF YES, STATE THE PRICE PER SHARE: $___ - ------------------------------------------------------------------------------------------------------------------------------- PERMISSION: GRANTED: DENIED: - ------------------------------------------------------------------------------------------------------------------------------- DATE/TIME: YOUR SIGNATURE: - ------------------------------------------------------------------------------------------------------------------------------- DATE: IF APPLICABLE, SIGNATURE-DESIGNATED PORTFOLIO MANAGER: - ------------------------------------------------------------------------------------------------------------------------------- DATE: IF APPLICABLE, SIGNATURE-IMMEDIATE SUPERVISOR: - ------------------------------------------------------------------------------------------------------------------------------- DATE: IF APPLICABLE, TRADING DESK/DEPARTMENT SIGNATURE: - ------------------------------------------------------------------------------------------------------------------------------- DATE: COMPLIANCE SIGNATURE: - -------------------------------------------------------------------------------------------------------------------------------
*IF SHARES BEING SOLD WERE PURCHASED ON MORE THAN ONE DATE, EACH ACQUISITION DATE MUST BE LISTED FOR PURPOSES OF DETERMINING THE THIRTY-DAY/SIXTY-DAY HOLDING PERIOD RESTRICTIONS. THE WHITE COPY OF THIS PREAPPROVAL FORM MUST BE RETURNED TO YOUR LOCAL COMPLIANCE GROUP BY NOON OF THE DAY FOLLOWING EXECUTION OF THE TRADE. REV. 1/01/0l WHITE - LOCAL COMPLIANCE GROUP PINK - EMPLOYEE COPY EXHIBIT C MORGAN STANLEY DEAN WITTER ASSET MANAGEMENT ("MSDWAM") EMPLOYEE ACCOUNT REQUEST FORM FOR MSDW ONLINE BROKERAGE ACCOUNT OR AN MSDW BROKERAGE ACCOUNT Please complete this form to open a Morgan Stanley Dean Witter Online, Inc. ("MSDW Online Account") or a Morgan Stanley Dean Witter Brokerage Account ("MSDW Brokerage Account") for all accounts beneficially owned by you. Please make additional copies of this page as necessary in order to include information for all your accounts. This form will be returned to you after your Local Compliance Group's review. - ----------------------------- --------------- ----------------- PRINT NAME EMPLOYEE ID # FAX # - ----------------------------- ------------------- SOCIAL SECURITY # DEPARTMENT/BRANCH # Check one of the following: [ ] I am an MSDW employee [ ] I am a subcontractor/vendor/temp - -------------------------------------------------------------------------------- ACCOUNT INFORMATION - -------------------------------------------------------------------------------- I would like to open an MSDW Online Account or an MSDW Brokerage Account. Account Title: --------------------------------------------------- Employee's relationship to account owner: ---------------------- [ ] This account is NOT independently managed; I am involved in the investment decisions./1/ [ ] This account is independently managed; I am NOT involved in the investment decisions./2/ Name of investment manager and relationship, if any: -------------------------- - -------------------------------------------------------------------------------- By signing below, you agree to abide by the Code of Conduct and MSDWAM's Code of Ethics with respect to any account maintained at MSDW Online or with an MSDW Broker. DATE: SIGNATURE: ---------------------------- ---------------------------- PLEASE ENSURE THAT YOUR LOCAL COMPLIANCE GROUP EITHER RECEIVES DUPLICATE STATEMENTS AND TRADE CONFIRMATIONS OR RECORDS CONTAINING THE SAME INFORMATION TO MSDW ONLINE/MSDW BROKERAGE: Pursuant to NYSE Rule 407, please accept this form as notification that MSDWAM has approved the employee named above to maintain the account titled above with your firm. The employee has a beneficial interest in such account. This account must be coded with the appropriate employee account range, i.e.; Morgan Stanley Dean Witter Advisors Inc., Morgan Stanley Dean Witter Investment Management Inc., Morgan Stanley Dean Witter Investment Group Inc., Morgan Stanley Dean Witter Investment Management Limited, Morgan Stanley Dean Witter Investment Management Company, Morgan Stanley Asset & Investment Trust Management Co., Limited, Morgan Stanley Dean Witter Investment Management Private Limited, Morgan Stanley Dean Witter Distributors Inc., Miller Anderson & Sherrerd, LLP, Morgan Stanley & Co. Incorporated, MAS Fund Distribution, Inc., Morgan Stanley Dean Witter Services Company Inc., in order to permit appropriate review by the Local Compliance Group. APPROVED BY: -------------------------------- SIGNATURE - COMPLIANCE GROUP -------------------------------- DATE: PRINT NAME - COMPLIANCE GROUP -------------- To be Completed by MSDW Broker or MSDW Online: MSDW Online/MSDW Brokerage Account Number: - -------------------- /1/ Your participation in the selection of any investment, including mutual funds, means that the account is NOT independently managed. /2/ You must not be involved in investment selections through recommendation, advice, and prior review or otherwise, or you must be a passive beneficiary of the account in order to represent that you are not involved in investment decisions for the account. Rev. (1/01) EXHIBIT D MORGAN STANLEY DEAN WITTER ASSET MANAGEMENT ("MSDWAM") INITIAL LISTING OF SECURITIES HOLDINGS AND BROKERAGE ACCOUNTS I hereby certify that the following is a complete and accurate listing as of the date hereof of all beneficially owned brokerage accounts or mutual fund accounts with brokerage facilities and Covered Securities/1/ held therein. I understand that if I am an Access Person of MSDWAM, I must provide this information to my Local Compliance Group no later than ten (10) calendar days after my hire date. Failure to do so within this time period will be considered a violation of MSDWAM's Code of Ethics: I. BROKERAGE ACCOUNTS MAINTAINED: I maintain the following BROKERAGE ACCOUNTS OR MUTUAL FUND ACCOUNTS WITH BROKERAGE FACILITIES (List below or attach the most recent account statement containing ALL information required below): - -------------------------------------------------------------------------------------------------------------- RELATIONSHIP TO ACCOUNTHOLDER NAME OF ACCOUNT ACCOUNT HELD AT: ACCOUNT NUMBER (SELF, SPOUSE, CHILD, ETC.) - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- (Use additional sheets if necessary)
Except where exceptional circumstances exist, accounts are required to be held with a MSDW broker or with MSDW Online. Accordingly, unless I am granted approval to maintain these accounts outside of Morgan Stanley Dean Witter, I agree to transfer them as soon as practicable (generally thirty days or less) to Morgan Stanley Dean Witter. Pending transfer of these accounts to Morgan Stanley Dean Witter, I will not effect airy brokerage transactions in these accounts and I will arrange for my Local Compliance Group to receive duplicate confirmations and monthly statements for each such account. II. SECURITIES OWNED: List each COVERED SECURITY held in the accounts) listed above or attach the most recent brokerage account statements) containing ALL information required below: - ------------------------------------------------------------------------------------------------------------------------------------ TYPE OF SECURITY (common stock, bond, TITLE OF SECURITY private placement, etc.) NUMBER OF SHARES PRINCIPAL AMOUNT DATE ACQUIRED DESCRIPTION OF INTEREST - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ (Use additional sheets if necessary)
- --------------- /1/ "Covered Securities" include all securities (including securities held in ESOP, IRA or other accounts), except for U.S. government securities, bank certificates of deposit, bankers' acceptances, commercial paper, U.S. government agency securities, high quality short-term debt instruments including repurchase agreements, and open-end investment companies. EXHIBIT D III. REQUEST TO MAINTAIN OUTSIDE BROKERAGE ACCOUNTS: I hereby request approval to maintain one or more of the brokerage accounts listed in Section I. above based on the following: Please check the appropriate box(es). [ ] The account is independently managed and I am not involved in investment selections through recommendation, advice, prior review or otherwise, or, I am a passive beneficiary of the account and am not involved in the investment decisions. List account: ----------------------------------------------- Name of investment manager and family relationship, if any: ------------------------------------------------------------ [ ] A participant in the account is employed by another asset management firm or brokerage firm which requires the account to be maintained at such firm. I will arrange for duplicate confirmations and monthly statements to be sent to my Local Compliance Group. List account: ----------------------------------------------- [ ] Other (explain) --------------------------------------------- List account: ----------------------------------------------- By signing this form, I acknowledge that I have received and understand the MSDWAM Code of Ethics and the Code of Conduct. I agree to abide by the provisions of the Code of Ethics and the Code of Conduct and to promptly notify my Local Compliance Group of any changes to the above information. - ---------------------------- ---------------------- (Sign Name) (Date) - ---------------------------- (Print Name) - ---------------------------- Employee Position/Title - -------------------------------------------------------------------------------- LOCAL COMPLIANCE GROUP: [ ] Approved [ ] Not Approved - ---------------------------- ---------------------- Signature (Date) EXHIBIT E MORGAN STANLEY DEAN WITTER ASSET MANAGEMENT QUARTERLY SECURITIES TRANSACTIONS AND NEW BROKERAGE ACCOUNT - CONFIDENTIAL REPORT FOR THE QUARTER ENDED: XXX/XXX/XXX 2000 Unless your accounts are limited to those listed in section (A) below ("MSDW Accounts") or you maintain approved non-MSDW accounts but have not engaged in any transactions in securities other than those listed in section (B) below ("Exempted Securities"), you are required to provide the information requested in section (B) below to your Local Compliance Group no later than 10 calendar days after the end of each calendar quarter. If your Local Compliance Group does not receive a response from you within the required time period, you will be deemed as applicable: (i) not to have executed any reportable transactions; or (ii) to have only executed reportable transactions in an account that is automatically reported to your Local Compliance Group; AND (iii) not opened any new brokerage or mutual fund accounts with brokerage facilities during the quarter. Failure to comply with the foregoing will be considered a violation of MSDWAM's Code of Ethics. A. Please print this form and complete section (B) below unless your accounts are with an MSDW broker or MSDW Online and broker trade confirms and account statements or other records with the same information are being sent to your Local Compliance Group; and/or B. Please complete the following (or attach brokerage confirmations in lieu) for all securities transactions executed during the quarter except for transactions in: . U.S. Government Securities; . Bank Certificates of Deposit . Banker's Acceptances; . Commercial Paper; . High Quality Short-Term Debt Instruments (including repurchase agreements); . U.S. Government Agency Securities; and . Open-end investment companies (mutual funds).
Date of Number of Shares/ Title of Security Unit Price Total Price Broker Name & Transaction Principal Amount (including, if applicable, Account Number interest and maturity date) - --------------------------------------------------------------------------------------------------------------- Purchases and Acquisitions - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Sales and Other Dispositions - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
If you opened a new account(s) this quarter without your Local Compliance Group's approval, state the date the account(s) opened? _______________________ What is the name of the broker dealer or financial institution with whom you established the account? _______________________________________________________ What date was this report submitted to your Local Compliance Group? ____________ EXHIBIT E Please check the appropriate boxes: I currently take part in the: [ ] Tax Deferred Equity Participation Plan ("TDEPP") [ ] Employee Stock Purchase Plan ("ESPP") [ ] Saving Today Affords Retirement Tomorrow ("START") [ ] Equity Incentive Compensation Program ("EICP") [ ] Other (Employee Stock Ownership Plan, 401K) [ ] None Name:_________________________ Signed:_______________________ Date: / / ____________ EXHIBIT F MORGAN STANLEY DEAN WITTER ASSET MANAGEMENT ANNUAL LISTING OF SECURITIES HOLDINGS AND CERTIFICATION OF COMPLIANCE I hereby certify that: (1) I have read and understand the Code of Ethics (the "Code"); which has been adopted by the above entity; and recognize the responsibilities and obligations incurred by my being subject to the Code; (2) except as noted below, all transactions entered into since January 1, 20XX in securities of which I had direct or indirect beneficial ownership under the Code have been effected in accordance with the provisions of the Code; (3) all my personal securities accounts are reflected completely and accurately on the attached list and all securities beneficially owned by me are reflected accurately in such accounts, as required to be disclosed pursuant to the Code (unless otherwise noted below); and (4) if applicable, I have indicated below the employer sponsored plan(s) in which I participate. EXCEPTIONS: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ANY ERRORS/OMISSIONS TO MY LIST OF ACCOUNT(S) AND/OR ANNUAL SECURITIES HOLDINGS ARE NOTED BELOW: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PLEASE CHECK THE APPROPRIATE BOXES: I currently take part in the: [ ] Tax Deferred Equity Participation Plan ("TDEPP") [ ] Employee Stock Purchase Plan ("ESPP") [ ] Saving Today Affords Retirement Tomorrow ("START") [ ] Equity Incentive Compensation Program ("EICP") [ ] Other (Employee Stock Ownership Plan, 401K) [ ] None Name:_________________________ Signature:_______________________ Date: _________________________ EXHIBIT G MORGAN STANLEY DEAN WITTER ASSET MANAGEMENT OUTSIDE BUSINESS ACTIVITIES FORM Name: ________________________________ Employee ID #: ______________________ Phone Number (Work): _________________ E-Mail: _____________________________ Department/Job Title: ________________ Cost Center: ________________________ I. Initial Disclosure of Outside Business Activities: List below all outside business activities(1) you are involved in. ================================================================================ COMPANY NAME TYPE OF TITLE/POSITION DATE YOU FIRST BECAME BUSINESS HELD INVOLVED WITH ACTIVITY ================================================================================ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- List any corporation of which you or a member of your immediate family directly or indirectly own, control, or hold the power to vote 5% percent or more of the outstanding voting securities. Please include the name of the organization, the date you first became involved with the organization, the nature of your involvement with the organization, and any other supporting documentation that may be deemed relevant. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- List any joint ventures in which you participate outside your employment with Morgan Stanley Dean Witter Asset Management. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- List any trustee or executor positions you hold other than those pertaining to your immediate family. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- I. Pre-Clearance of Outside Business Activities: Complete this section for each outside business activity listed above or for any outside business activity you plan to engage in. Please note that all outside business activities must be pre-cleared through the completion and approval of this form. Retain a copy of the completed form for your records. 1. Do you currently serve, or do you plan to serve, as an officer, director/trustee, partner, or employee of any entity other than MSDWAM [ ] Yes [ ] No . If you plan to serve, or currently serve, as a director/trustee, is the company publicly or privately held? [ ] Publicly [ ] Privately 1. Do you or a member of your immediate family own, or plan to own, directly or indirectly, 5% or more of the outstanding voting securities of any entity? [ ] Yes [ ] No - ------------------ (1) "Outside business activities" are described in the Code of Conduct and generally refer to your associations with any entities other than Morgan Stanley Dean Witter or any of its affiliates. 2. Please provide the following information with respect to your outside business activity or planned outside business activity: . Name of outside entity: ______________________________________________ Address: Is the company publicly or privately held ? [ ] Publicly [ ] Privately . Country or state of formation:________________________________________ . Type of business: . Title or position: [ ] Director/Trustee [ ] Officer [ ] Shareholder [ ] Employee [ ] Other . Amount of compensation from the outside business activity, if any: $__________________________ Frequency of compensation from outside business activity: [ ] Weekly [ ] Bi-Weekly [ ] Bimonthly [ ] Annually . Amount and percentage of any stock ownership, partnership or other financial interest in this entity: Number of shares or units: ________________________________ Cost per share or unit: ___________________________________ Percentage of total shares or units: ______________________ . Description of your activities, duties, and responsibilities with regard to this entity: . Date of First Involvement: ______________________________________ . Approximate amount of time spent or planned to be spent on outside business activity (hours/week): ___________ . Approximate amount of time spent or planned to be spent on outside business activity during MSDWAM's normal office hours (hours/week): _________________________ . Describe any relationship or connection of any kind between the outside entity and MSDWAM: ___________________________ . Did MSDWAM request that you accept this position with the outside entity? [ ] Yes [ ] No - -------------------------------------------------------------------------------- Note: A completed Private Placement Approval Request Form must also be completed, signed and forwarded to the Code of Ethics Review Committee (please consult with your Local Compliance Group) for any private investment relating to the above outside business activity, including any personal investment or role in recommending or selling related securities to others. By signing below, I certify that my responses to this Outside Business Activities Form are complete, true and accurate to the best of my knowledge. I will report any changes or corrections to this information promptly, in writing, to my Local Compliance Group and will obtain prior written acknowledgement or approval as required by the Local Compliance Group before any additional involvement such as participation in additional sales, holdings, compensation or participation in the company's management or before engaging in any future outside business activities. I hereby represent that this proposed outside business activity does not conflict with the interests of MSDWAM or the MSDWAM clients. I hereby confirm that the outside business activity described in this questionnaire is unrelated to and beyond the scope of my employment by MSDWAM. Notwithstanding the immediately preceding sentence, I understand that regulations and MSDWAM policy require that I obtain consent to engage in any outside business activity, and I acknowledge that such consent, if granted, is revocable at any time in MSDWAM's sole discretion and is subject to my understanding and acknowledgement that such outside business activity is in no way sponsored by MSDWAM and shall give rise to no liability on the part of MSDWAM whatsoever, whether by way of indemnification, insurance or otherwise. Employee Signature: _________________________ Date: _________________________ Employee's Immediate Supervisor's Signature: __________________________________ Date: _________________________ CODE OF ETHICS REVIEW COMMITTEE: [ ] Approved [ ] Not Approved Name: _______________________________________ Signature: ____________________ Title: ______________________________________ Date: _________________________ EX-99.(Q) 29 0029.txt POWERS OF ATTORNEY EXHIBIT (Q) POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that the undersigned, Trustee of North American Funds, does hereby constitute and appoint Alice T. Kane, John I. Fitzgerald, Nori Gabert and Todd Spillane, or any of them, the true and lawful attorneys-in- fact of the undersigned with respect to all matters arising in connection with Registration Statements of North American Funds and any and all amendments (including post-effective amendments) thereto, in the capacity indicated below, and to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and any state securities authorities. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent, or his or her substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 23/rd/ day of January, 2001. /s/ Judith L. Craven -------------------- Dr. Judith L. Craven Trustee POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that the undersigned, Trustee of North American Funds, does hereby constitute and appoint Alice T. Kane, John I. Fitzgerald, Nori Gabert and Todd Spillane, or any of them, the true and lawful attorneys-in- fact of the undersigned with respect to all matters arising in connection with Registration Statements of North American Funds and any and all amendments (including post-effective amendments) thereto, in the capacity indicated below, and to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and any state securities authorities. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent, or his or her substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 23/rd/ day of January, 2001. /s/ William F. Devin -------------------- Mr. William F. Devin Trustee 2 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that the undersigned, Trustee of North American Funds, does hereby constitute and appoint Alice T. Kane, John I. Fitzgerald, Nori Gabert and Todd Spillane, or any of them, the true and lawful attorneys-in- fact of the undersigned with respect to all matters arising in connection with Registration Statements of North American Funds and any and all amendments (including post-effective amendments) thereto, in the capacity indicated below, and to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and any state securities authorities. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent, or his or her substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 23/rd/ day of January, 2001. /s/ Timothy J. Ebner -------------------- Dr. Timothy J. Ebner Trustee 3 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that the undersigned, Trustee of North American Funds, does hereby constitute and appoint Alice T. Kane, John I. Fitzgerald, Nori Gabert and Todd Spillane, or any of them, the true and lawful attorneys-in- fact of the undersigned with respect to all matters arising in connection with Registration Statements of North American Funds and any and all amendments (including post-effective amendments) thereto, in the capacity indicated below, and to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and any state securities authorities. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent, or his or her substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 23/rd/ day of January, 2001. /s/ Gustavo E. Gonzales, Jr. --------------------------- The Honorable Gustavo E. Gonzales, Jr. Trustee 4 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that the undersigned, Trustee of North American Funds, does hereby constitute and appoint Alice T. Kane, John I. Fitzgerald, Nori Gabert and Todd Spillane, or any of them, the true and lawful attorneys-in- fact of the undersigned with respect to all matters arising in connection with Registration Statements of North American Funds and any and all amendments (including post-effective amendments) thereto, in the capacity indicated below, and to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and any state securities authorities. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent, or his or her substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 23/rd/ day of January, 2001. /s/ Joseph T. Grause -------------------- Mr. Joseph T. Grause Trustee 5 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that the undersigned, Trustee of North American Funds, does hereby constitute and appoint Alice T. Kane, John I. Fitzgerald, Nori Gabert and Todd Spillane, or any of them, the true and lawful attorneys-in- fact of the undersigned with respect to all matters arising in connection with Registration Statements of North American Funds and any and all amendments (including post-effective amendments) thereto, in the capacity indicated below, and to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and any state securities authorities. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent, or his or her substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 23/rd/ day of January, 2001. /s/ Alice T. Kane ----------------- Ms. Alice T. Kane Trustee 6 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that the undersigned, Trustee of North American Funds, does hereby constitute and appoint Alice T. Kane, John I. Fitzgerald, Nori Gabert and Todd Spillane, or any of them, the true and lawful attorneys-in- fact of the undersigned with respect to all matters arising in connection with Registration Statements of North American Funds and any and all amendments (including post-effective amendments) thereto, in the capacity indicated below, and to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and any state securities authorities. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent, or his or her substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 23/rd/ day of January, 2001. /s/ Kenneth J. Lavery --------------------- Mr. Kenneth J. Lavery Trustee 7 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that the undersigned, Trustee of North American Funds, does hereby constitute and appoint Alice T. Kane, John I. Fitzgerald, Nori Gabert and Todd Spillane, or any of them, the true and lawful attorneys-in- fact of the undersigned with respect to all matters arising in connection with Registration Statements of North American Funds and any and all amendments (including post-effective amendments) thereto, in the capacity indicated below, and to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and any state securities authorities. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent, or his or her substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 23/rd/ day of January, 2001. /s/ Ben H. Love --------------- Mr. Ben H. Love Trustee 8 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that the undersigned, Trustee of North American Funds, does hereby constitute and appoint Alice T. Kane, John I. Fitzgerald, Nori Gabert and Todd Spillane, or any of them, the true and lawful attorneys-in- fact of the undersigned with respect to all matters arising in connection with Registration Statements of North American Funds and any and all amendments (including post-effective amendments) thereto, in the capacity indicated below, and to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and any state securities authorities. The undersigned hereby ratifies and confirms all that said attorney-in-fact and agent, or his or her substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 23/rd/ day of January, 2001. /s/ John E. Maupin, Jr. ---------------------- Dr. John E. Maupin, Jr. Trustee 9 -----END PRIVACY-ENHANCED MESSAGE-----