-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, sK2THWR9B1nkn5xl3O1WUK8iGfWEH+JNzOg8uiTHCwpbAFUuPIklFxZqRO0jvySj YmtJ2irA9vh19V96Hm8Q9g== 0000916641-95-000123.txt : 19950415 0000916641-95-000123.hdr.sgml : 19950414 ACCESSION NUMBER: 0000916641-95-000123 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950413 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAMBRIDGE SERIES TRUST CENTRAL INDEX KEY: 0000883428 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-45315 FILM NUMBER: 95528778 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TOWER STREET 2: C/O FEDERATED INVESTORS CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 8047823648 MAIL ADDRESS: STREET 1: RIVERFRONT PLAZA STREET 2: WEST TOWER 901 E BYRD STREET CITY: RICHMOND STATE: VA ZIP: 23219 497 1 CAMBRIDGE SERIES TRUST 497 CAMBRIDGE SERIES TRUST Supplement dated April 13, 1995 to Statement of Additional Information dated January 27, 1995 The Statement of Additional Information of Cambridge Series Trust (the "Trust") is hereby amended to reflect the following changes: 1. The name of Trust is changed from Cambridge Series Trust to The Mentor Funds. 2. The names of the Portfolios of the Trust are changed as follows: i. Cambridge Growth Portfolio to Mentor/Cambridge Growth Portfolio. ii. Cambridge Capital Growth Portfolio to Mentor Capital Growth Portfolio. iii. Cambridge Government Income Portfolio to Mentor Quality Income Portfolio. iv. Cambridge Municipal Income Portfolio to Mentor Municipal Income Portfolio. v. Cambridge Income and Growth Portfolio to Mentor Income and Growth Portfolio. vi. Cambridge Global Portfolio to Mentor Perpetual Global Portfolio. 3. The name of Cambridge Investment Advisors, Inc. is changed to Commonwealth Advisors, Inc. 4. The name of Cambridge Distributors, Inc. is changed to Mentor Distributors, Inc. 5. Perpetual Portfolio Management Ltd. has replaced Scudder, Stevens & Clark as Sub-Advisor of the Global Portfolio. 6. Phoenix Investment Counsel, Inc. no longer serves as Sub-Advisor to Mentor Capital Growth Portfolio. 7. Pacific Investment Management Company no longer serves as Sub-Advisor to Mentor Quality Income Portfolio. 8. Kemper Financial Services no longer serves as Sub-Advisor to Mentor/Cambridge Growth Portfolio. 9. The name of Investment Management Group, Inc. is changed to Mentor Investment Group, Inc. 10. The Quality Income Portfolio's investment policies have been modified. Please consult the prospectus of The Mentor Funds dated April 13, 1995 for a discussion of the investment policies of the Portfolio. January 27, 1995 Cambridge Series Trust Cambridge Growth Portfolio Cambridge Capital Growth Portfolio Cambridge Government Income Portfolio Cambridge Municipal Income Portfolio Cambridge Income and Growth Portfolio Cambridge Global Portfolio Statement of Additional Information This combined Statement of Additional Information should be read with the combined Prospectus of Cambridge Series Trust (the "Trust") dated January 27, 1995. This Statement is not a prospectus itself. To receive a copy of the Prospectus, write to the Trust or call 1-800-382-0016. Statement dated January 27, 1995 Table of Contents General Information About Brokerage Transactions 20 the Trust 1 How to Buy Shares 21 Investment Objectives and Policies of the Distribution Plan (Class B Shares) 21 Portfolios 1 Conversion to Federal Funds 22 Repurchase Agreements 1 Purchases at Net Asset Value 22 When-Issued and Delayed Delivery Transactions 1 Determining Net Asset Value 22 Lending of Portfolio Securities 1 Determining Market Value Bank Instruments 2 of Securities 22 Restricted Securities 2 Exchange Privilege 23 Lower-Grade Municipal Securities 2 Redeeming Shares 23 Zero-Coupon Securities 4 Contingent Deferred Sales Charge 23 Reverse Repurchase Agreements 5 Redemptions in Kind 23 Futures and Options Transactions 5 Tax Status 24 Futures Contracts 5 The Portfolios' Tax Status 24 Put Options on Futures Contracts 5 Shareholders' Tax Status 25 Call Options on Futures Contracts 6 Total Return 25 "Margin" in Futures Transactions 6 Yield 26 Regulatory Restrictions 7 Tax-Equivalent Yield (Municipal Income Portfolio) 26 Purchasing Put Options on Portfolio Securities 7 Tax-Equivalency Table 26 Writing Covered Call Options on Portfolio Securities 7 Performance Comparisons 27 Over-the-Counter Options 7 Financial Statements 29 Collateralized Mortgage Obligations (CMOs) 7 Appendix 30 Convertible Securities 8 Warrants 8 Dollar Rolls 8 Swaps, Caps, Floors and Collars 9 High Yield, High Risk Debt Securities 10 Indexed Securities 10 Currency Transactions 11 Risk of Currency Transactions 12 Eurodollar Instruments 12 Portfolio Turnover 12 Investment Limitations 12 Management of the Trust 15 Officers and Trustees 15 Ownership of Portfolios 16 Trustee Liability 16 Investment Advisory Services 16 Investment Adviser 16 Investment Adviser Fees 17 The Sub-Advisers 17 Distribution of Portfolio Shares 19 Administrative Services 19 Shareholder Servicing Plan 19 I General Information About the Trust The Trust was established as a Massachusetts business trust on January 20, 1992. As of the date of this Statement, the Trust consists of two classes of shares of beneficial interest, Class A and Class B shares, in each of the following six separate portfolios of securities (collectively, the 1 "Portfolios" and each individually, the "Portfolio"): Cambridge Growth Portfolio ("Growth Portfolio"); Cambridge Capital Growth Portfolio ("Capital Growth Portfolio"); Cambridge Government Income Portfolio ("Government Income Portfolio"); Cambridge Municipal Income Portfolio ("Municipal Income Portfolio"); and Cambridge Income and Growth Portfolio ("Income and Growth Portfolio"); and Cambridge Global Portfolio ("Global Portfolio"). Investment Objectives and Policies of the Portfolios The Prospectus discusses the objective of each Portfolio and the policies it employs to achieve those objectives. The following discussion supplements the description of the Portfolios' investment policies in the Prospectus. The Portfolios' respective investment objectives cannot be changed without approval of shareholders. Except as noted, the investment policies described below may be changed by the Board of Trustees without shareholder approval. Shareholders will be notified before any material change in these policies becomes effective. Repurchase Agreements The Portfolios or their custodian will take possession of the securities subject to repurchase agreements and these securities will be marked to market daily. In the event that a defaulting seller filed for bankruptcy or became insolvent, disposition of such securities by a Portfolio might be delayed pending court action. The Portfolios believe that, under the regular procedures normally in effect for custody of a Portfolio's portfolio securities subject to repurchase agreements, a court of competent jurisdiction would rule in favor of a Portfolio and allow retention or disposition of such securities. The Portfolios will only enter into repurchase agreements with banks and other recognized financial institutions, such as broker/dealers, which are deemed by the adviser to be creditworthy pursuant to guidelines established by the Board of Trustees. When-Issued and Delayed Delivery Transactions The Portfolios may engage in when-issued and delayed delivery transactions. These transactions are arrangements in which a Portfolio purchases securities with payment and delivery scheduled for a future time. A Portfolio engages in when-issued and delayed delivery transactions only for the purpose of acquiring portfolio securities consistent with its investment objective and policies, not for investment leverage, but a Portfolio may sell such securities prior to settlement date if such a sale is considered to be advisable. No income accrues to the Portfolios on securities in connection with such transactions prior to the date the Portfolios actually take delivery of securities. In when-issued and delayed delivery transactions, a Portfolio relies on the seller to complete the transaction. The seller's failure to complete the transaction may cause a Portfolio to miss a price or yield considered to be advantageous. These transactions are made to secure what is considered to be an advantageous price or yield for a Portfolio. Settlement dates may be a 2 month or more after entering into these transactions, and the market values of the securities purchased may vary from the purchase prices. No fees or other expenses, other than normal transaction costs, are incurred. However, liquid assets of a Portfolio sufficient to make payment for the securities to be purchased are segregated at the trade date. These securities are marked to market daily and are maintained until the transaction is settled. As a matter of policy, the Portfolios, other than the Municipal Income Portfolio, do not intend to engage in when-issued and delayed delivery transactions to an extent that would cause the segregation of more than 20% of the total value of their respective assets. Lending of Portfolio Securities The collateral received when a Portfolio lends portfolio securities must be valued daily and, should the market value of the loaned securities increase, the borrower must furnish additional collateral to the particular Portfolio. During the time portfolio securities are on loan, the borrower pays a Portfolio any dividends or interest paid on such securities. Loans are subject to termination at the option of a Portfolio or the borrower. A Portfolio may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or equivalent collateral to the borrower or placing broker. A Portfolio would not have the right to vote securities on loan, but would terminate the loan and regain the right to vote if that were considered important with respect to the investment. Bank Instruments The Portfolios may invest in the instruments of banks and savings and loans whose deposits are insured by the Bank Insurance Fund or the Savings Association Insurance Fund, both of which are administered by the Federal Deposit Insurance Corporation ("FDIC"), such as certificates of deposit, demand and time deposits, savings shares, and bankers' acceptances. However, the above-mentioned instruments are not necessarily guaranteed by those organizations. In addition to domestic bank obligations, such as certificates of deposit, demand and time deposits, savings shares, and bankers' acceptances, the Portfolios may invest in: (bullet) Eurodollar Certificates of Deposit ("ECDs") issued by foreign branches of U.S. or foreign banks; (bullet) Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated deposits in foreign branches of U.S. or foreign banks; (bullet) Canadian Time Deposits, which are U.S. dollar-denominated deposits issued by branches of major Canadian banks located in the U.S.; and 3 (bullet) Yankee Certificates of Deposit ("Yankee CDs"), which are U.S. dollar-denominated certificates of deposit issued by U.S. branches of foreign banks and held in the U.S. Restricted Securities The Portfolios may invest in restricted securities. Restricted securities are any securities in which each Portfolio may otherwise invest pursuant to its investment objective and policies but which are subject to restriction on resale under federal securities law. The ability of the Board of Trustees to determine the liquidity of certain restricted securities is permitted under a Securities and Exchange Commission ("SEC") Staff position set forth in the adopting release for Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain secondary market transactions involving securities subject to restrictions on resale under federal securities laws. The Rule provides an exemption from registration for resales of otherwise restricted securities to qualified institutional buyers. The Rule was expected to further enhance the liquidity of the secondary market for securities eligible for resale under the Rule. The Trust, on behalf of the Portfolios, believes that the Staff of the SEC has left the question of determining the liquidity of all restricted securities (eligible for resale under Rule 144A) for determination of the Trust's Board of Trustees. The Board of Trustees considers the following criteria in determining the liquidity of certain restricted securities. (bullet) the frequency of trades and quotes for the security; (bullet) the number of dealers willing to purchase or sell the security and the number of other potential buyers; (bullet) dealer undertakings to make a market in the security; and (bullet) the nature of the security and the nature of the marketplace trades. Lower-Grade Municipal Securities In normal circumstances, at least 80% of the Municipal Income Portfolio's total assets will be invested in investment-grade tax-exempt municipal securities and up to 20% of the Municipal Income Portfolio's total assets may be invested in lower-grade tax-exempt municipal securities. The amount of available information about the financial condition of municipal 4 securities issuers is generally less extensive than that for corporate issuers with publicly traded securities, and the market for tax-exempt municipal securities is considered to be generally less liquid than the market for corporate debt obligations. Liquidity relates to the ability of a Portfolio to sell a security in a timely manner at a price which reflects the value of that security. As discussed below, the market for lower-grade tax-exempt municipal securities is considered generally to be less liquid than the market for investment-grade tax-exempt municipal securities. Further, municipal securities in which the Municipal Income Portfolio may invest include special obligation bonds, lease obligations, participation certificates and variable rate instruments. The market for such securities may be particularly less liquid. The relative illiquidity of some of the Municipal Income Portfolio's securities may adversely affect the ability of the Municipal Income Portfolio to dispose of such securities in a timely manner and at a price which reflects the value of such security in the Trust's judgment. Although the issuer of some such municipal securities may be obligated to redeem such securities at face value, such redemption could result in capital losses to the Municipal Income Portfolio to the extent that such municipal securities were purchased by the Municipal Income Portfolio at a premium to face value. The market for less liquid securities tends to be more volatile than the market for more liquid securities, and market values of relatively illiquid securities may be more susceptible to change as a result of adverse publicity and investor perceptions than are the market values of higher grade, more liquid securities. The Municipal Income Portfolio's net asset value will change with changes in the value of its portfolio securities. Because the Municipal Income Portfolio will invest primarily in fixed income municipal securities, the Municipal Income Portfolio's net asset value can be expected to change as general levels of interest rates fluctuate. When interest rates decline, the value of a portfolio invested in fixed income securities can be expected to rise. Conversely, when interest rates rise, the value of a portfolio invested in fixed income securities can be expected to decline. Net asset value and market value may be volatile due to the Municipal Income Portfolio's investment in lower-grade and less liquid municipal securities. Volatility may be greater during periods of general economic uncertainty. To the extent that there is no established retail market for some of the securities in which the Municipal Income Portfolio may invest, there may be relatively inactive trading in such securities and the ability of the Trust to accurately value such securities may be adversely affected. During periods of reduced market liquidity and in the absence of readily available market quotations for securities held in the Municipal Income Portfolio, the responsibility of the Trust to value the Municipal Income Portfolio's securities becomes more difficult and the Trust's judgment may play a greater role in the valuation of the Municipal Income Portfolio's securities due to the reduced availability of reliable objective data. To the extent that the Municipal Income Portfolio invests in illiquid 5 securities and securities which are restricted as to resale, the Municipal Income Portfolio may incur additional risks and costs. Illiquid and restricted securities are particularly difficult to dispose of. When determining whether municipal leases purchased by the Municipal Income Portfolio will be classified as a liquid or illiquid security, the Board of Trustees has directed the Sub-Adviser to consider the following factors: the frequency of trades and quotes for the security; the volatility of quotations and trade prices for the security; the number of dealers willing to purchase or sell the security and the number of potential purchases; dealer undertaking to make a market in the security; the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer); the rating of the security and the financial condition and prospects of the issuer of the security; whether the lease can be terminated by the lessee; the potential recovery, if any, from a sale of the leased property upon termination of the lease; the lessee's general credit strength (e.g., its debt, administrative, economic and financial characteristics and prospects); the likelihood that the lessee will discontinue appropriating funding for the leased property because the property is no longer deemed essential to its operations (e.g., the potential for an "event of nonappropriation"); any credit enhancement or legal recourse provided upon an event of nonappropriation or other termination of the lease; and such other factors as may be relevant to the Portfolio's ability to dispose of the security. Lower-grade tax-exempt municipal securities generally involve greater credit risk than higher-grade municipal securities. A general economic downturn or a significant increase in interest rates could severely disrupt the market for lower-grade tax-exempt municipal securities and adversely affect the market value of such securities. In addition, in such circumstances, the ability of issuers of lower-grade tax-exempt municipal securities to repay principal and to pay interest, to meet projected financial goals and to obtain additional financing may be adversely affected. Such consequences could lead to an increased incidence of default for such securities and adversely affect the value of the lower- grade tax-exempt municipal securities in the Municipal Income Portfolio and, thus, the Portfolio's net asset value. The secondary market prices of lower-grade tax-exempt municipal securities are less sensitive to changes in interest rates than are those for higher rated tax-exempt municipal securities, but are more sensitive to adverse economic changes or individual issuer developments. Adverse publicity and investors' perceptions, whether or not based on rational analysis, may also affect the value and liquidity of lower-grade tax-exempt municipal securities. Yields on the Municipal Income Portfolio's securities can be expected to fluctuate over time. In addition, periods of economic uncertainty and changes in interest rates can be expected to result in increased volatility of the market prices of the lower-grade tax-exempt municipal securities in the Municipal Income Portfolio's portfolio and, thus, in the net asset value of the Portfolio. Net asset value and market value may be volatile 6 due to the Municipal Income Portfolio's investment in lower-grade and less liquid municipal securities. Volatility may be greater during periods of general economic uncertainty. The Municipal Income Portfolio may incur additional expenses to the extent it is required to seek recovery upon a default in the payment of interest or a repayment of principal on its portfolio holdings, and the Municipal Income Portfolio may be unable to obtain full recovery thereof. In the event that an issuer of securities held by the Municipal Income Portfolio experiences difficulties in the timely payment of principal or interest, and such issuer seeks to restructure the terms of its borrowings, the Municipal Income Portfolio may incur additional expenses and may determine to invest additional capital with respect to such issuer or the project or projects to which the Municipal Income Portfolio's securities relate. Recent and proposed legislation may have an adverse impact on the market for lower-grade tax- exempt municipal securities. Recent legislation requires federally-insured savings and loan associations to divest their investments in lower-grade bonds. Other legislation has, from time to time, been proposed which, if enacted, could have an adverse impact on the market for lower-grade tax- exempt municipal securities. The Municipal Income Portfolio will rely on the Sub-Adviser's judgment, analysis, and experience in evaluating the creditworthiness of an issue. In this evaluation, the Sub-Adviser will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. The Sub-Adviser also may consider, although it does not rely primarily on, the credit ratings of Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's"), in evaluating tax-exempt municipal securities. Such ratings evaluate only the safety of principal and interest payments, not market value risk. Additionally, because the creditworthiness of an issuer may change more rapidly than is able to be timely reflected in changes in credit ratings, the Sub-Adviser continuously monitors the issuers of tax-exempt municipal securities held in the Municipal Income Portfolio. The Municipal Income Portfolio may, if deemed appropriate by the Sub-Adviser, retain a security whose rating has been downgraded below B-by S&P or below B3 by Moody's, or whose rating has been withdrawn. Because issuers of lower-grade tax-exempt municipal securities frequently choose not to seek a rating of their municipal securities, the Sub-Adviser will be required to determine the relative investment quality of many of the municipal securities in the Municipal Income Portfolio. Further, because the Municipal Income Portfolio may invest up to 20% of its total assets in these lower-grade municipal securities, achievement by the Municipal Income Portfolio of its investment objective may be more dependent upon the Sub-Adviser's investment analysis than would be the case if the Municipal Income Portfolio were investing exclusively in higher- grade municipal securities. The relative lack of financial information available with respect to issuers of municipal securities may adversely affect the Sub-Adviser's ability to successfully conduct the required 7 investment analysis. Zero-Coupon Securities Zero-coupon securities in which the Income and Growth and Global Portfolios may invest are debt obligations which are generally issued at a discount and payable in full at maturity, and do not provide for current payments of interest prior to maturity. Zero-coupon securities usually trade at a deep discount from their face or par value and are subject to greater market value fluctuations from changing interest rates than debt obligations of comparable maturities which make current distributions of interest. As a result, the net asset value of shares of a Portfolio investing in zero- coupon securities may fluctuate over a greater range than shares of other Portfolios and other mutual funds investing in securities making current distributions of interest and having similar maturities. Zero-coupon securities may include U.S. Treasury bills issued directly by the U.S. Treasury or other short-term debt obligations, and longer-term bonds or notes and their unmatured interest coupons which have been separated by their holder, typically a custodian bank or investment brokerage firm. A number of securities firms and banks have stripped the interest coupons from the underlying principal (the "corpus") of U.S. Treasury securities and resold them in custodial receipt programs with a number of different names, including Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in book-entry form at the Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered securities which are owned ostensibly by the bearer or holder thereof), in trust on behalf of the owners thereof. In addition, the Treasury has facilitated transfers of ownership of zero- coupon securities by accounting separately for the beneficial ownership of particular interest coupons and corpus payments on Treasury securities through the Federal Reserve book-entry recordkeeping system. The Federal Reserve program as established by the Treasury Department is known as "STRIPS" or "Separate Trading of Registered Interest and Principal of Securities." Under the STRIPS program, a Portfolio will be able to have its beneficial ownership of U.S. Treasury zero-coupon securities recorded directly in the book-entry recordkeeping system in lieu of having to hold certificates or other evidence of ownership of the underlying U.S. Treasury securities. When debt obligations have been stripped of their unmatured interest coupons by the holder, the stripped coupons are sold separately. The principal or corpus is sold at a deep discount because the buyer receives only the right to receive a future fixed payment on the security and does not receive any rights to periodic cash interest payments. Once stripped or separated, the corpus and coupons may be sold separately. Typically, the coupons are sold separately or grouped with other coupons with like maturity dates and sold in such bundled form. Purchasers of stripped 8 obligations acquire, in effect, discount obligations that are economically identical to the zero-coupon securities issued directly by the obligor. No more than 5% of the net assets of the Income and Growth Portfolio will be invested in CATS, TIGRS or STRIPS. Reverse Repurchase Agreements The Portfolios may also enter into reverse repurchase agreements. These transactions are similar to borrowing cash. In a reverse repurchase agreement, the Portfolio transfers possession of a portfolio instrument to another person, such as a financial institution, broker, or dealer, in return for a percentage of the instrument's market value in cash, and agrees that on a stipulated date in the future the Portfolio will repurchase the portfolio instrument by remitting the original consideration plus interest at an agreed upon rate. The use of reverse repurchase agreements may enable the Portfolio to avoid selling portfolio instruments at a time when a sale may be deemed to be disadvantageous, but the ability to enter into reverse repurchase agreements does not ensure that the Portfolio will be able to avoid selling portfolio instruments at a disadvantageous time. When effecting reverse repurchase agreements, liquid assets of the Portfolio, in a dollar amount sufficient to make payment for the obligations to be purchased, are segregated at the trade date. These securities are marked to market daily and are maintained until the transaction is settled. Futures and Options Transactions The Portfolios may engage in futures and options hedging transactions. The Income and Growth Portfolio will not, however, utilize options on its futures. In an effort to reduce fluctuations in the net asset value of shares of a Portfolio, a Portfolio may attempt to hedge all or a portion of its portfolio by buying and selling financial futures contracts, buying put options on portfolio securities and listed put options on futures contracts, and writing call options on futures contracts. A Portfolio may also write covered call options on portfolio securities to attempt to increase its current income. A Portfolio will maintain its positions in securities, option rights, and segregated cash subject to puts and calls until the options are exercised, closed, or have expired. An option position on financial futures contracts may be closed out only on the exchange on which the position was established. Futures Contracts The Portfolios may engage in transactions in futures contracts. A futures contract is a firm commitment by two parties: the seller who agrees to make delivery of the specific type of security called for in the contract ("going short") and the buyer who agrees to take delivery of the security ("going long") at a certain time in the future. However, a stock index futures contract is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between 9 the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. No physical delivery of the underlying securities in the index is made. The purpose of the acquisition or sale of a futures contract by a Portfolio is to protect the Portfolio from fluctuations in the value of its securities caused by anticipated changes in interest rates or market conditions without necessarily buying or selling the securities. For example, in the fixed income securities market, price generally moves inversely to interest rates. A rise in rates generally means a drop in price. Conversely, a drop in rates generally means a rise in price. In order to hedge their holdings of fixed income securities against a rise in market interest rates, Government Income Portfolio, Municipal Income Portfolio, Income and Growth Portfolio and Global Portfolio could enter into contracts to deliver securities at a predetermined price (i.e., "go short") to protect themselves against the possibility that the prices of their fixed income securities may decline during the anticipated holding period. Any of these Portfolios would "go long" (i.e., agree to purchase securities in the future at a predetermined price) to hedge against a decline in market interest rates. Put Options on Futures Contracts The Portfolios, with the exception of the Income and Growth Portfolio, may engage in transactions in put options on futures contracts. A Portfolio may purchase listed put options on futures contracts. Unlike entering directly into a futures contract, which requires the purchaser to buy a financial instrument on a set date at a specified price, the purchase of a put option on a futures contract entitles (but does not obligate) its purchaser to decide on or before a future date whether to assume a short position at the specified price. A Portfolio would purchase put options on futures contracts to protect portfolio securities against decreases in value resulting from market factors, such as an anticipated increase in interest rates. Generally, if the hedged portfolio securities decrease in value during the term of an option, the related futures contracts will also decrease in value and the option will increase in value. In such an event, a Portfolio will normally close out its option by selling an identical option. If the hedge is successful, the proceeds received by a Portfolio upon the sale of the second option may be large enough to offset both the premium paid by the Portfolio for the original option plus the decrease in value of the hedged securities. Alternatively, a Portfolio may exercise its put option to close out the position. To do so, it would simultaneously enter into a futures contract of the type underlying the option (for a price less than the strike price of the option) and exercise the option. The Portfolio would then deliver the futures contract in return for payment of the strike price. If the Portfolio neither closes out nor exercises an option, the option will expire on the date provided in the option contract, and only the premium paid for the contract will be lost. 10 When a Portfolio sells a put on a futures contract, it receives a cash premium which can be used in whatever way is deemed most advantageous to the Portfolio. In exchange for such premium, the Portfolio grants to the purchaser of the put the right to receive from the Portfolio, at the strike price, a short position in such futures contract, even though the strike price upon exercise of the option is greater than the value of the futures position received by such holder. If the value of the underlying futures position is not such that exercise of the option would be profitable to the option holder, the option will generally expire without being exercised. The Portfolio has no obligation to return premiums paid to it whether or not the option is exercised. It will generally be the policy of each Portfolio, in order to avoid the exercise of an option sold by it, to cancel its obligation under the option by entering into a closing purchase transaction, if available, unless it is determined to be in such Portfolio's interest to deliver the underlying futures position. A closing purchase transaction consists of the purchase by the Portfolio of an option having the same term as the option sold by the Portfolio, and has the effect of canceling the Portfolio's position as a seller. The premium which the Portfolio will pay in executing a closing purchase transaction may be higher than the premium received when the option was sold, depending in large part upon the relative price of the underlying futures position at the time of each transaction. Call Options on Futures Contracts The Portfolios, with the exception of the Income and Growth Portfolio, may engage in transactions in call options on futures contracts. In addition to purchasing put options on futures, the Portfolios may write listed call options on futures contracts to hedge their respective portfolios against, for example, an increase in market interest rates. When a Portfolio writes a call option on a futures contract, it is undertaking the obligation of assuming a short futures position (selling a futures contract) at the fixed strike price at any time during the life of the option if the option is exercised. As market interest rates rise (in the case of the Government Income Portfolio, Municipal Income Portfolio and Global Portfolio) or as stock prices fall (in the case of the Growth Portfolio, Capital Growth Portfolio and Global Portfolio), causing the prices of futures to go down, a Portfolio's obligation under a call option on a future (to sell a futures contract) costs less to fulfill, causing the value of a Portfolio's call option position to increase. In other words, as the underlying future's price goes down below the strike price, the buyer of the option has no reason to exercise the call, so that a Portfolio keeps the premium received for the option. This premium can help substantially to offset the drop in value of a Portfolio's portfolio securities. Prior to the expiration of a call written by a Portfolio, or exercise of it by the buyer, a Portfolio may close out the option by buying an identical option. If the hedge is successful, the cost of the second option will be less than the premium received by a Portfolio for the initial option. The net premium income of a Portfolio will then help offset the decrease in value of the hedged securities. 11 When a Portfolio purchases a call on a financial futures contract, it receives in exchange for the payment of a cash premium the right, but not the obligation to enter into the underlying futures contract at a strike price determined at the time the call was purchased, regardless of the comparative market value of such futures position at the time the option is exercised. The holder of a call option has the right to receive a long (or buyer's) position in the underlying futures contract. A Portfolio will not maintain open positions in futures contracts it has sold or call options it has written on futures contracts if, in the aggregate, the value of the open positions (marked to market) exceeds the current market value of its securities portfolio (including cash or cash equivalents) plus or minus the unrealized gain or loss on those open positions, adjusted for the correlation of volatility between the hedged securities and the futures contracts. If this limitation is exceeded at any time, a Portfolio will take prompt action to close out a sufficient number of open contracts to bring its open futures and options positions within this limitation. "Margin" in Futures Transactions Unlike the purchase or sale of a security, the Portfolios do not pay or receive money upon the purchase or sale of a futures contract. Rather, the Portfolios are required to deposit an amount of "initial margin" in cash or U.S. Treasury bills with the custodian (or the broker, if legally permitted). The nature of initial margin in futures transactions is different from that of margin in securities transactions in that futures contracts initial margin does not involve a borrowing by a Portfolio to finance the transactions. Initial margin is in the nature of a performance bond or good faith deposit on the contract which is returned to a Portfolio upon termination of the futures contract, assuming all contractual obligations have been satisfied. A futures contract held by a Portfolio is valued daily at the official settlement price of the exchange on which it is traded. Each day a Portfolio pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking to market." Variation margin does not represent a borrowing or loan by a Portfolio but is instead settlement between a Portfolio and the broker of the amount one would owe the other if the futures contract expired. In computing its daily net asset value, a Portfolio will mark to market its open futures positions. The Portfolios are also required to deposit and maintain margin when they write call options on futures contracts. Regulatory Restrictions To the extent required to comply with Commodity Futures Trading Commission Regulation 4.5 and thereby avoid status as a "commodity pool operator," the Portfolios will not enter into a futures contract, or purchase an option 12 thereon, if immediately thereafter the initial margin deposits for futures contracts held by a Portfolio, plus premiums paid by it for open options of futures, would exceed 5% of the total assets of the Portfolio. The Portfolios will not engage in transactions in futures contracts or options thereon for speculation, but only to attempt to hedge against changes in market conditions affecting the values of assets which the Portfolios hold or intend to purchase. When futures contracts or options thereon are purchased in order to protect against a price increase on securities or other assets intended to be purchased later, it is anticipated that at least 75% of such intended purchases will be completed. When other futures contracts or options thereon are purchased, the underlying value of such contracts will at all times not exceed the sum of (1) accrued profit on such contracts held by the broker; (2) cash or high-quality money market instruments set aside in an identifiable manner; and (3) cash proceeds from investments due in 30 days or less. Purchasing Put Options on Portfolio Securities With the exception of the Income and Growth Portfolio, the Portfolios may purchase put options on portfolio securities to protect against price movements in particular securities in their respective portfolios. A put option gives a Portfolio, in return for a premium, the right to sell the underlying security to the writer (seller) at a specified price during the term of the option. Writing Covered Call Options on Portfolio Securities The Capital Growth, Government Income, and Municipal Income and Global Portfolios may write covered call options to generate income. As a writer of a call option, a Portfolio has the obligation upon exercise of the option during the option period to deliver the underlying security upon payment of the exercise price. A Portfolio may only sell call options either on securities held in its portfolio or on securities which it has the right to obtain without payment of further consideration (or has segregated cash in the amount of any additional consideration). Over-the-Counter Options The Capital Growth, Government Income, and Municipal Income and Global Portfolios may purchase and write over-the-counter options on portfolio securities in negotiated transactions with the buyers or writers of the options for those options on portfolio securities held by a Portfolio and not traded on an exchange. Over-the-counter options are two-party contracts with price and terms negotiated between buyer and seller. In contrast, exchange-traded options are third-party contracts with standardized strike prices and expiration dates and are purchased from a clearing corporation. Exchange-traded options have a continuous liquid market while over-the-counter options may not. 13 Collateralized Mortgage Obligations (CMOs) The Government Income and Income and Growth Portfolios may invest in CMOs. Privately issued CMOs generally represent an ownership interest in a pool of federal agency mortgage pass-through securities such as those issued by the Government National Mortgage Association. The terms and characteristics of the mortgage instruments may vary among pass-through mortgage loan pools. The market for such CMOs has expanded considerably since its inception. The size of the primary issuance market and the active participation in the secondary market by securities dealers and other investors make government- related pools highly liquid. Convertible Securities The Growth, Capital Growth, Income and Growth and Global Portfolios may invest in convertible securities. Convertible securities are fixed income securities which may be exchanged or converted into a predetermined number of the issuer's underlying common stock at the option of the holder during a specified time period. Convertible securities may take the form of convertible preferred stock, convertible bonds or debentures, units consisting of "usable" bonds and warrants or a combination of the features of several of these securities. The investment characteristics of each convertible security vary widely, which allows convertible securities to be employed for a variety of investment strategies. A Portfolio will exchange or convert the convertible securities held in its portfolio into shares of the underlying common stock when, in the Sub- Adviser's opinion, the investment characteristics of the underlying common shares will assist the Portfolio in achieving its investment objectives. Otherwise, the Portfolio may hold or trade convertible securities. In selecting convertible securities for the Portfolio, the Portfolio's Sub- Adviser evaluates the investment characteristics of the convertible security as a fixed income instrument and the investment potential of the underlying equity security for capital appreciation. In evaluating these matters with respect to a particular convertible security, the Portfolio's Sub-Adviser considers numerous factors, including the economic and political outlook, the value of the security relative to other investment alternatives, trends in the determinants of the issuer's profits, and the issuer's management capability and practices. Warrants The Growth, Capital Growth, and Income and Growth and Global Portfolios may invest in warrants. Warrants are basically options to purchase common stock at a specific price (usually at a premium above the market value of the optioned common stock at issuance) valid for a specific period of time. Warrants may have a life ranging from less than a year to twenty years or may be perpetual. However, most warrants have expiration dates after which 14 they are worthless. In addition, if the market price of the common stock does not exceed the warrant's exercise price during the life of the warrant, the warrant will expire as worthless. Warrants have no voting rights, pay no dividends, and have no rights with respect to the assets of the corporation issuing them. The percentage increase or decrease in the market price of the warrant may tend to be greater than the percentage increase or decrease in the market price of the optioned common stock. A Portfolio will not invest more than 5% of the value of its total assets in warrants. No more than 2% of this 5% may be warrants which are not listed on the New York or American Stock Exchanges. Warrants acquired in units or attached to securities may be deemed to be without value for purposes of this policy. Dollar Rolls The Government Income, Income and Growth and Global Portfolios may enter into "dollar roll" transactions, which consist of the sale by the Government Income Portfolio, Income and Growth Portfolio or Global Portfolio to a bank or broker/dealer (the "counterparty") of GNMA certificates or other mortgage-backed securities together with a commitment to purchase similar, but not identical, securities at a future date, at the same price. The counterparty receives all principal and interest payments, including prepayments, made on the security while the counterparty is the holder. The Government Income, Income and Growth and Global Portfolios receive a fee from the counterparty as consideration for entering into the commitment to purchase. Dollar rolls may be renewed over a period of several months with a different repurchase price and a cash settlement made at each renewal without physical delivery of securities. Moreover, the transaction may be preceded by a firm commitment agreement pursuant to which the Government Income Portfolio, Income and Growth Portfolio or Global Portfolio agrees to buy a security on a future date. The Government Income, Income and Growth and Global Portfolios will not use such transactions for leveraging purposes and, accordingly, will segregate cash, U.S. Government securities or other high grade debt obligations in an amount sufficient to meet its purchase obligations under the transactions. The Government Income, Income and Growth and Global Portfolios will also maintain asset coverage of at least 300% for all outstanding firm commitments, dollar rolls and other borrowings. Dollar rolls are treated for purposes of the Investment Company Act of 1940 as borrowings of the Government Income, Income and Growth and Global Portfolios because they involve the sale of a security coupled with an agreement to repurchase. Like all borrowings, a dollar roll involves costs to the Government Income, Income and Growth and Global Portfolios. For example, while the Government Income, Income and Growth and Global Portfolios receive a fee as consideration for agreeing to repurchase the security, the Government Income, Income and Growth and Global Portfolios forgo the right to receive all principal and interest payments while the counterparty holds the security. These payments to the counterparty may exceed the fee received by the Government Income, Income and Growth and Global Portfolios, thereby effectively charging the Government Income, Income and Growth and Global Portfolios interest 15 on its respective borrowing. Further, although the Government Income, Income and Growth and Global Portfolios can estimate the amount of expected principal prepayment over the term of the dollar roll, a variation in the actual amount of prepayment could increase or decrease the cost of the Government Income, Income and Growth and Global Portfolio's borrowing. The entry into dollar rolls involves potential risks of loss which are different from those of the securities underlying the transactions. For example, if the counterparty becomes insolvent, the Government Income, Income and Growth and Global Portfolios' right to purchase from the counterparty might be restricted. Additionally, the value of such securities may change adversely before the Government Income, Income and Growth and Global Portfolios are able to purchase them. Similarly, the Government Income, Income and Growth and Global Portfolios may be required to purchase securities in connection with a dollar roll at a higher price than may otherwise be available on the open market. Since, as noted above, the counterparty is required to deliver a similar, but not identical security to the Government Income, Income and Growth and Global Portfolios, the security which the Government Income, Income and Growth and Global Portfolios are required to buy under the dollar roll may be worth less than an identical security. Finally, there can be no assurance that the Government Income, Income and Growth and Global Portfolios' use of the cash that it receives from a dollar roll will provide a return that exceeds borrowing costs. The Board of Trustees of the Trust on behalf of the Government Income, Income and Growth and Global Portfolios have adopted guidelines to ensure that those securities received are substantially identical to those sold. To reduce the risk of default, the Government Income, Income and Growth and Global Portfolios will engage in such transactions only with banks and broker-dealers selected pursuant to such guidelines. Swaps, Caps, Floors and Collars The Global Portfolio may enter into interest rate, currency and index swaps and the purchase or sale of related caps, floors and collars. The Global Portfolio expects to enter into these transactions primarily 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 the Global Portfolio anticipates purchasing at a later date. The Global Portfolio intends to use these transactions as hedges and not as speculative investments and will not sell interest rate caps or floors where it does not own securities or other instruments providing the income stream the Global Portfolio may be obligated to pay. Interest rate swaps involve the exchange by the Global Portfolio with another party of their respective commitments to pay or receive interest, e.g., 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 of two or more currencies based on the relative value differential among them and an index swap is an agreement to swap cash flows on a notional amount based on changes in the values of the reference 16 indices. The purchase of a cap entitles the purchaser to receive payments on a notional principal amount from the party selling such cap to the extent that a specified index exceeds 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 such floor to the extent that a specified 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 within a predetermined range of interest rates or values. The Global Portfolio will usually enter into swaps on a net basis, i.e., the two payment streams are netted out in a cash settlement on the payment date or dates specified in the instrument, with the Global Portfolio receiving or paying, as the case may be, only the net amount of the two payments. Inasmuch as these swaps, caps, floors and collars are entered into for good faith hedging purposes, the Global Portfolio and its Sub- Adviser believe such obligations do not constitute senior securities under the Investment Company Act of 1940 and, accordingly, will not treat them as being subject to its borrowing restrictions. The Global Portfolio will not enter into any swap, cap, floor or collar transaction unless, at the time of entering into such transaction, the unsecured long-term debt of the Counterparty, combined with any credit enhancements, is rated at least A by S&P or Moody's or has an equivalent rating from a NRSRO or is determined to be of equivalent credit quality by the Global Portfolio's Sub-Adviser. If there is a default by the Counterparty, the Global Portfolio 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, accordingly, they are less liquid than swaps. High Yield, High Risk Debt Securities The Global Portfolio may invest up to 5% of its net assets in securities rated Baa/BBB or lower and in unrated securities of equivalent quality in the Sub-Adviser's judgment. The Global Portfolio may invest in debt securities which are rated as low as C by Moody's or D by S&P. Such securities may be in default with respect to payment of principal or interest. Below investment grade securities (rated below Baa by Moody's and below BBB by S&P) or unrated securities of equivalent quality in the Sub-Adviser's judgment, carry a high degree of risk (including the possibility of default or bankruptcy of the issuers of such securities), generally involve greater volatility of price and risk of principal and income, and may be less liquid, than securities in the higher rating categories and are considered speculative. The lower the ratings of such debt securities, the greater their risks render them like equity securities. See the Appendix to this Statement of Additional Information for a more complete description of the 17 ratings assigned by ratings organizations and their respective characteristics. An economic downturn could disrupt the high yield market and impair the ability of issuers to repay principal and interest. Also, an increase in interest rates would likely have a greater adverse impact on the value of such obligations than on higher quality debt securities. During an economic downturn or period of rising interest rates, highly leveraged issues may experience financial stress which could adversely affect their ability to service their principal and interest payment obligations. Prices and yields of high yield securities will fluctuate over time and, during periods of economic uncertainty, volatility of high yield securities may adversely affect the Global Portfolio's net asset value. In addition, investments in high yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield securities, may be more speculative and may be subject to greater fluctuations in value due to changes in interest rates. The trading market for high yield securities may be thin to the extent that there is no established retail secondary market. A thin trading market may limit the ability of the Global Portfolio to accurately value high yield securities in its portfolio and to dispose of those securities. Adverse publicity and investor perceptions may decrease the values and liquidity of high yield securities. These securities may also involve special registration responsibilities, liabilities and costs, and liquidity and valuation difficulties. Credit quality in the high-yield securities market can change suddenly and unexpectedly, and even recently issued credit ratings may not fully reflect the actual risks posed by a particular high-yield security. For these reasons, it is the policy of the Sub-Adviser not to rely exclusively on ratings issued by established credit rating agencies, but to supplement such ratings with its own independent and on-going review of credit quality. The achievement of the Global Portfolio's investment objective by investment in such securities may be more dependent on the Sub-Adviser's credit analysis than is the case for higher quality bonds. Should the rating of a portfolio security be downgraded, the Sub-Adviser will determine whether it is in the best interest of the Global Portfolio to retain or dispose of such security. Prices for below investment-grade securities may be affected by legislative and regulatory developments. For example, new federal rules require savings and loan institutions to gradually reduce their holdings of this type of security. Also, recent legislation restricts the issuer's tax deduction for interest payments on these securities. Such legislation may significantly depress the prices of outstanding securities of this type. Indexed Securities The Global Portfolio may invest in indexed securities, the value of which is linked to currencies, interest rates, commodities, indices or other 18 financial indicators ("reference instruments"). Most indexed securities have maturities of three years or less. Indexed securities differ from other types of debt securities in which the Global Portfolio may invest in several respects. First, the interest rate or, unlike other debt securities, the principal amount payable at maturity of an indexed security may vary based on changes in one or more specified reference instruments, such as an interest rate compared with a fixed interest rate or the currency exchange rates between two currencies (neither of which need be the currency in which the instrument is denominated). The reference instrument need not be related to the terms of the indexed security. For example, the principal amount of a U.S. dollar denominated indexed security may vary based on the exchange rate of two foreign currencies. An indexed security may be positively or negatively indexed; that is, its value may increase or decrease if the value of the reference instrument increases. Further, the change in the principal amount payable or the interest rate of an indexed security may be a multiple of the percentage change (positive or negative) in the value of the underlying reference instrument(s). Investment in indexed securities involves certain risks. In addition to the credit risk of the security's issuer and the normal risks of price changes in response to changes in interest rates, the principal amount of indexed securities may decrease as a result of changes in the value of reference instruments. Further, in the case of certain indexed securities in which the interest rate is linked to a reference instrument, the interest rate may be reduced to zero, and any further declines in the value of the security may then reduce the principal amount payable on maturity. Finally, indexed securities may be more volatile than the reference instruments underlying indexed securities. Currency Transactions The Global Portfolio may engage in currency transactions with counterparties in order to hedge the value of portfolio holdings denominated in particular currencies against fluctuations in relative value. Currency transactions include forward currency contracts, exchange listed currency futures, 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. A Global Portfolio may enter into currency transactions with counterparties which have received (or the guarantors of the obligations which have received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or that have an equivalent rating from a NRSRO or (except for OTC currency options) are determined to be of equivalent credit 19 quality by the Sub-Adviser. The Global Portfolio dealings in forward currency contracts and other currency transactions such as futures, options, options on futures and swaps will be limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is entering into a currency transaction with respect to specific assets or liabilities of the Global Portfolio, which will generally arise in connection with the purchase or sale of its portfolio securities or the receipt of income therefrom. Position hedging is entering into a currency transaction with respect to portfolio security positions denominated or generally quoted in that currency. The Global Portfolio 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 in its portfolio that are denominated or generally quoted in or currently convertible into such currency, other than with respect to proxy hedging as described below. The Global Portfolio may also cross-hedge currencies by entering into transactions to purchase or sell one or more currencies that are expected to decline in value relative to other currencies to which the Global Portfolio has or in which a Global Portfolio expects to have portfolio exposure. To reduce the effect of currency fluctuations on the value of existing or anticipated holdings of portfolio securities, the Global Portfolio may also engage in proxy hedging. Proxy hedging is often used when the currency to which the Portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy hedging entails entering into a forward contract to sell a currency whose changes in value are generally considered to be linked to a currency or currencies in which some or all of the Global Portfolio's securities are or are expected to be denominated, and to buy U.S. dollars. The amount of the contract would not exceed the value of the Global Portfolio's securities denominated in linked currencies. For example, if the Sub-Adviser considers that the Austrian schilling is linked to the German deutschemark (the "D-mark"), the Global Portfolio holds securities denominated in schillings and the Sub-Adviser believes that the value of schillings will decline against the U.S. dollar, the Sub-Adviser may enter into a contract to sell D-marks and buy dollars. Currency hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to the Global Portfolio if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated. Further, there is the risk that the perceived linkage between various currencies may not be present or may not be present during the particular time that the Global Portfolio is engaging in proxy hedging. Except when the Global Portfolio enters into a forward contract for the purchase or sale of a security 20 denominated in a particular currency, which requires no segregation, a currency contract which obligates the Global Portfolio to buy or sell currency will generally require the Global Portfolio to hold an amount of that currency or liquid securities denominated in that currency equal to the Global Portfolio's obligations or to segregate liquid high grade assets equal to the amount of the Global Portfolio's obligation. Risk of Currency Transactions Currency transactions are subject to risks different from those of other portfolio transactions. Because currency control is of great importance to the issuing governments and influences economic planning and policy, purchases and sales of currency and related instruments can be negatively affected by government exchange controls, blockages, and manipulations or exchange restrictions imposed by governments. These can result in losses to the Global Portfolio if it is unable to deliver or receive currency or funds in settlement of obligations and could also cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as incurring transaction costs. Buyers and sellers of currency futures are subject to the same risks that apply to the use of futures generally. Further, settlement of a currency futures contract for the purchase of most currencies must occur at a bank based in the issuing nation. Trading options on currency futures is relatively new, and the ability to establish and close out positions on such options is subject to the maintenance of a liquid market which may not always be available. Currency exchange rates may fluctuate based on factors extrinsic to that country's economy. Eurodollar Instruments The Global Portfolio may make investments in Eurodollar instruments. Eurodollar instruments are U.S. dollar-denominated futures contracts or options thereon which are linked to the London Interbank Offered Rate ("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. The Global Portfolio 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. Portfolio Turnover The annual turnover rate of the Portfolios may vary from year to year, and may also be affected by cash requirements for redemptions and repurchases of Portfolio shares and by the necessity of maintaining the Portfolios as regulated investment companies under the Internal Revenue Code, as amended, in order to receive certain favorable tax treatment. The Portfolios will not attempt to set or meet a portfolio turnover rate since any turnover would be incidental to transactions undertaken in an 21 attempt to achieve each Portfolio's investment objective. During the fiscal years ended September 30, 1994 and 1993, the respective portfolio turnover rates for the indicated Portfolios were as follows: Growth Portfolio, 132% and 137%; Capital Growth Portfolio, 149% and 192%; Government Income Portfolio, 455% and 102%; and Municipal Income Portfolio, 87% and 88%. During the fiscal year ended September 30, 1994 and the period of May 24, 1993 (date of initial public investment), to September 30, 1993, the portfolio turnover rate for the Income and Growth Portfolio was 78% and 13%. During the period of March 29, 1994 (date of initial public investment), to September 30, 1994, the portfolio turnover rate for the Global Portfolio was 2%. Investment Limitations Issuing Senior Securities and Borrowing Money The Portfolios will not issue senior securities except that a Portfolio (other than the Municipal Income Portfolio) may borrow money directly or through reverse repurchase agreements in amounts up to one-third of the value of its net assets, including the amount borrowed; and except to the extent that a Portfolio may enter into futures contracts. The Municipal Income Portfolio may borrow money from banks for temporary purposes in amounts up to 5% of its total assets. The Portfolios will not borrow money or engage in reverse repurchase agreements for investment leverage, but rather as a temporary, extraordinary, or emergency measure or to facilitate management of the Portfolio by enabling it to meet redemption requests when the liquidation of portfolio securities is deemed to be inconvenient or disadvantageous. The Portfolios will not purchase any securities while any borrowings in excess of 5% of its total assets are outstanding. During the period any reverse repurchase agreements are outstanding, the Government Income Portfolio will restrict the purchase of portfolio securities to money market instruments maturing on or before the expiration date of the reverse repurchase agreements, but only to the extent necessary to assure completion of the reverse repurchase agreements. Notwithstanding this restriction, the Portfolios may enter into when-issued and delayed delivery transactions. Selling Short and Buying on Margin 22 The Portfolios will not sell any securities short or purchase any securities on margin, but may obtain such short-term credits as are necessary for clearance of purchases and sales of securities. The deposit or payment by a Portfolio of initial or variation margin in connection with futures contracts or related options transactions is not considered the purchase of a security on margin. Pledging Assets The Portfolios will not mortgage, pledge, or hypothecate any assets, except to secure permitted borrowings. In these cases the Portfolios may pledge assets having a value of 10% of assets taken at cost. For purposes of this restriction, (a) the deposit of assets in escrow in connection with the writing of covered put or call options and the purchase of securities on a when-issued basis; and (b) collateral arrangements with respect to (i) the purchase and sale of stock options (and options on stock indexes) and (ii) initial or variation margin for futures contracts, will not be deemed to be pledges of a Portfolio's assets. Margin deposits for the purchase and sale of futures contracts and related options are not deemed to be a pledge. Lending Cash or Securities The Portfolios will not lend any of their respective assets except portfolio securities up to one-third of the value of total assets. (The Municipal Income Portfolio will not lend portfolio securities.) This shall not prevent a Portfolio from purchasing or holding U.S. government obligations, money market instruments, variable amount demand master notes, bonds, debentures, notes, certificates of indebtedness, or other debt securities, entering into repurchase agreements, or engaging in other transactions where permitted by a Portfolio's investment objective, policies and limitations or Declaration of Trust. The Municipal Income Portfolio will not make loans except to the extent the obligations the Portfolio may invest in are considered to be loans. Investing in Restricted Securities The Portfolios (other than the Government Income Portfolio) will not invest more than 10% of the value of their net assets in restricted securities; the Government Income Portfolio will not invest more than 15% of the value of its net assets in restricted securities. 23 Investing in Commodities None of the Portfolios will invest in commodities, except to the extent that the Portfolios may engage in transactions involving futures contracts or options on futures contracts, and except to the extent the securities the Municipal Income Portfolio invests in are considered interests in commodities or commodities contracts or to the extent the Portfolio exercises its rights under agreements relating to such municipal securities. Investing in Real Estate None of the Portfolios will purchase or sell real estate, including limited partnership interests, except to the extent the securities the Income and Growth Portfolio and Municipal Income Portfolio may invest in are considered to be interests in real estate or to the extent the Municipal Income Portfolio exercises its rights under agreements relating to such municipal securities (in which case the Portfolio may liquidate real estate acquired as a result of a default on a mortgage), although the Portfolios may invest in securities of issuers whose business involves the purchase or sale of real estate or in securities which are secured by real estate or interests in real estate. Diversification of Investments With respect to 75% of the value of its respective total assets, a Portfolio will not purchase securities issued by any one issuer (other than cash or securities issued or guaranteed by the government of the United States or its agencies or instrumentalities and repurchase agreements collateralized by such securities), if as a result more than 5% of the value of its total assets would be invested in the securities of that issuer. A Portfolio will not acquire more than 10% of the outstanding voting securities of any one issuer. Concentration of Investments A Portfolio will not invest 25% or more of the value of its respective total assets in any one industry (other than securities issued by the U.S. government, its agencies or instrumentalities). As described in the Prospectus, the Municipal Income Portfolio may from time to time invest more than 25% of its assets in a particular segment of the municipal bond market; however, that Portfolio will not invest more than 25% of its assets in industrial development bonds in a single industry except as described in the Prospectus. 24 Underwriting A Portfolio will not underwrite any issue of securities, except as a Portfolio may be deemed to be an underwriter under the Securities Act of 1933 in connection with the sale of securities in accordance with its investment objective, policies, and limitations. The above limitations cannot be changed with respect to a Portfolio without approval of holders of a majority of that Portfolio's shares. The following limitations may be changed by the Board of Trustees without shareholder approval. Shareholders will be notified before any material change in these limitations becomes effective. Investing in Illiquid Securities The Portfolios will not invest more than 15% of the value of their respective net assets in illiquid securities, including repurchase agreements providing for settlement more than seven days after notice; over-the-counter options; certain restricted securities not determined by the Trustees to be liquid; and non-negotiable fixed income time deposits with maturities over seven days. Investing in Securities of Other Investment Companies The Portfolios will limit their respective investments in other investment companies to no more than 3% of the total outstanding voting stock of any investment company, invest no more than 5% of total assets in any one investment company, or invest more than 10% of total assets in investment companies in general. The Portfolios will purchase securities of closed- end investment companies only in open market transactions involving only customary broker's commissions. However, these limitations are not applicable if the securities are acquired in a merger, consolidation, reorganization, or acquisition of assets. It should be noted that investment companies incur certain expenses such as management fees, and therefore any investment by a Portfolio in shares of another investment company would be subject to duplicative expenses. Investing in New Issuers Except for the Municipal Income Portfolio, no Portfolio will invest more than 5% of the value of its respective total assets in securities of issuers which have records of less than three years of continuous operations, including the operation of any predecessor. The Municipal Income Portfolio will not invest more than 5% of its total assets in industrial development bonds where the payment of principal and interest is 25 the responsibility of companies with less than three years of operating history. Investing in Issuers Whose Securities are Owned by Officers and Trustees of the Trust A Portfolio will not purchase or retain the securities of any issuer if the officers and Trustees of the Trust, the Investment Adviser, or Sub-Adviser own individually more than 1/2 of 1% of the issuer's securities or together own more than 5% of the issuer's securities. Investing in Minerals A Portfolio will not purchase interests in oil, gas, or other mineral exploration or development programs or leases, except it may purchase the securities of issuers which invest in or sponsor such programs and except pursuant to the exercise by the Municipal Income Portfolio of its rights under agreements relating to municipal securities. Arbitrage Transactions A Portfolio will not enter into transactions for the purpose of engaging in arbitrage. Purchasing Securities to Exercise Control A Portfolio will not purchase securities of a company for the purpose of exercising control or management, except to the extent that exercise by the Municipal Income Portfolio of its rights under agreements related to municipal securities would be deemed to constitute such control or management. None of the Portfolios borrowed money (including through use of reverse repurchase agreements) or loaned portfolio securities in excess of 5% of the value of its net assets during the last fiscal year, and no Portfolio has any present intent to do so in the coming fiscal year. 26 Except with respect to the Portfolios' policy of borrowing money, if a percentage limitation is adhered to at the time of investment, a later increase or decrease in percentage resulting from any change in value or net assets will not result in a violation of such restriction. To comply with registration requirements in certain states, the Portfolios (1) will limit the aggregate value of the assets underlying covered call options or put options written by a Portfolio to not more than 25% of its net assets, (2) will limit the premiums paid for options purchased by a Portfolio to 5% of its net assets, (3) will limit the margin deposits on futures contracts entered into by a Portfolio to 5% of its net assets, and (4) will limit investment in warrants to 5% of its net assets. No more than 2% will be warrants which are not listed on the New York or American Stock Exchanges. Also to comply with certain state restrictions, the Growth Portfolio, Capital Growth Portfolio, and Income and Growth Portfolio will limit their investment in restricted securities to 5% of total assets. (If state requirements change, these restrictions may be revised without shareholder notification.) Management of the Trust Officers and Trustees Officers and Trustees are listed with their addresses, principal occupations, and present positions, including any affiliation with Cambridge Administrative Services, Cambridge Distributors, Inc., Cambridge Investment Advisors, Inc., and WFS Financial, Inc. Positions with Principal Occupations Name and Address the Trust During Past Five Years Daniel J. Ludeman*** Chairman Chairman, Investment Management Group, Inc.; Managing Director, WFS 901 E. Byrd Street and Trustee Financial Corp.; formerly, Managing Director, Wheat First Butcher Singer, Richmond, Virginia 23219 Inc. Peter J. Quinn, Jr.*** President President, Cambridge Investment Advisors, Inc., and 901 E. Byrd Street and Trustee Cambridge Distributors, Inc.; Managing Director, Investment Richmond, Virginia 23219 Management Group, Inc.; formerly, Senior Vice President/Director of Mutual Funds, Wheat First Butcher Singer, Inc. Paul F. Costello Senior Vice Managing Director, Investment Management Group., 901 E. Byrd Street President, Inc.; Senior Vice President, Cambridge Investment Richmond, Virginia 23219 Treasurer, Advisors, Inc., and Cambridge Distributors, Inc.; and Secretary President, Mentor Series Trust and Cash Resource Trust; President, Mentor Income Fund, Inc.; President, IMG Series Trust; formerly, Director, President and Chief Executive Officer, First Variable Life Insurance Company; President and Chief Financial Officer, Variable Investors Series Trust; President and Treasurer, Atlantic Capital & Research, Inc.; Vice President and Treasurer, Variable Stock Fund, Inc., Monarch Investment Series Trust, and GEICO Tax Advantage Series Trust; Vice President, Monarch Life Insurance Company, GEICO Investment Services Company, Inc., Monarch Investment Services Company, Inc., and Springfield Life Insurance Company. Arnold H. Dreyfuss Trustee Formerly, Chairman and Chief Executive 5100 Cary Street Road Officer, Hamilton Beach/Proctor-Silex, Inc.; Richmond, Virginia 23225 Director, Mentor Growth Fund. Thomas F. Keller Trustee Dean, The Fuqua School of Business, Duke Duke University University, Durham, NC. Durham, North Carolina 27706 Louis W. Moelchert, Jr. Trustee Vice President for Business & Finance, University of Richmond University of Richmond, Richmond, VA. Richmond, Virginia 23173 Stanley F. Pauley Trustee Chairman, E. R. Carpenter Company, Inc. P.O. Box 27205 Richmond, Virginia 23261 Troy A. Peery, Jr.** Trustee President, Heilig-Meyers Company; 2235 Staples Mill Road Member, Board of Directors, ACME Markets. Richmond, Virginia 23230
27 * This Trustee is deemed to be an "interested person" of the Trust as defined in the Investment Company Act of 1940. ** Members of the Executive Committee. The Executive Committee of the Board of Trustees handles the responsibilities of the Board of Trustees between meetings of the Board. 28 Ownership of Portfolios Officers and Trustees own less than 1% of the outstanding Class A shares and Class B shares of each Portfolio. Trustee Liability The Trust's Declaration of Trust provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law. However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of their office. Investment Advisory Services Investment Adviser The Trust's Investment Adviser is Cambridge Investment Advisors, Inc. It is the Investment Adviser's responsibility to select, subject to review and approval by the Trust's Board of Trustees and shareholders, the sub- advisers for the Portfolios (collectively, the "Sub-Advisers" and each individually the "Sub-Adviser") who have distinguished themselves in their respective areas of expertise in asset management and to review their continued performance. Cambridge Investment Advisors, Inc., is a wholly- owned subsidiary of Investment Management Group, Inc., which in turn is a wholly-owned subsidiary of WFS Financial, Inc. The Investment Adviser and the Sub-Advisers shall not be liable for any losses that may be sustained in the purchase, holding or sale of any security, or for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties imposed upon it by its contract with the Trust. Investment Adviser Fees For performing its responsibilities, the Investment Adviser receives an annual investment advisory fee from each Portfolio as described in the Prospectus. The Investment Adviser, in turn, made payments to the Sub- Advisers for their services as stated in the section entitled "The Sub- Advisers." During the fiscal years ended September 30, 1994 and 1993, 29 the Investment Adviser earned and waived advisory fees as follows: 1994 1993 Investment Investment Investment Investment Advisory Advisory Advisory Advisory Portfolio Fee Earned Fee Waived Fee Earned Fee Waived Growth Portfolio . . . . . . . . $ 410,955 $ -- $ 316,743 $ 18,450 Capital Growth Portfolio . . . . 590,693 -- 570,705 35,435 Government Income Portfolio . . . 839,139 -- 888,963 230,311 Municipal Income Portfolio . . . 468,787 81,713 378,268 374,138 Income and Growth Portfolio . . . 374,462 -- 45,081* --* Global Portfolio**. . . . . . . . 69,515 69,515 -- -- * For the period May 24, 1993 (date of initial public investment), to September 30, 1993. ** For the period March 29, 1994 (date of initial public investment), to September 30, 1994.
State Expense Limitations The Investment Adviser has undertaken to comply with the expense limitation established by certain states for investment companies whose shares are registered for sale in those states. If a Portfolio's normal operating expenses (including the investment advisory fee, but not including brokerage commissions, interest, taxes, and extraordinary expenses) exceed 2 1/2% per year of the first $30 million of average net assets, 2% per year of the next $70 million of average net assets, and 1 1/2% per year of the remaining average net assets, the Investment Adviser will reimburse the particular Portfolio for its expenses over the limitation. If a Portfolio's monthly projected operating expenses exceed this expense limitation, the investment advisory fee paid will be reduced by the amount of the excess, subject to an annual adjustment. If the expense limitation is exceeded, the amount to be reimbursed by the Investment Adviser will be limited, in any single fiscal year, by the amount of the investment advisory fee. This arrangement is not part of the Investment Advisory Agreement and may 30 be amended or rescinded in the future. The Sub-Advisers Pursuant to a Sub-Advisory Agreement entered into between the Investment Adviser and each Sub-Adviser, each Portfolio is advised by a Sub-Adviser who has complete discretion to purchase and sell portfolio securities for the Portfolio to which it serves as the Sub-Adviser within the particular Portfolio's investment objective, restrictions, and policies. Kemper Financial Services, Inc. ("KFS"), serves as the Sub-Adviser to the Growth Portfolio under the terms of a Sub-Advisory Agreement between the Investment Adviser and KFS. KFS is a wholly-owned subsidiary of Kemper Financial Companies, Inc. ("KFC"). KFC is a business corporation incorporated under the laws of the State of Delaware. It was founded in 1986 and is a financial services holding company and a subsidiary of Kemper Corporation. Kemper Corporation was incorporated under the laws of the State of Delaware in 1968 and is a diversified insurance and financial services holding company. During the fiscal years ended September 30, 1994 and 1993, KFS earned $205,478 and $158,980, respectively, as its sub-advisory fee for services it provided on behalf of the Growth Portfolio. Phoenix Investment Counsel, Inc. ("PIC"), serves as the Sub-Adviser to the Capital Growth Portfolio under the terms of a Sub-Advisory Agreement between the Investment Adviser and PIC. PIC is a wholly-owned subsidiary of Phoenix Equity Planning Corporation, which was incorporated under the laws of the State of Connecticut in 1968, and is registered as a broker- dealer in fifty states. Phoenix Equity Planning Corporation is an indirect subsidiary of Phoenix Home Life Mutual Insurance Company. Phoenix Home Life Mutual Insurance Company has been engaged in the business of writing ordinary and group life and health insurance and annuities since 1861. During the fiscal years ended September 30, 1994 and 1993, PIC earned $295,347 and $286,476, respectively, as its sub-advisory fee for services it provided on behalf of the Capital Growth Portfolio. Pacific Investment Management Company ("PIMCO") serves as the Sub- Adviser to the Government Income Portfolio under the terms of a Sub- Advisory Agreement between the Investment Adviser and PIMCO. PIMCO and certain of its affiliates have entered into an Agreement and Plan of Consolidation with Thompson Advisory Group L.P. ("TAG") which provides for the consolidation of the investment advisory and related businesses of PIMCO and TAG. The consolidation resulted in the transfer of the current investment advisory business of PIMCO to a new entity, Pacific Investment Management Company ("New PIMCO"). The terms and conditions of the new sub-advisory agreement between the Cambridge Government Income Portfolio and New PIMCO are identical in all material respects to those of the previous sub-advisory contract with PIMCO, and were approved by the shareholders of the Cambridge Government Income Portfolio of Cambridge Series Trust at a meeting held on October 28, 1994. 31 PIMCO, established in 1971, provides investment advisory services to investment companies, pension plans, foundations, endowments and other institutions located both in the U.S. and abroad. As of November 30, 1993, PIMCO had over $52.6 billion of assets under management, of which approximately $26.0 billion were invested in U.S. Government securities. PIMCO, a wholly owned subsidiary of Pacific Mutual Life Insurance Company, is located at 840 Newport Center Drive, Suite 360, Newport Beach, California 92660. Prior to PIMCO's serving as the Sub-Adviser to the Government Income Portfolio, the Sub-Adviser to this Portfolio was Federated Advisers. During the fiscal year ended September 30, 1994, PIMCO earned $419,570 as its sub-advisory fee for services it provided on behalf of the Government Income Portfolio. During the fiscal year ended September 30, 1993, Federated Advisers, the Portfolio's former sub-adviser, earned $442,982 as its sub-advisory fee for services it provided on behalf of the Government Income Portfolio, of which $42,481 was voluntarily waived. Van Kampen/American Capital Management Inc. ("VK/AC Management") serves as the Sub-Adviser to the Municipal Income Portfolio under the terms of a Sub-Advisory Agreement between the Investment Adviser and VK/AC Management. VK/AC Management is a wholly-owned subsidiary of Van Kampen/ American Capital, Inc., which, in turn, is a wholly-owned subsidiary of VK/ AC Holding, Inc. VK/AC Holding, Inc., is indirectly controlled by Clayton & Dubilier Associates IV Limited Partnership, the general partners of which are Joseph L. Rice, III, B. Charles Ames, Alberto Cribiore, Donald J. Gogel, and Hubbard C. Howe, each of whom is a principal of Clayton, Dubilier & Rice, Inc., a New York-based private investment firm. During the fiscal year ended September 30, 1994, VK/AC Management earned $234,393 for services it provided on behalf of the Municipal Income Portfolio. During the period from February 17, 1993, to September 30, 1993, VK/AC Management earned $132,315 as its sub-advisory fee for services it provided on behalf of the Municipal Income Portfolio, of which $130,250 was voluntarily waived. During the period from October 1, 1992, to February 16, 1993, Van Kampen/American Capital Investment Advisory Corp., the Portfolio's former sub-adviser, earned $56,819 as its sub-advisory fee for services it provided on behalf of the Municipal Income Portfolio, all of which was voluntarily waived. Wellington Management Company ("WMC") serves as the Sub-Adviser to the Income and Growth Portfolio under the terms of a Sub-Advisory Agreement between the Investment Adviser and WMC. WMC is a professional investment counseling firm which provides investment services to investment companies, employee benefit plans, endowments, foundations, and other institutions and individuals. During the fiscal year ended September 30, 1994, and for the period from May 24, 1993 (date of initial public investment), to September 30, 1993, WMC earned $187,231 and $22,521, respectively, as its sub-advisory fees for services it provided on behalf of the Income and Growth Portfolio. Scudder, Stevens & Clark, Inc. ("Scudder") serves as the Sub-Adviser to the Global Portfolio under the terms of a Sub-Advisory Agreement between the Investment Adviser and Scudder. Scudder is an investment counseling firm which was established as a partnership in 1919. In 1953, Scudder introduced Scudder International Fund, the first mutual fund registered with the Commission in the U.S. investing internationally in securities of 32 issuers in several foreign countries. The Investment Adviser pays the Sub-Adviser an annual fee expressed as a percentage of Global Portfolio assets: .55% on the first $75 million in Global Portfolio assets and .50% on assets over $75 million. During the period from March 29, 1994 (date of initial public investment), to September 30, 1994, Scudder earned $34,757 as its sub-advisory fee for services it provided on behalf of the Global Portfolio. Distribution of Portfolio Shares Cambridge Distributors, Inc., is the principal distributor of Portfolio shares, as explained in the prospectus. During the fiscal year ended September 30, 1994, the distributors, both affiliated parties of the Trust, received the following commissions and other compensation: Net Underwriting Compensation on Discounts and Redemption and Brokerage *Other Name of Principal Underwriter Commissions Repurchases Commissions Compensation Cambridge Distributors, Inc. . . $ 77,089 $142,445 $ -- $2,650,747 Federated Securities Corp. . . . $ -- $ -- $ -- $ -- * "Other Compensation" represents $1,652,605 for services performed under the Trust's Distribution Plan and $998,142 for services performed under the Trust's Shareholder Servicing Plan.
Administrative Services Investment Management Group, Inc. ("IMG"), which is the parent of the Investment Adviser, provides administrative personnel and services to the Portfolios for the fees set forth in the Prospectus. Prior to June 1, 1994, Cambridge Administrative Services ("CAS"), a subsidiary of Federated Advisers, had provided such services. During the fiscal years ended September 30, 1994 and 1993, the Portfolios incurred costs for administrative services as follows: 1994 1993 Administrative Administrative Administrative Administrative Administrative Administrative Portfolio Fee Earned Fee Waived Fee Earned Fee Waived Fee Earned Fee Earned CAS CAS IMG IMG CAS CAS Growth Portfolio . . . . . . $ 45,092 $ 6,569 $19,103 $ -- $ 55,468 $ 20,121 Capital Growth Portfolio . . 65,005 -- 27,273 -- 104,427 36,269 Government Income Portfolio . 126,300 23,563 48,497 -- 184,593 41,518 Municipal Income Portfolio . 66,804 -- 30,849 -- 97,110 34,261 Income and Growth Portfolio . 37,484 15,033 24,831 -- 7,514* 3,005* Global Portfolio**. . . . . . 1,326 530 6,344 -- -- -- * For the period May 24, 1993 (date of initial public investment), to September 30, 1993. ** For the period March 29, 1994 (date of initial public investment), to September 30, 1994.
33 Shareholder Servicing Plan The Trust has adopted a Shareholder Servicing Plan (the "Service Plan") with respect to both classes of shares of each Portfolio. Pursuant to the Service Plan, financial institutions will enter into shareholder service agreements with the Portfolios to provide administrative support services to their customers who from time to time may be owners of record or beneficial owners of shares of one or more Portfolios. In return for providing these support services, a financial institution may receive payments from one or more Portfolios at a rate not exceeding .25% of the average daily net assets of the Class A or Class B shares of the particular Portfolio or Portfolios beneficially owned by the financial institution's customers for whom it is holder of record or with whom it has a servicing relationship. The Service Plan is designed to stimulate financial institutions to render administrative support services to the Portfolios and their shareholders. These administrative support services include, but are not limited to, the following functions: providing office space, equipment, telephone facilities, and various personnel including clerical, supervisory, and computer as necessary or beneficial to establish and maintain shareholder accounts and records; processing purchase and redemption transactions and automatic investments of client account cash balances; answering routine client inquiries regarding the Portfolios; assisting clients in changing dividend options, account designations and addresses; and providing such other services as the Portfolios reasonably request. Among the benefits the Board of Trustees expects to achieve in adopting the Service Plan are the following: (1) an efficient and effective administrative system; (2) a more efficient use of shareholder assets by having them rapidly invested in the Portfolios, through an automatic transfer of funds from a demand deposit account to an investment account, with a minimum of delay and administrative detail; and (3) an efficient and reliable shareholder records system and prompt responses to shareholder requests and inquiries concerning their accounts. In addition to receiving payments under the Service Plan, financial institutions may be compensated by the Investment Adviser, a Sub-Adviser, and/or the administrator, or affiliates thereof, for providing administrative support services to holders of Class A or Class B shares of the Portfolios. These payments will be made directly by the Investment Adviser, a Sub-Adviser, and/or the administrator and will not be made from the assets of any of the Portfolios. During the fiscal years ended September 30, 1994 and 1993, the Portfolios incurred shareholder service fees under the Service Plan (all of which was received by the Distributor) as follows: 34 Portfolio 1994 1993 Growth Portfolio . . . . . . . . . . . . . . . . $128,423 $ 98,981 Capital Growth Portfolio . . . . . . . . . . . . 184,588 178,345 Government Income Portfolio. . . . . . . . . . . 349,642 369,151 Municipal Income Portfolio . . . . . . . . . . . 195,328 157,611 Income and Growth Portfolio . . . . . . . . . . 124,821 15,027* Global Portfolio** . . . . . . . . . . . . . . . 15,340 -- * For the period May 24, 1993 (date of initial public investment), to September 30, 1993. ** For the period March 29, 1994 (date of initial public investment), to September 30, 1994. Brokerage Transactions When selecting brokers and dealers to handle the purchase and sale of portfolio instruments, a Sub-Adviser looks for prompt execution of the order at the best overall terms available. In working with dealers, a Sub- Adviser will generally use those who are recognized dealers in specific portfolio instruments, except when a better price and execution of the order can be obtained elsewhere. A Sub-Adviser makes decisions on portfolio transactions and selects brokers and dealers subject to guidelines established by the Board of Trustees. A Sub-Adviser may select brokers and dealers who offer brokerage and research services. These services may be furnished directly to the Portfolios or to a Sub-Adviser and may include: (bullet) advice as to the advisability of investing in securities; (bullet) security analysis and reports; (bullet) economic studies; (bullet) receipt of quotations for portfolio evaluations; and (bullet) similar services. A Sub-Adviser and its affiliates exercise reasonable judgment in selecting brokers who offer brokerage and research services to execute securities transactions. They determine in good faith that commissions charged by such persons are reasonable in relationship to the value of the brokerage and research services provided. Research services provided by brokers may be used by a Sub-Adviser in advising a Portfolio and other accounts. To the extent that receipt of these services may supplant services for which a Sub-Adviser or its 35 affiliates might otherwise have been paid, it would tend to reduce their expenses, but it is not expected that such reduction will be material. During the fiscal years ended September 30, 1994 and 1993, the Portfolios paid brokerage commissions on brokerage transactions as follows: Portfolio 1994 1993 Growth Portfolio . . . . . . . . . . . . . . . . $159,585 $173,167 Capital Growth Portfolio . . . . . . . . . . . . 195,086 334,227 Income and Growth Portfolio . . . . . . . . . . 116,782 25,668* Global Portfolio** . . . . . . . . . . . . . . . 45,449 -- * For the period May 24, 1993 (date of initial public investment), to September 30, 1993. ** For the period March 29, 1994 (date of initial public investment), to September 30, 1994. Wheat First Butcher & Singer Capital Markets ("Wheat First"), an affiliated party of the Investment Adviser, received for the fiscal year ended September 30, 1994 and 1993, brokerage commissions of $101,279 and $120,726, respectively, for services performed on behalf of certain of the Portfolios, as follows: 1994 1993 Growth Portfolio . . . . . . . . . . . . . . . . $ 588 $ 3,297 Capital Growth Portfolio . . . . . . . . . . . . 78,085 113,126 Income and Growth Portfolio. . . . . . . . . . . 22,606 4,303* Global Portfolio** . . . . . . . . . . . . . . . -- -- * For the period May 24, 1993 (date of initial public investment), to September 30, 1993. ** For the period March 29, 1994 (date of initial public investment), to September 30, 1994. During the fiscal year ended September 30, 1994, with respect to the Growth Portfolio, the brokerage commissions received by Wheat First represented 0.37% of the aggregate brokerage commissions paid by the Portfolio and represented 0.18% of the Portfolio's transactions effected through brokers. Also during the same period, the brokerage commissions received by Wheat First on behalf of the Capital Growth Portfolio represented 40.03% of the aggregate brokerage commissions paid by the Portfolio and represented 35.20% of the Portfolio's transactions effected through brokers. With respect to the Income and Growth Portfolio, during the fiscal year ended September 30, 1994, the brokerage commissions received by Wheat First represented 19.36% of the aggregate brokerage commissions paid by the Portfolio and represented 11.81% of the Portfolio's transactions effected through brokers. The Portfolios' brokerage Transactions with affiliated broker-dealers will comply with Rule 17e-1 under the 1940 Act. 36 How to Buy Shares Except under certain circumstances described in the Prospectus, Class A shares of the Portfolios are sold at their net asset value plus an applicable sales charge on days the New York Stock Exchange is open for business. Class B shares of the Portfolios are sold at their net asset value with no sales charge on days the New York Stock Exchange is open for business. The procedure for purchasing Class A and Class B shares of the Portfolios is explained in the Prospectus under the section entitled "How to Buy Shares." Dealers will be compensated on purchases of Class A shares in accordance to the following schedule: Amount of Purchase Dealer Commission Less than $2 million . 1.00% $2 million but less than $3 million .80% $3 million but less than $50 million .50% $50 million but less than $100 million .25% $100 million or more . .15% The above commission will be paid by the Distributor and not the Trust or its shareholders. Distribution Plan (Class B Shares) With respect to the Class B shares of the Portfolios, the Trust has adopted a Plan pursuant to Rule 12b-1, which was promulgated by the SEC under the Investment Company Act of 1940 (the "Plan"). The Plan provides for payment of fees to the Distributor to finance any activity which is principally intended to result in the sale of Class B shares of the Portfolios. Such activities may include the advertising and marketing of Class B shares; preparing, printing and distributing prospectuses and sales literature to prospective shareholders, brokers or administrators; and implementing and operating the Plan. Pursuant to the Plan, the Distributor may pay fees to brokers for distribution services as to Class B shares. The Board of Trustees expects that the adoption of the Plan will result in the sale of a sufficient number of Class B shares of the Portfolios so as to allow each Portfolio to achieve economic viability. It is also anticipated that an increase in the size of each Portfolio will facilitate more efficient portfolio management and assist each Portfolio in seeking to achieve its investment objective. Pursuant to the Plan, during the fiscal years ended September 30, 1994 and 1993, financial institutions (such as a broker/dealer or bank) received fees for services provided on behalf of Class B shares of the Portfolios as follows, all of which was received by the Distributor: 37 Portfolio 1994 1993 Growth Portfolio . . . . . . . . . . . . . . . . $253,834 $178,568 Capital Growth Portfolio . . . . . . . . . . . . 360,712 326,101 Government Income Portfolio . . . . . . . . . . 511,023 512,241 Municipal Income Portfolio . . . . . . . . . . . 253,801 193,150 Income and Growth Portfolio. . . . . . . . . . . 252,486 26,967* Global Portfolio** . . . . . . . . . . . . . . . 20,749 -- * For the period May 24, 1993 (date of initial public investment), to September 30, 1993. ** For the period March 29, 1994 (date of initial public investment), to September 30, 1994. Conversion to Federal Funds The Shareholder Services Group, Inc., acts as the shareholder's agent in depositing checks and converting them to federal funds. Purchases at Net Asset Value Class A shares of the Portfolios may be purchased at net asset value, without a sales charge, by the following: advisory accounts through registered investment advisers; bank trust departments purchasing on behalf of their clients; Trustees, emeritus trustees, employees and retired employees of the Trust; or directors, emeritus directors, employees and retired employees of the Distributor, or affiliates thereof, or any financial institution who has a sales agreement with the Distributor with regard to the Trust. Spouses and children under age 21 of the foregoing persons may also buy Class A shares of the Portfolios at net asset value with no sales charge. Determining Net Asset Value Net asset value generally changes each day. The days on which net asset value is calculated by each Portfolio are described in the Prospectus. Net asset value will not be calculated on days on which the New York Stock Exchange is closed. Determining Market Value of Securities Market values of each Portfolio's portfolio securities are determined as follows: (bullet) according to the last sale price on a national securities exchange, if available; 38 (bullet) in the absence of recorded sales for equity securities, according to the mean between the last closing bid and asked prices, and for bonds and other fixed income securities as determined by an independent pricing service; or (bullet) for short-term obligations, according to the prices as furnished by an independent pricing service or for short-term obligations with maturities of less than 60 days, at amortized cost, or at fair value as determined in good faith by the Board of Trustees. Prices provided by independent pricing services may be determined without relying exclusively on quoted prices and may consider yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. Over-the-counter put options will be valued at the mean between the bid and the asked prices. Covered call options will be valued at the last sale price on the national exchange on which such option is traded. Unlisted call options will be valued at the latest bid price as provided by brokers. Following the calculation of security values in terms of currency in which the market quotation used is expressed ("local currency"), the valuing agent shall calculate these values in terms of U.S. dollars on the basis of the conversion of the local currencies (if other than U.S.) into U.S. dollars at the rates of exchange prevailing at the value time as determined by the valuing agent. Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed well before the close of business on each business day in New York (i.e., a day on which the Exchange is open). In addition, European or Far Eastern securities trading generally or in a particular country or countries may not take place on all business days in New York. Furthermore, trading takes place in Japanese markets on certain Saturdays and in various foreign markets on days which are not business days in New York and on which the Global Portfolio's net asset value is not calculated. The Global Portfolio calculates net asset value per share, and therefore effects sales, redemptions and repurchases of its shares, as of the close of the Exchange once on each day on which the Exchange is open. Such calculation does not take place contemporaneously with the determination of the prices of the majority of the portfolio securities used in such calculation. If events materially affecting the value of such securities occur between the time when their price is determined and the time when the Global Portfolio's net asset value is calculated, such securities will be valued at fair value as determined in good faith by the Board of Trustees. Exchange Privilege The SEC has issued an order exempting the Trust from certain provisions of 39 the Investment Company Act of 1940. As a result, shareholders of the Portfolios are allowed to exchange all or some of their Class A or Class B shares with no sales charge or contingent deferred sales charge ("CDSC"), as described in the Prospectus. For a complete description of the exchange privilege, see the section in the Prospectus entitled "Exchange Privilege." Redeeming Shares The Portfolios redeem shares at the next computed net asset value, less the applicable CDSC, after the particular Portfolio receives the redemption request. Redemption procedures are explained in the Prospectus under the section entitled "Redeeming Shares." Although The Shareholder Services Group, Inc., does not charge for telephone redemptions, it reserves the right to charge a fee for the cost of wire-transferred redemptions. Contingent Deferred Sales Charge During certain periods, Class A shares of the Portfolios were eligible to be purchased at net asset value (without a sales charge) with the proceeds from the redemption, sale, or maturity of other investments and may, therefore, be subject to a CDSC as explained in the prospectus. The eligible period for the Global Portfolio was from February 22, 1994, through and including June 30, 1994. The eligible period for the Income and Growth Portfolio was prior to July 31, 1993. For the Growth Portfolio, Capital Growth Portfolio, Government Income Portfolio, and Municipal Income Portfolio, these eligible periods were (1) prior to June 30, 1992, and (2) from December 1, 1992, through and including January 31, 1993. Redemptions in Kind Although the Trust intends to redeem Class A and Class B shares in cash, it reserves the right under certain circumstances to pay the redemption price in whole or in part by a distribution of securities from the respective Portfolio's investment portfolio. To the extent available, such securities will be readily marketable. Redemption in kind will be made in conformity with applicable SEC rules, taking such securities at the same value employed in determining net asset value and selecting the securities in a manner that the Trustees determine to be fair and equitable. The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act of 1940, under which, with respect to each Portfolio, the Trust is obligated to redeem Class A or Class B shares for any one shareholder in cash only up to the lesser of $250,000 or 1% of the respective class's net asset value during any 90-day period. 40 Tax Status The Portfolios' Tax Status The Portfolios expect to pay no federal income tax because they expect to meet the requirements of Subchapter M of the Internal Revenue Code, as amended, applicable to regulated investment companies and to receive the special tax treatment afforded to such companies. To qualify for this treatment, each Portfolio must, among other requirements: (bullet) derive at least 90% of its gross income from dividends, interest and gains from the sale of securities; (bullet) derive less than 30% of its gross income from the sale of securities held less than three months; (bullet) invest in securities within certain statutory limits; and (bullet) distribute to its shareholders at least 90% of its net income earned during the year. Each Portfolio will be treated as a single, separate entity for federal income tax purposes so that income and losses (including capital gains and losses) realized by a Portfolio will not be combined for tax purposes with income and losses realized by any of the other Portfolios. The Global Portfolio intends to qualify for and may make the election permitted under Section 853 of the Internal Revenue Code so that shareholders may (subject to limitations) be able to claim a credit or deduction on their federal income tax returns for, and may be required to treat as part of the amounts distributed to them, their pro rata portion of qualified taxes paid by the Portfolio to foreign countries (which taxes relate primarily to investment income). The Global Portfolio may make an election under Section 853 of the Internal Revenue Code, provided that more than 50% of the value of the total assets of the Global Portfolio at the close of the taxable year consists of securities in foreign corporations. The foreign tax credit available to shareholders is subject to certain limitations imposed by the Internal Revenue Code. If the Global Portfolio invests in stock of certain foreign investment companies, the Global Portfolio may be subject to U.S. federal income taxation on a portion of any "excess distribution" with respect to, or gain from the disposition of, such stock. The tax would be determined by allocating such distribution or gain ratably to each day of the Global Portfolio's holding period for the stock. The distribution or gain so 41 allocated to any taxable year of the Global Portfolio, other than the taxable year of the excess distribution or disposition, would be taxed to the Global Portfolio at the highest ordinary income rate in effect for such year, and the tax would be further increased by an interest charge to reflect the value of the tax deferral deemed to have resulted from the ownership of the foreign company's stock. Any amount of distribution or gain allocated to the taxable year of the distribution or disposition would be included in the Global Portfolio's investment company taxable income and, accordingly, would not be taxable to the Global Portfolio to the extent distributed by the Global Portfolio as a dividend to its shareholders. Proposed regulations have been issued which may allow the Global Portfolio to make an election to mark to market its shares of these foreign investment companies in lieu of being subject to U.S. federal income taxation. At the end of each taxable year to which the election applies, the Global Portfolio would report as ordinary income the amount by which the fair market value of the foreign company's stock exceed the Global Portfolio's adjusted basis in these shares. No mark to market losses would be recognized. The effect of the election would be to treat excess distributions and gain on dispositions as ordinary income which is not subject to a fund level tax when distributed to shareholders as a dividend. Alternatively, the Global Portfolio may elect to include as income and gain their share of the ordinary earnings and net capital gain of certain foreign investment companies in lieu of being taxed in the manner described above. Many futures contracts (including foreign currency futures contracts) entered into by the Global Portfolio, certain forward foreign currency contracts, and all listed nonequity options written or purchased by the Global Portfolio (including options on debt securities, options on futures contracts, options on securities indices and options on broad-based stock indices) will be governed by Section 1256 of the Internal Revenue Code. Absent a tax election to the contrary, gain or loss attributable to the lapse, exercise or closing out of any such position generally will be treated as 60% long-term and 40% short-term capital gain or loss, and on the last trading day of the Global Portfolio's fiscal year, all outstanding Section 1256 positions will be marked to market (i.e., treated as if such positions were closed out at their closing price on such day), with any resulting gain or loss recognized. Under certain circumstances, entry into a futures contract to sell a security may constitute a short sale for federal income tax purposes, causing an adjustment in the holding period of the underlying security or a substantially identical security in the Global Portfolio. Under Section 988 of the Internal Revenue Code, discussed below, foreign currency gains or loss from foreign currency related forward contracts, certain futures and similar financial instruments entered into or acquired by a Global Portfolio will be treated as ordinary income or loss. Under the Internal Revenue Code, gains or losses attributable to 42 fluctuations in exchange rates which occur between the time the Global Portfolio accrues receivables or liabilities denominated in a foreign currency and the time the Global Portfolio actually collects such receivables, or pays such liabilities, generally are treated as ordinary income or ordinary loss. Similarly, on disposition of debt securities denominated in a foreign currency and on disposition of certain futures and forward contracts, gains or losses attributable to fluctuations in the value of foreign currency between the date of acquisition of the security or contract and the date of disposition are also treated as ordinary gain or loss. These gains or losses, referred to under the Internal Revenue Code as "Section 988" gains or losses, may increase or decrease the amount of the Global Portfolio's investment company taxable income to be distributed to its shareholders as ordinary income. A portion of the difference between the issue price of zero coupon securities and their face value ("original issue discount") is considered to be income to a Portfolio each year, even though the Portfolio will not receive cash interest payments from these securities. This original issue discount imputed income will comprise a part of the investment company taxable income of the Portfolios which must be distributed to shareholders in order to maintain the qualification of the Portfolios as regulated investment companies and to avoid federal income tax at the level of the Portfolios. Shareholders' Tax Status Except as described below for the Municipal Income Portfolio, unless otherwise exempt, shareholders are subject to federal income tax on dividends and capital gains received as cash or additional shares. With respect to the Government Income and Municipal Income Portfolios, no portion of any income dividend paid by a Portfolio is expected to be eligible for the dividends received deduction available to corporations. With respect to the Growth, Capital Growth, Income and Growth and Global Portfolios, the dividends received deduction for corporations will apply to ordinary income distributions to the extent the distribution represents amounts that would qualify for the dividends received deduction to a particular Portfolio if that Portfolio were a regular corporation and to the extent designated by a Portfolio as so qualifying. These dividends and any short-term capital gains are taxable as ordinary income. Capital Gains Shareholders will pay federal tax on long-term capital gains distributed to them regardless of how long they have held the shares of the particular Portfolio. 43 Shareholders of the Municipal Income Portfolio are not required to pay the federal regular income tax on any dividends received from the Portfolio that represent net interest on tax-exempt municipal bonds. However, under the Tax Reform Act of 1986, dividends representing net interest earned on some municipal bonds may be included in calculating the federal individual alternative minimum tax or the federal alternative minimum tax for corporations. For a more complete discussion of shareholders' tax status, including a discussion of the individual alternative minimum tax and the corporate alternative minimum tax, see the section of the prospectus entitled "Tax Information." Total Return The average annual total return for both classes of shares of the following Portfolios for the fiscal year ended September 30, 1994, were as follows: Since Inception Portfolio Class A Class B Class A Class B Growth Portfolio . . . . . -16.87% -12.48% -0.84%* 0.99%* Capital Growth Portfolio . -6.79% -2.00% 0.68%* 2.44%* Government Income Portfolio -7.97% -3.97% 0.14%* 1.66%* Municipal Income Portfolio -9.35% -5.34% 4.42%* 6.00%* Income and Growth Portfolio 0.68% 5.66% 4.30%** 8.15%** Global***. . . . . . . . . -5.17% -1.21% -5.17% -1.21% * For the period from April 29, 1992 (date of initial public investment), to September 30, 1994. ** For the period from May 24, 1993 (date of initial public investment), to September 30, 1994. *** For the period from March 29, 1994 (date of initial public investment), to September 30, 1994. The average annual total return for a Portfolio is the average compounded rate of return for a given period that would equate a $1,000 initial investment to the ending redeemable value of that investment. The ending redeemable value is computed by multiplying the number of shares owned at the end of the period by the maximum offering price per share at the end of the period. The number of shares owned at the end of the period is based on the number of shares purchased at the beginning of the period with $1,000, less any applicable sales load, adjusted over the period by any additional shares, assuming the monthly, quarterly, or semi-annual (as applicable) reinvestment of all dividends and distributions. Any applicable CDSC is deducted from the ending value of the investment based on the lesser of the original purchase price or the net asset value of shares redeemed. 44 Cumulative total return reflects a Portfolio's total performance over a specific period of time. This total return assumes and is reduced by the payment of the maximum sales load and CDSC. Yield The thirty-day yield for both classes of shares of the Portfolios for the period ending September 30, 1994, were as follows: Portfolio Class A Class B Government Income Portfolio. 6.08% 5.73% Municipal Income Portfolio . 4.56% 4.11% Income and Growth Portfolio. 1.87% 1.57% The yield for both classes of each Portfolio is determined by dividing the net investment income per share (as defined by the SEC) earned by the particular Portfolio over a thirty-day period by the maximum offering price per share of the particular Portfolio on the last day of the period. This value is then annualized using semi-annual compounding. This means that the amount of income generated during the thirty-day period is assumed to be generated each month over a twelve-month period and is reinvested every six months. The yield does not necessarily reflect income actually earned by the particular Portfolio because of certain adjustments required by the SEC and, therefore, may not correlate to the dividends or other distributions paid to shareholders. To the extent that financial institutions and broker/dealers charge fees in connection with services provided in conjunction with an investment in a Portfolio, the performance will be reduced for those shareholders paying those fees. Tax-Equivalent Yield (Municipal Income Portfolio) The tax-equivalent yield for Class A shares of the Municipal Income Portfolio for the thirty-day period ended September 30, 1994, was 7.55%. The tax-equivalent yield for the Class B shares was 6.81% for the same period. The tax-equivalent yield for both classes of the Municipal Income Portfolio is calculated similarly to the yield, but is adjusted to reflect the 45 taxable yield that the Portfolio would have had to earn to equal its actual yield, assuming a 39.6% tax rate (the maximum effective federal rate for individuals) and assuming that income is 100% tax-exempt. Tax-Equivalency Table The Portfolio may also use a tax-equivalency table in advertising and sales literature. The interest earned by the municipal bonds in the Portfolio's investment portfolio generally remains free from federal regular income tax* but may be subject to state and local taxes. Capital gains, if any, are subject to federal, state and local tax. As the table below indicates, a "tax-fee" investment is an attractive choice for investors, particularly in times of narrow spreads between tax-free and taxable yields. Taxable Yield Equivalent for 1994 Federal Income Tax Bracket: 15.00% 20.00% 31.00% 36.00% 39.60% Joint Return: $1-36,900 $36,901-89,150 $89,151-140,000 $140,001-250,000 Over $250,000 Single Return: $1-22,100 $22,101-53,500 $53,501-115,000 $115,001-250,000 Over $250,000
Tax-Exempt Yield Taxable Yield Equivalent 2.50% 2.94% 3.47% 3.62% 3.91% 4.14% 3.00 3.53 4.17 4.35 4.69 4.97 3.50 4.12 4.86 5.07 5.47 5.79 4.00 4.71 5.56 5.80 6.25 6.62 4.50 5.29 6.25 6.52 7.03 7.45 5.00 5.88 6.94 7.25 7.81 8.28 5.50 6.47 7.64 7.97 8.59 9.11 6.00 7.06 8.33 8.70 9.38 9.93 6.50 7.65 9.03 9.42 10.16 10.76 7.00 8.24 9.72 10.14 10.94 11.59 7.50 8.82 10.42 10.87 11.72 12.42 8.00 9.41 11.11 11.59 12.50 13.25 8.50 10.00 11.81 12.32 13.28 14.07 Note: The maximum marginal tax rate for each bracket was used in calculating the taxable yield equivalent. The table above is for illustrative purposes only. It is not an indicator of past or future performance of the Portfolio. * Some portion of the Portfolio's income maybe subject to the federal 46 alternative minimum tax and state and local taxes. Performance Comparisons The performance of Class A and Class B shares of each Portfolio depends upon such variables as: (bullet) portfolio quality; (bullet) average portfolio maturity; (bullet) type of instruments in which the particular Portfolio is invested; (bullet) changes in the expenses of the Trust or Class A or Class B shares of a particular Portfolio; and (bullet) various other factors. The performance of each Portfolio's Class A and Class B shares fluctuates on a daily basis largely because net earnings and net asset value per share fluctuate daily. Both net earnings and net asset value per share are factors in the computation of yield and total return for each class of the Portfolios. From time to time each Portfolio may advertise its performance of both classes of shares of the Portfolios compared to similar funds or portfolios using certain indices, reporting services, and financial publications. These may include the following: (bullet) Lipper Analytical Services, Inc., ranks funds in various fund categories by making comparative calculations using total return. Total return assumes the reinvestment of all capital gains distributions and income dividends and takes into account any change in net asset value over a specified period of time. From time to time, a Portfolio will quote its Lipper ranking in advertising and sales literature. (bullet) Dow Jones Industrial Average ("DJIA") is an unmanaged index representing share prices of major industrial corporations, public utilities, and transportation companies. Produced by the Dow Jones & Company, it is cited as a principal indicator of market conditions. 47 (bullet) Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a composite index of common stocks in industry, transportation, and financial and public utility companies, can be used to compare to the total returns of funds whose portfolios are invested primarily in common stocks. In addition, the Standard & Poor's index assumes reinvestments of all dividends paid by stocks listed on its index. Taxes due on any of these distributions are not included, nor are brokerage or other fees calculated, in the Standard & Poor's figures. (bullet) Consumer Price Index is generally considered to be a measure of inflation. (bullet) CDA Mutual Fund Growth Index is a weighted performance average of other mutual funds with growth of capital objectives. (bullet) Lipper Growth Fund Index is an average of the net asset-valuated total returns for the top 30 growth funds tracked by Lipper Analytical Services, Inc., an independent mutual fund rating service. (bullet) Shearson Lehman Government/Corporate (Total) Index is comprised of approximately 5,000 issues, which include non-convertible bonds publicly issued by the U.S. government or its agencies; corporate bonds guaranteed by the U.S. government and quasi-federal corporations; and publicly issued, fixed-rate, non-convertible domestic bonds of companies in industry, public utilities and finance. The average maturity of these bonds approximates nine years. Tracked by Shearson Lehman Brothers Inc., the index calculates total returns for one month, three month, twelve month and ten year periods and year-to-date. (bullet) Shearson Lehman Government Index is an unmanaged index comprised of all publicly issued, non-convertible domestic debt of the U.S. government, or any agency thereof, or any quasi-federal corporation and of corporate debt guaranteed by the U.S. government. Only notes and bonds with a minimum outstanding principal of $1 million and a minimum maturity of one year are included. (bullet) Morningstar, Inc., an independent rating service, is the publisher of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-listed mutual funds of all types, according to their risk-adjusted returns. The maximum rating is five stars, and ratings are effective for two weeks. (bullet) Russell Growth 1000 (Russell 1000 Index) is a broadly diversified index consisting of approximately 1,000 common stocks of companies with market 48 values between $20 million and $300 million that can be used to compare the total returns of funds whose portfolios are invested primarily in growth common stocks. (bullet) Shearson Lehman Aggregate Bond Index is a total return index measuring both the capital price changes and income provided by the underlying universe of securities, weighted by market value outstanding. The Aggregate Bond Index is comprised of the Shearson Lehman Government Bond Index, Corporate Bond Index, Mortgage-Backed Securities Index, and Yankee Bond Index. These indices include: U.S. Treasury obligations, including bonds and notes; U.S. agency obligations, including those of the Federal Farm Credit Bank, Federal Land Bank, and the Bank for Cooperatives; foreign obligations; and U.S. investment-grade corporate debt and mortgage-backed obligations. All corporate debt included in the Aggregate Bond Index has a minimum S&P rating of BBB, a minimum Moody's rating of Baa, or a minimum Fitch rating of BBB. (bullet) Salomon Brothers Mortgage-Backed Securities Index-15 Years includes the average of all 15-year mortgage securities, which include Federal Home Loan Mortgage Corporation (Freddie Mac), Federal National Mortgage Association (Fannie Mae), and Government National Mortgage Association (Ginnie Mae). (bullet) Shearson Lehman Municipal Bond Index is a total return performance benchmark for the long-term, investment-grade tax-exempt bond market. Returns and attributes for the Index are calculated semi-monthly using approximately 21,000 municipal bonds, which are priced by Muller Data Corporation. From time to time, the Global Portfolio may advertise its performance of both classes of shares of the Portfolio compared to similar funds or portfolios using certain indices, reporting services, and financial publications. These may include the following: Morgan Stanley Capital International World Index, The Morgan Stanley Capital International EAFE (Europe, Australia, Far East) index, J. P. Morgan Global Traded Bond Index, Salomon Brothers World Government Bond Index, and the Standard & Poor's 500 Composite Stock Price Index (S&P 500). The Global Portfolio also may compare its performance to the performance of unmanaged stock and bond indices, including the total returns of foreign government bond markets in various countries. All index returns are translated into U.S. dollars. The total return calculation for these unmanaged indices may assume the reinvestment of dividends and any distributions, if applicable, may include withholding taxes, and generally do not reflect deductions for administrative and management costs. Investors may use such indices or reporting services in addition to the Trust's Prospectus to obtain a more complete view of a particular Portfolio's performance before investing. Of course, when comparing a 49 Portfolio's performance to any index, conditions such as composition of the index and prevailing market conditions should be considered in assessing the significance of such comparisons. When comparing funds using reporting services, or total return and yield, investors should take into consideration any relevant differences in funds, such as permitted portfolio compositions and methods used to value portfolio securities and compute net asset value. Advertisements and other sales literature for the Trust may quote total returns which are calculated on non-standardized base periods. These total returns also represent the historic change in the value of an investment in the Trust based on monthly reinvestment of dividends over a specified period of time. From time to time the Portfolios may advertise their performance, using charts, graphs, and descriptions, compared to federally insured bank products, including certificates of deposit and time deposits, and to money market funds using the Lipper Analytical Service money market instruments average. Advertisements may quote performance information which does not reflect the effect of the sales load. Financial Statements The financial statements for the fiscal year ended September 30, 1994, are incorporated herein by reference to the combined Annual Report of the Trust dated September 30, 1994 (File Nos. 33-45315 and 811-6550). You may request a copy of the combined Annual Report free of charge by writing the Trust or by calling 1-800-382-0016. 50 Appendix Moody's Investors Service, Inc., Long-Term Municipal Debt Ratings Aaa-bonds 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-Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A-Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa-Bonds which are rated Baa are considered as medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba-Bonds which are 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 thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B-Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess the strongest investment attributes are designated by the symbols Aa1, A1, Baa1, Ba1 and B1. 51 Standard and Poor's Corporation Long-Term Municipal Debt Ratings AAA-Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA-Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A-Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB-Debt rated BBB is 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 debt in this category than in higher rated categories. BB, B, CCC, CC-Debt rated BB, B, CCC and CC is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties of major risk exposure to adverse conditions. Plus (+) or Minus (-): The ratings from "A" to "B" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. Moody's Investors Service, Inc., Short-Term Loan Ratings MIG1/VMIG1-This designation denotes best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broadbased access to the market for refinancing. MIG2/VMIG2-This designation denotes high quality. Margins of protection are ample although not so large as in the preceding group. Standard and Poor's Corporation Municipal Note Ratings SP-1-Very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. SP-2-Satisfactory capacity to pay principal and interest. 52 Fitch Investors Service, Inc., Short-Term Debt Ratings F-1+-Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1-Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. F-2-Good Credit Quality. Issues carrying this rating have a satisfactory degree of assurance for timely payment. Moody's Investors Service, Inc., Commercial Paper Ratings P-1-Issuers rated PRIME-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. PRIME-1 repayment capacity will normally be evidenced by the following characteristics: conservative capitalization structures with moderate reliance on debt and ample asset protection; broad margins in earning coverage of fixed financial charges and high internal cash generation; and well-established access to a range of financial markets and assured sources of alternate liquidity. P-2-Issuers rated PRIME-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Standard and Poor's Corporation Commercial Paper Ratings A-1-This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus (+) sign designation. A-2-Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as high as for issues designated A-1. 53 -----END PRIVACY-ENHANCED MESSAGE-----