U.S. GLOBAL INVESTORS FUNDS
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 3, 1997
Amended May 1, 1998
U.S. GOLD SHARES FUND ("Gold Shares Fund")
U.S. WORLD GOLD FUND ("World Gold Fund")
U.S. GLOBAL RESOURCES FUND ("Global Resources Fund")
CHINA REGION OPPORTUNITY FUND ("China Region Fund")
U.S. ALL AMERICAN EQUITY FUND ("All American Fund")
U.S. INCOME FUND ("Income Fund")
U.S. REAL ESTATE FUND ("Real Estate Fund")
U.S. TAX FREE FUND ("Tax Free Fund")
UNITED SERVICES NEAR-TERM TAX FREE FUND ("Near-Term Tax Free Fund")
U.S. GOVERNMENT SECURITIES SAVINGS FUND ("Government Securities Savings Fund")
U.S. TREASURY SECURITIES CASH FUND ("Treasury Securities Cash Fund")
U.S. Global Investors Funds ("Trust") is an open-end series investment company.
This Statement of Additional Information is not a prospectus. You should read it
in conjunction with the prospectus issued November 3, 1997, and amended May 1,
1998, which you may request from U. S. Global Investors, Inc. ("Adviser"), 7900
Callaghan
Road, San Antonio, Texas 78229, or 1-800-US-FUNDS (1-800-873-8637).
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TABLE OF CONTENTS
GENERAL INFORMATION..........................................................3
INVESTMENT OBJECTIVES AND POLICIES...........................................3
Investment Restrictions.............................................4
Valuation of Shares.................................................5
Gold and Natural Resources Funds....................................6
China Region Fund...................................................6
Real Estate Fund....................................................8
Tax-free Funds......................................................8
Government Money Market Funds......................................12
RISK FACTORS................................................................12
Repurchase Agreements..............................................14
Lending of Portfolio Securities....................................15
Borrowing..........................................................15
STRATEGIC TRANSACTIONS......................................................15
PORTFOLIO TRANSACTIONS......................................................19
MANAGEMENT OF THE FUNDS.....................................................19
PRINCIPAL HOLDERS OF SECURITIES.............................................21
INVESTMENT ADVISORY SERVICES................................................21
ADVISORY FEE SCHEDULE.......................................................23
TRANSFER AGENCY AND OTHER SERVICES..........................................24
CERTAIN PURCHASES OF SHARES OF THE FUNDS....................................25
ADDITIONAL INFORMATION ON REDEMPTIONS.......................................26
CALCULATION OF PERFORMANCE DATA.............................................26
Total Return.......................................................27
Yield ..........................................................28
Tax Equivalent Yield...............................................28
Nonstandardized Total Return.......................................28
Distribution Rates.................................................29
Effect of Fee Waiver and Expense Reimbursement.....................29
TAX STATUS..................................................................29
Taxation of the Funds--in General..................................29
Taxation of the Funds' Investments.................................30
Taxation of the Shareholder........................................31
Currency Fluctuations--"Section 988" Gains or Losses...............32
Foreign Taxes......................................................32
CUSTODIAN, FUND ACCOUNTANT, AND ADMINISTRATOR...............................33
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL...................................33
FINANCIAL STATEMENTS........................................................33
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GENERAL INFORMATION
U. S. Global Investors Funds is an open-end management investment company, a
voluntary association of the type known as a "business trust," organized under
the laws of the Commonwealth of Massachusetts. There are numerous series within
the Trust, each of which represents a separate diversified portfolio of
securities (collectively referred to herein as "Portfolios" or "Funds" and
individually as a "Portfolio" or "Fund").
The assets received by the Trust from the issue or sale of shares of each of the
Funds, and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are separately allocated to each Fund. They constitute
the underlying assets of each Fund, are required to be segregated on the books
of accounts, and are to be charged with the expenses with respect to such Fund.
Any general expenses of the Trust, not readily identifiable as belonging to a
particular Fund, shall be allocated by or under the direction of the Board of
Trustees in such manner as the Board determines to be fair and equitable.
Each share of each of the Funds represents an equal proportionate interest in
that Fund with each other share and is entitled to such dividends and
distributions, out of the income belonging to that Fund, as are declared by the
Board. Upon liquidation of the Trust, shareholders of each Fund are entitled to
share pro rata in the net assets belonging to the Fund available for
distribution.
The trustees have exclusive power, without the requirement of shareholder
approval, to issue series of shares without par value, each series representing
interests in a separate portfolio, or divide the shares of any portfolio into
classes, each class having such different dividend, liquidation, voting and
other rights as the trustees may determine, and may establish and designate the
specific classes of shares of each portfolio. Before establishing a new class of
shares in an existing portfolio, the trustees must determine that the
establishment and designation of separate classes would not adversely affect the
rights of the holders of the initial or previously established and designated
class or classes.
As described under "How The Funds Are Organized" in the prospectus, the Trust's
First Amended and Restated Master Trust Agreement ("Master Trust Agreement"),
requires no annual or regular meeting of shareholders. In addition, after the
trustees were initially elected by the shareholders, the trustees became a
self-perpetuating body. Thus, there will ordinarily be no shareholder meetings
unless otherwise required by the Investment Company Act of 1940 ("1940 Act").
On any matter submitted to shareholders, the holder of each share is entitled to
one vote per share (with proportionate voting for fractional shares). On matters
affecting any individual Fund, a separate vote of that Fund would be required.
Shareholders of any Fund are not entitled to vote on any matter which does not
affect their Fund but which requires a separate vote of another Fund.
Shares do not have cumulative voting rights, which means that in situations in
which shareholders elect trustees, holders of more than 50% of the shares voting
for the election of trustees can elect 100% of the Trust's trustees, and the
holders of less than 50% of the shares voting for the election of trustees will
not be able to elect any person as a Trustee.
Shares have no preemptive or subscription rights and are fully transferable.
There are no conversion rights. Under Massachusetts law, the shareholders of the
Trust could, under certain circumstances, be held personally liable for the
obligations of the Trust. However, the Master Trust Agreement disclaims
shareholder liability for acts or obligations of the Trust and requires that
notice of such disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Trust or the trustees. The Master Trust
Agreement provides for indemnification out of the Trust's property for all
losses and expenses of any shareholder held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Trust itself would be unable to meet its obligations.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of the Funds are described in detail in
the prospectus. The following discussion provides supplemental information
concerning certain investment limitations and techniques in which one or more of
the Funds may engage, and certain of the risks they may entail. Certain of the
investment techniques may not be available to all of the Funds. All of the Funds
are managed by U.S. Global Investors, Inc.
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INVESTMENT RESTRICTIONS
None of the Funds will change any of the following investment restrictions,
without, in either case, the affirmative vote of a majority of the outstanding
voting securities of that Fund, which, as used herein, means the lesser of (1)
67% of that Fund's outstanding shares present at a meeting at which more than
50% of the outstanding shares of that Fund are represented either in person or
by proxy, or (2) more than 50% of that Fund's outstanding shares.
A Fund may not:
1. Issue senior securities.
2. Borrow money, except that (i) a Fund may borrow not in excess of 5% of the
total assets of that Fund from banks as a temporary measure for
extraordinary purposes, and (ii) the Gold Shares Fund, World Gold Fund,
China Region Fund, and All American Fund may borrow money only for
temporary or emergency purposes (not for leveraging or investment),
provided that the amount of such borrowings may not exceed 33 1/3% of the
Fund's total assets (including the amount borrowed) less liabilities (other
than borrowings).
3. Underwrite the securities of other issuers, except for the Gold Shares
Fund, Global Resources Fund and World Gold Fund, to the extent that these
Funds may be deemed to act as an underwriter in certain cases when
disposing of restricted securities.
4. Invest in real estate, except as may be represented by securities for which
there is an established market or, with respect to the Gold Shares Fund,
when such interests are an incidental part of asset acquired through merger
or consolidation, and except that this restriction shall not prevent the
Real Estate Fund from making any investment which is otherwise consistent
with its objectives and policies.
5. Engage in the purchase or sale of commodities or commodity futures
contracts, except that the Gold Shares Fund and World Gold Fund may invest
not more than 10% of its total net assets in gold and gold bullion, and
except that the Gold Shares Fund, World Gold Fund, China Region Fund, and
All American Fund may invest in futures contracts, options on futures
contracts, and similar instruments.
6. Lend its assets, except that any Fund may purchase money market debt
obligations and repurchase agreements secured by money market obligations,
and except for the purchase or acquisition of bonds, debentures or other
debt securities of a type customarily purchased by institutional investors
and except that any Fund may lend portfolio securities with an aggregate
market value of not more than one-third of such Fund's total net assets.
(Accounts receivable for shares purchased by telephone shall not be deemed
loans.) The Near-Term Tax Free Fund may not lend its assets, except that
purchases of debt securities in furtherance of the Fund's investment
objectives will not constitute lending of assets.
7. Purchase any security on margin, except that it may obtain such short-term
credits as are necessary for clearance of securities transactions.
8. Make short sales.
9. Invest in securities which are subject to legal or contractual restrictions
on resale ("restricted securities"), except that (i) the China Region Fund
may invest up to 15% of net assets in illiquid securities, including
securities which are subject to legal or contractual restrictions on
resale, and (ii) the Gold Shares Fund, the Global Resources Fund, and the
World Gold Fund may invest up to 10% of the value of their respective net
assets in such restricted securities. Any such investments by the Gold
Shares Fund will be in companies that have been in existence for two
consecutive years or more, including the operation of predecessors, and
that have not defaulted in the payment of any debt within such two years.
(This 10% restriction includes the 2% restriction on warrants described in
(12) below.)
10. Invest more than 25% of its total assets in securities of companies
principally engaged in any one industry (other than obligations issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities), except that the Gold Shares Fund will invest primarily
in securities of companies involved in the exploration for, mining of,
processing of or dealing in gold; the Global Resources Fund and the World
Gold Fund will invest at least 25% of the value of their respective total
assets in securities of companies principally engaged in natural resource
operations; the Tax Free Fund and the Near-Term Tax Free Fund may invest
more than 25% of its total assets in general obligation bonds or in
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securities issued by states or municipalities in connection with the
financing of projects with similar characteristics, such as hospital
revenue bonds, housing revenue bonds or electric power project bonds; and
the Real Estate Fund will invest at least 65% of its assets in securities
of companies engaged principally in or related to the real estate industry.
The Tax Free Fund and the Near-Term Tax Free Fund will consider industrial
revenue bonds where payment of principal and interest is the ultimate
responsibility of companies within the same industry as securities from one
industry. The China Region Fund will consider a foreign government to be an
"industry". For purposes of determining industry concentration, each Fund
relies on the Standard Industrial Classification as compiled an independent
source, as in effect from time to time.
11. (a) Invest more than 5% of the value of its total assets in securities of
any one issuer, except such limitation shall not apply to obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities, or (b) acquire more than 10% of the voting securities of
any one issuer. (These limitations as to the Gold Shares Fund, Near- Term
Tax Free Fund, and China Region Fund apply to only 75% of the value of
their respective gross assets.)
12. The Gold Shares Fund may not invest more than 2% of the value of its net
assets in marketable warrants.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of net assets, will not be considered a violation
of any of the foregoing restrictions.
VALUATION OF SHARES
Share value is calculated in U.S. dollars. A security quoted in another currency
is converted to U.S. dollars using the exchange rate in effect in the principal
market where the security is traded. A portfolio security listed or traded in
domestic or international markets, either on an exchange or over-the-counter, is
valued at the last reported sales price before the time when the Fund values
assets. Lacking any sales on that day, the security is valued at the mean
between the last reported bid and ask prices. ("Domestic market" includes
markets in the United States or Canada, while "international market" refers to
any market NOT in the United States or Canada.)
If market quotations are not readily available, or restricted securities or
similar assets are being valued, the Fund values the assets at fair value using
procedures established by the board of trustees. These procedures require that
the adviser write a FAIR VALUE MEMORANDUM describing the methodology and
rationale for establishing fair value. A copy is delivered to the chairman of
the audit committee or any independent trustee if the chairman is unavailable.
The chairman has the authority to establish fair value as described in the FAIR
VALUE MEMORANDUM or to request an immediate meeting of the audit committee to
establish fair value.
Securities traded on more than one market are valued according to the broadest
and most representative market. Prices used to value portfolio securities are
monitored to ensure that they represent current market values. Calculation of
net asset value may not take place at the same time as the determination of the
prices of a portfolio used in such calculations. Events affecting the value of
securities that occur between the time prices are established and the New York
Stock Exchange closes are not reflected in the Fund's calculation of net asset
value unless the board of trustees decides that the event would materially
affect the net asset value. In that case, the Fund will make an adjustment. If
the price of a portfolio security is materially different from its current
market value, the security will be valued at fair value.
Debt securities with maturities of sixty days or less at the time of purchase
are valued based on the amortized cost. This involves valuing an instrument at
its cost initially and assuming, after that, a constant amortization to maturity
of any discount or premium, despite the impact of fluctuating interest rates on
the market value of the instrument.
To maintain a constant per share price of $1.00 for the government securities
money market funds, portfolio investments are valued at cost, and any discount
or premium created by market movements is amortized to maturity despite the
effect of fluctuating interest rates on the market value of the security.
The following discussion of the investment objectives, policies and risks
associated with each particular Fund supplements the discussions in the
prospectus.
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GOLD AND NATURAL RESOURCES FUNDS
The Gold Shares Fund and World Gold Fund intend to concentrate their investments
in common stocks of companies involved in exploration for, mining of, processing
of, or dealing in gold, with emphasis on stock of foreign companies. The Gold
Shares Fund may also invest in the securities of issuers engaged in operations
related to silver and other precious metals. The Gold Shares Fund may also
invest in the securities of closed-end investment companies, provided its
investments in these securities do not exceed 3% of the total voting stock of
such closed-end investment company.
Approximately 30% of the world's output of gold is produced in the Republic of
South Africa. A substantial portion of the Gold Shares Fund's net assets are
invested in securities of South African issuers engaged in mining of,
exploration for, processing of, or dealing in gold.
The production and marketing of gold may be affected by the actions of the
International Monetary Fund and certain governments, or by changes in existing
governments. In the current order of magnitude of production of gold bullion,
the four largest producers of gold are the Republic of South Africa, the United
States, Australia and Russia. Economic and political conditions prevailing in
these countries may have direct effects on the production and marketing of
newly-produced gold and sales of central bank gold holdings. In South Africa,
the activities of companies engaged in gold mining are subject to the policies
adopted by the Ministry of Mines. The Reserve Bank of South Africa, as the sole
authorized sales agent for South African gold, has an influence on the price and
timing of sales of South African gold. The Gold Shares Fund has significant
investments in South African issuers. The unsettled political and social
conditions in South Africa may have disruptive effects on the market prices of
the investments of the Gold Shares Fund and may impair its ability to hold
investments in South African issuers.
Because gold and gold bullion do not generate investment income, the return to a
Fund from such investments will be derived solely from the gains and losses
realized by the Fund upon the sale of the gold and gold bullion. The Funds may
also incur storage and other costs relating to their investments in gold and
gold bullion. Under certain circumstances, these costs may exceed the custodial
and brokerage costs associated with investments in portfolio securities. To
qualify as a regulated investment company under Subchapter M of the Code, at
least ninety percent (90%) of a Fund's gross income for any taxable year must be
derived from dividends, interest, gains from the disposition of securities, and
gains from certain other specified transactions ("Gross Income Test"). Gains
from the disposition of gold and gold bullion will not qualify for purposes of
satisfying the Gross Income Test. Additionally, to qualify under Subchapter M of
the Code, at the close of each quarter of each Fund's taxable year, at least
fifty percent (50%) of the value of the Fund's total assets must be represented
by cash, Government securities and certain other specified assets ("Asset Value
Test"). Investments in gold and gold bullion will not qualify for purposes of
satisfying the Asset Value Test. To maintain each Fund's qualification as a
regulated investment company under the Code, each Fund will establish procedures
to monitor its investments in gold and gold bullion for purposes of satisfying
the Gross Income Test and the Asset Value Test.
CHINA REGION FUND
The China Region Fund will invest primarily in securities which are listed or
otherwise traded by authorized brokers and other entities and will focus its
investments on equities and quasi-equity securities. Quasi-equity securities may
include, for example: warrants or similar rights, other financial instruments
with substantial equity characteristics, such as debt securities convertible
into equity securities. Although the China Region Fund expects to invest
primarily in listed securities of established companies, it may, subject to
local investment limitations, invest in unlisted securities of China companies
and companies that have business associations in China, including investments in
new and early stage companies. This may include direct equity investments. Such
investments may involve a high degree of business and financial risk. Because of
the absence of any trading markets for these investments, the China Region Fund
may find itself unable to liquidate such securities in a timely fashion,
especially in the event of negative news regarding the specific securities or
the China markets in general. Such securities could decline significantly in
value prior to the China Region Fund's being able to liquidate such securities.
In addition to financial and business risks, issues whose securities are not
listed will not be subject to the same disclosure requirements applicable to
issuers whose securities are listed.
PEOPLE'S REPUBLIC OF CHINA. The People's Bank of China is officially responsible
for managing stock markets in the People's Republic of China, regulating all
trading and settlement and approving all issues of new securities. The Shanghai
and Shenzhen Stock Exchanges are highly automated with trading and settlement
executed electronically. Considerable
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autonomy has been given to local offices of the State Commission of Economic
System Reform in developing securities markets. They are charged with
identifying suitable companies for listing.
There are currently two officially recognized securities exchanges in China --
the Shanghai Stock Exchange which opened in December 1990 and the Shenzhen Stock
Exchange which opened in July 1991. Shares traded on these Exchanges are of two
types -- "A" shares which can be traded only by Chinese investors and "B" shares
which can be traded only by individuals and corporations not residents of China.
The settlement period for "B" share trades is the same in Shenzhen and Shanghai.
Settlements are effected on the third business day after the transaction. As of
June 1996, seventeen companies were authorized to issue what are called "H"
shares which trade in Hong Kong and may be purchased by anyone.
The China Region Fund will invest in both new and existing enterprises
registered and operating in China. These will include wholly Chinese-owned
enterprises, wholly foreign-owned enterprises and Sino-foreign joint ventures.
It is not the intention of the China Region Fund to limit its investments to
Shenzhen and Shanghai alone.
HONG KONG. Sovereignty over Hong Kong was transferred from Great Britain to the
PRC on July 1, 1997, at which time Hong Kong became a Special Administrative
Region ("SAR") of the PRC. Under the agreement providing for such transfer
(known as the "Joint Declaration") and the PRC law implementing its commitments
thereunder ("Basic Law"), the current social and economic systems in Hong Kong
are to remain unchanged for at least 50 years, and Hong Kong is to enjoy a high
degree of autonomy except in foreign and defense affairs. The SAR will be vested
with executive, legislative and judicial power. Laws currently in force, as they
may be amended by the SAR Legislature, are to remain in force except to the
extent they contravene the Basic Law. The PRC may not levy taxes on the SAR, the
Hong Kong dollar is to remain fully convertible, and Hong Kong is to remain a
free port. Under the terms of the Basic Law, Hong Kong's current social
freedoms, including freedoms of speech, press, assembly, travel, and religion,
are not to be affected. It is not clear how future developments in Hong Kong and
China may affect the implementation of the Basic Law after the transfer of
sovereignty in 1997.
It is to be expected that the Hong Kong stock market will remain volatile in
response to prevailing perceptions of political developments in China. Foreign
enterprises are treated virtually the same as domestic enterprises and there are
no restrictions on exchange of foreign currencies or on the repatriation of
profits. Import and export licenses are easy to obtain. There are no exchange
controls, investment restrictions or dividend withholding taxes. However,
currently there are no laws in Hong Kong which specifically protect foreign
investors against expropriation.
TAIWAN. The Taiwan Stock Exchange ("TSE"), the sole stock exchange in Taiwan, is
owned by government-controlled enterprises and private banks. In 1968, the
Securities and Exchange Law was passed and, since that time, the Taiwan
securities market has been regulated by the Taiwan Securities and Exchange
Commission ("TSEC") which, in turn, is supervised by the Ministry of Finance
("MOF"). The Central Bank of China ("CBC") is also responsible for supervising
certain aspects of the Taiwan securities market.
While, historically, foreign individual investors have not been permitted to
invest directly in securities listed on the TSE, since 1990 certain foreign
institutional investors have been permitted access to the Taiwan securities
market. Currently, foreign institutional investors which meet certain guidelines
promulgated by the TSEC and which are also approved by the TSEC, the MOF and the
CBC, will be permitted to invest in TSE listed securities. However, qualifying
foreign institutional investors (such as the China Region Fund) may not own more
than 5% of the shares of a company listed on the TSE, and the total foreign
ownership of any listed company may not exceed 10%. In addition, the Taiwanese
government prohibits foreign investment in certain industries including
transportation and energy companies. Furthermore, Taiwan imposes an overall
country limit on investment and requires a long-term commitment. The China
Region Fund's Management believes that over time restrictions on investments in
Taiwan may ease to permit greater and more flexible investment in Taiwanese
securities.
The political reunification of China and Taiwan is a highly problematic issue
that may not be settled in the near future. Taiwan's economic interaction with
China can take place only through indirect channels (generally via Hong Kong)
due to the official prohibitions on direct trade between the PRC and Taiwan.
Nevertheless, in fewer than four years, Taiwan has become a significant investor
in China and China has become one of the largest markets for Taiwanese goods.
EXCHANGE CONTROL. PRC currency, the Renminbi ("RNB"), is not freely convertible.
The exchange rate of RNB against foreign currencies is regulated and published
daily by the State Administration of Exchange Control ("SAEC"). In 1986, to help
solve the foreign exchange problems of foreign investors, China established
Foreign Exchange Adjustment Centers, commonly referred to as "swap enters," in
various cities. These swap centers provide an official forum where foreign
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invested enterprises may, under the supervision and control of SAEC and its
branch offices, engage in mutual adjustment of their foreign exchange surpluses
and shortfalls. More recently, regulations have been relaxed to allow Chinese
state enterprises and individuals to participate in foreign exchange swap
transactions. Trading of RNB and foreign currencies at the swap centers is
conducted at a rate determined by supply and demand rather than at the official
exchange rate. Such market exchange rates can be highly volatile and are subject
to sharp fluctuations depending on market conditions.
The China Region Fund may use official or market rates of exchange in connection
with portfolio transactions and net asset value determinations consistent with
prevailing practices in the relevant markets or locations, except that the China
Region Fund will not use any exchange rate if the effect of such use would be to
restrict repatriation of assets.
No exchange control approval is required for the China Region Fund to acquire
"B" shares listed on stock exchanges. Dividends and/or proceeds from the sale of
securities purchased by the China Region Fund in listed China companies may be
remitted outside China, subject to payment of any relevant taxes and completion
of the requisite formalities.
Shanghai securities are now being quoted in U.S. dollars and Shenzhen securities
are now being quoted in Hong Kong dollars.
REAL ESTATE FUND
The Real Estate Fund is designed to provide investors the advantages of real
estate investment with the convenience and liquidity provided by a
professionally managed fund.
The Real Estate Fund's portfolio will consist primarily of securities of
companies in the real estate industry or securities of companies related to the
real estate industry. Because the Real Estate Fund's portfolio will be
concentrated in one industry, this would not be a suitable investment for a
person seeking a more diversified portfolio.
The Real Estate Fund's investments will include the common and preferred stock
of companies, including real estate investment trusts ("REITs"), listed on
national securities exchanges or on NASDAQ which have at least 50% of the value
of their assets in, or which derive at least 50% of their revenue from, the
ownership, construction, management or sale of residential, commercial or
industrial real estate.
The Real Estate Fund may be subject to the risks associated with the direct
ownership of real estate because of its policy to concentrate investments in the
securities of companies owning, constructing, managing or selling residential,
commercial or industrial real estate. Additional risks include declines in the
value of real estate, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
limitations on rents, changes in neighborhood values, the appeal of properties
to tenants, and increase in interest rates. Such risks may also affect the value
of securities of companies that serve the real estate industry.
TAX-FREE FUNDS
The two tax-free funds invest primarily in municipal bonds. Municipal securities
are generally of two principal types--notes and bonds. Municipal notes generally
have maturities of one year or less and provide for short-term capital needs.
Municipal bonds normally have maturities of more than one year, and meet
longer-term needs. Municipal bonds are classified into two principal
categories--general obligation bonds and revenue bonds. General obligation bonds
are backed by the taxing power of the issuer and are considered the safest type
of municipal bond. Revenue bonds are backed by the revenues derived from a
project or facility.
The tax-free funds invest only in debt securities earning one of the four
highest ratings by Moody's Investor's Services (Aaa, Aa, A, Baa) or by Standard
& Poors Corporation (AAA, AA, A, BBB). Not more than 10% of either of the
tax-free fund's total assets will be invested in the fourth rating category.
Investments in the fourth category may have speculative characteristics and
therefore, may involve higher risks. Investments in the fourth rating category
of bonds are generally regarded as having an adequate capacity to pay interest
and repay principal. However, these investments may be more susceptible to
adverse changes in the economy. Municipal notes (including variable rate demand
obligations) must be rated
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MIG1/VMIG2 or MIG2/VMIG2 by Moody's or SP-1 or SP-2 by S&P. Tax-exempt
commercial paper must be rated P-1 or P-2 by Moody's or A-1 or A-2 by S&P.
The tax-free funds may purchase variable and floating rate obligations from
issuers or may acquire participation interest in pools of these obligations from
banks or other financial institutions. Variable and floating rate obligations
are municipal securities whose interest rates change periodically. They normally
have a stated maturity greater than one year, but permit the holder to demand
payment of principal and interest anytime or at specified intervals.
The tax-free funds may purchase obligations with term puts attached. "Put" bonds
are tax-exempt securities that may be sold back to the issuer or a third party
at face value before the stated maturity. The put feature may increase the cost
of the security to the Fund, consequently reducing the yield of the security.
The tax-free funds may purchase municipal lease obligations or certificates of
participation in municipal lease obligations. A municipal lease obligation is
not a general obligation of the municipality for which the municipality pledges
its taxing power. Ordinarily, a lease obligation will contain a
"nonappropriation" clause if the municipality has no obligation to make lease
payments in future years unless money is appropriated for that purpose annually.
Because of the risk of nonappropriation, some lease obligations are issued with
third-party credit enhancements, such as insurance or a letter of credit.
Municipal lease obligations are a relatively new type of financing that has not
yet developed the depth of marketability associated with more conventional
municipal securities. For these reasons, before investing in a municipal lease
obligation, the adviser will consider, among other things, whether (1) the
leased property is essential to a governmental function of the municipality, (2)
the municipality is prohibited from substituting or purchasing similar equipment
if lease payments are not appropriated, and (3) the municipality has maintained
good market acceptability for its lease obligations in the past.
While the tax-free funds primarily invest in municipal bonds the income of which
is free from federal income taxes, they may also invest in repurchase agreements
and other securities which may earn taxable income. Moreover, the tax-free funds
may sell portfolio securities at a gain, which if long term may be taxed to
shareholders as long term capital gains and if short term may be taxed to
shareholders as ordinary income.
Subsequent to a purchase by either tax-free fund, an issue of municipal bonds
may cease to be rated or its rating may be reduced below the minimum required
for purchase by that Fund. Neither event will require sale of such municipal
bonds by either tax-free fund, but the Adviser will consider such event in its
determination of whether either tax-free fund should continue to hold the
municipal bonds. To the extent that the rating given by Moody's or Standard &
Poor's for municipal bonds may change as a result of changes in such
organizations or their rating systems, the tax-free funds will attempt to use
comparable ratings as standards for its investments in accordance with their
investment policies.
GENERAL INFORMATION ON MUNICIPAL BONDS. Municipal bonds are generally understood
to include debt obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, bridges, highways, housing, hospitals, mass transportation, schools,
streets, and water and sewer works. Municipal bonds may also be issued to refund
outstanding obligations. In addition, certain types of private activity bonds
are issued by or on behalf of public authorities to obtain funds to provide
privately operated hazardous waste-treatment facilities; certain redevelopment
projects; airports, docks, and wharves (other than lodging, retail, and office
facilities); mass commuting facilities; multifamily residential rental property;
sewage and solid waste disposal property; facilities for the furnishing of
water; and local furnishing of electric energy or gas or district heating and
cooling facilities. Such obligations are considered to be municipal bonds
provided that the interest paid thereon qualifies as exempt from Federal income
tax, in the opinion of bond counsel, to the issuer. In addition, if the proceeds
from private activity bonds are used for the construction, equipment, repair or
improvement of privately operated industrial or commercial facilities, the
interest paid on such bonds may be exempt from Federal income tax, although
current Federal tax laws place substantial limitations on the size of such
issues.
In order to be classified as a "diversified" investment company under the 1940
Act, a mutual fund may not, with respect to 75% of its total assets, invest more
than 5% of its total assets in the securities of any one issuer (except U.S.
government obligations) or own more than 10% of the outstanding voting
securities of any one issuer. For the purpose of diversification under the 1940
Act, the identification of the issuer of municipal bonds depends on the terms
and conditions of the security. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the issuing entity and the security is backed
only by the assets and revenues of such entity, such
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entity would be deemed to be the sole issuer. Similarly, in the case of a
private activity bond, if that bond is backed only by the assets and revenues of
the non-governmental user, then such non-governmental user would be deemed to be
the sole issuer. If, however, in either case the creating government or some
other entity guarantees a security, such a guarantee may be considered a
separate security and is to be treated as an issue of such government or other
entity.
The yields on municipal bonds are dependent on a variety of factors, including
general economic and monetary conditions, money market factors, conditions of
the municipal bond market, size of a particular offering, maturity of the
obligation, and rating of the issue. The imposition of a mutual fund's
management fees, as well as other operating expenses, will have the effect of
reducing the yield to investors.
Municipal bonds are also subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Code, and laws, if any, which may be enacted by Congress or state
legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of such obligations or upon
municipalities by levying taxes. There is also the possibility that, as a result
of litigation or other conditions, the power or ability of any one or more
issuers to pay, when due, principal of and interest on its, or their, municipal
bonds may be materially affected. The Tax Reform Act of 1986 enlarged the scope
of the alternative minimum tax. As a result, interest on private activity bonds
issued after August 7, 1986, will be a preference item for alternative minimum
tax purposes.
From time to time, proposals to restrict or eliminate the Federal income tax
exemption for interest on municipal bonds have been introduced before Congress.
Similar proposals may be introduced in the future. If such a proposal were
enacted, the availability of municipal bonds for investment by the tax-free
funds would be adversely affected. In such event, the tax-free funds would
re-evaluate their investment objective and policies.
MUNICIPAL NOTES. Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal notes
include:
1. Tax Anticipation Notes. Tax anticipation notes are issued to finance
working capital needs of state and local governments. Generally, they are
issued in anticipation of various seasonal tax revenues, such as ad valorem
property, income sales, use and business taxes, and are payable from these
specific future taxes. Tax anticipation notes are usually general
obligations of the issuer. General obligations are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of
principal and interest.
2. Revenue Anticipation Notes. Revenue anticipation notes are issued by state
and local governments or governmental bodies with the expectation that
receipt of future revenues, such as Federal revenue sharing or state aid
payments, will be used to repay the notes. Typically, they also constitute
general obligations of the issuer.
3. Bond Anticipation Notes. Bond anticipation notes are issued to provide
interim financing for state and local governments until long-term financing
can be arranged. In most cases, the long-term bonds then provide the money
for the repayment of the notes.
4. Tax-Exempt Commercial Paper. Tax-exempt commercial paper is a short-term
obligation with a stated maturity of 365 days or less. It is issued and
backed by agencies of state and local governments to finance seasonal
working capital needs or as short-term financing in anticipation of
longer-term financing.
VARIABLE RATE DEMAND OBLIGATIONS. Variable rate obligations have a yield which
is adjusted periodically based upon changes in the level of prevailing interest
rates. Such adjustments are generally made on a daily, weekly or monthly basis.
Variable rate obligations lessen the capital fluctuations usually inherent in
fixed income investments.
Unlike securities with fixed rate coupons, variable rate instrument coupons are
not fixed for the full term of the instrument. Rather, they are adjusted
periodically based upon changes in prevailing interest rates. The more
frequently such instruments are adjusted, the less such instruments are affected
by interest rate changes. The value of a variable rate instrument, however, may
fluctuate in response to market factors and changes in the creditworthiness of
the issuer. By investing in variable rate obligations the tax-free funds seek to
take advantage of the normal yield curve pattern that usually results in higher
yields on longer-term investments. This policy also means that should interest
rates decline, a tax-free fund's yield will decline and that tax-free fund and
its shareholders will forego the opportunity for capital appreciation of that
tax-free fund's investments and of their shares to the extent a portfolio is
invested in variable rate obligations. Should interest rates increase, a
tax-free
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fund's yield will increase and that tax-free fund and its shareholders will be
subject to lessened risks of capital depreciation of its portfolio investments
and of their shares to the extent a portfolio is invested in variable rate
obligations. There is no limitation on the percentage of the tax-free funds'
assets which may be invested in variable rate obligations. For purposes of
determining a tax-free fund's weighted average portfolio maturity, the term of a
variable rate obligation is defined as the longer of the length of time until
the next rate adjustment or the time of demand.
Floating rate demand notes have an interest rate fixed to a known lending rate
(such as the prime rate) and are automatically adjusted when the known rate
changes. Variable rate demand notes have an interest rate which is adjusted at
specified intervals to a known rate. Demand notes provide that the holder may
demand payment of the note at its par value plus accrued interest by giving
notice to the issuer. To ensure that ability of the issuer to make payment upon
such demand, the note may be supported by an unconditional bank letter of
credit.
The trustees have approved investments in floating and variable rate demand
notes upon the following conditions: the tax-free funds have an unconditional
right of demand, upon notice to exceed thirty days, against the issuer to
receive payment; the Adviser determines the financial condition of the issuer
and continues to monitor it in order to be satisfied that the issuer will be
able to make payment upon such demand, either from its own resources or through
an unqualified commitment from a third party; and the rate of interest payable
is calculated to ensure that the market value of such notes will approximate par
value on the adjustment dates.
OBLIGATIONS WITH TERM PUTS ATTACHED. The tax-free funds may purchase municipal
securities together with the right that it may resell the securities to the
seller at an agreed-upon price or yield within a specified period prior to the
maturity date of the securities. Although it is not a put option in the usual
sense, such a right to resell is commonly known as a "term put." The tax-free
funds may purchase obligations with puts attached from banks and broker-dealers.
The price which the tax-free funds expect to pay for municipal securities with
puts generally is higher than the price which otherwise would be paid for the
municipal securities alone. The tax-free funds will use puts for liquidity
purposes in order to permit it to remain more fully invested in municipal
securities than would otherwise be the case by providing a ready market for
certain municipal securities in its portfolio at an acceptable price. The put
generally is for a shorter term than the maturity of the municipal security and
does not restrict in any way the tax-free funds' ability to dispose of (or
retain) the municipal security.
In order to ensure that the interest on municipal securities subject to puts is
tax-exempt to either tax-free fund, it will limit its use of puts in accordance
with applicable interpretations and rulings of the Internal Revenue Service.
Since it is difficult to evaluate the likelihood of exercise of the potential
benefit of a put, it is expected that puts will be determined to have a "value"
of zero, regardless of whether any direct or indirect consideration was paid.
Accordingly, puts as separate securities are expected not to affect the
calculation of the weighted average portfolio maturity. Where a tax-free fund
has paid for a put, the cost will be reflected as unrealized depreciation in the
underlying security for the period during which the commitment is held, and
therefore would reduce any potential gain on the sale of the underlying security
by the cost of the put. There is a risk that the seller of the put may not be
able to repurchase the security upon exercise of the put by that tax-free fund.
To minimize such risks, the tax-free funds will only purchase obligations with
puts attached from sellers whom the Adviser believes to be creditworthy.
MOODY'S INVESTORS SERVICE, INC. Aaa--the "best quality." Aa--"high quality by
all standards," but margins of protection or other elements make long-term risks
appear somewhat larger than Aaa rated municipal bonds. A--"upper medium grade
obligation." Security for principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in
the future. Baa--"medium grade obligations." 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 have speculative
characteristics as well.
STANDARD & POOR'S CORPORATION. AAA--"obligation of the highest quality."
AA--issues with investment characteristics "only slightly less marked than those
of the prime quality issues." A--"the third strongest capacity for payment of
debt service." Principal and interest payments on the bonds in this category are
considered safe. It differs from the two higher ratings, because with respect to
general obligation bonds, there is some weakness which, under certain adverse
circumstances, might impair the ability of the issuer to meet debt obligations
at some future date. With respect to revenue bonds, debt service coverage is
good but not exceptional, and stability of the pledged revenues could show some
variations
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because of increased competition or economic influences on revenues.
BBB--"regarded as having 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.
GOVERNMENT MONEY MARKET FUNDS
The Treasury Securities Cash Fund and Government Securities Savings Fund have
adopted a fundamental policy requiring use of best efforts to maintain a
constant net asset value of $1.00 per share. Shareholders should understand
that, while the Trust will use its best efforts to attain this objective, there
can be no guarantee that it will do so. The Treasury Securities Cash Fund and
Government Securities Savings Fund value their respective portfolio securities
on the basis of the amortized cost method. This requires that those Funds
maintain a dollar-weighted average portfolio maturity of 90 days or less,
purchase only instruments having remaining maturities of 397 days or less, and
invest only in securities determined by the Board of Trustees of the Trust to be
of high quality with minimal credit risks.
RISK FACTORS
The following information supplements the discussion of the Fund's risk factors
discussed in the Fund's prospectus. The following are among the most significant
risks associated with an investment in the Fund.
EQUITY PRICE FLUCTUATION. Equity securities are subject to price fluctuations
depending on a variety of factors, including market, business, and economic
conditions.
FOREIGN INVESTMENTS. Investing in securities issued by companies whose principal
business activities are outside the United States may involve significant risks
not present in domestic investments. For example, there is generally less
publicly available information about foreign companies, particularly those not
subject to the disclosure and reporting requirements of the United States
securities laws. Foreign issuers are generally not bound by uniform accounting,
auditing, and financial reporting requirements and standards of practice
comparable to those applicable to domestic issuers. Investments in foreign
securities will typically be denominated in foreign currency. If the foreign
currency declines in value against the U.S. dollar, the value of the foreign
security will be worth less to a U.S. shareholder. Investments in foreign
securities also involve the risk of possible adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation, limitation
of the removal of funds or other assets of the Fund, political or financial
instability or diplomatic and other developments that could affect such
investment. In addition, economies of particular countries or areas of the world
may differ favorably or unfavorably from the economy of the United States. It is
anticipated that in most cases the best available market for foreign securities
will be on exchanges or in over-the-counter markets located outside of the
United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers (particularly those in developing
countries) may be less liquid and more volatile than securities of comparable
United States companies. In addition, foreign brokerage commissions are
generally higher than commissions on securities traded in the United States and
may be non-negotiable. In general, there is less overall governmental
supervision and regulation of foreign securities markets, broker-dealers, and
issuers than in the United States.
EMERGING MARKETS. The Gold and Natural Resources Funds and the Equity Funds
(especially the China Region Fund) may invest in countries considered by the
Adviser to represent emerging markets. The Adviser determines which countries
are emerging market countries by considering various factors, including
development of securities laws and market regulation, total number of issuers,
total market capitalization, and perceptions of the investment community.
Generally, emerging markets are those other than North America, Western Europe,
and Japan.
Investing in emerging markets involves risks and special considerations not
typically associated with investing in other more established economies or
securities markets. Investors should carefully consider their ability to assume
the below listed risks before making an investment in the Fund. Investing in
emerging markets is considered speculative and involves the risk of total loss.
Risks of investing in emerging markets include:
1. the risk that the Fund's assets may be exposed to nationalization,
expropriation, or confiscatory taxation;
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2. the fact that emerging market securities markets are substantially smaller,
less liquid and more volatile than the securities markets of more developed
nations The relatively small market capitalization and trading volume of
emerging market securities may cause the Fund's investments to be
comparatively less liquid and subject to greater price volatility than
investments in the securities markets of developed nations. Many emerging
markets are in their infancy and have yet to be exposed to a major
correction. In the event of such an occurrence, the absence of various
market mechanisms that are inherent in the markets of more developed
nations may lead to turmoil in the market place, as well as the inability
of the Fund to liquidate its investments;
3. greater social, economic and political uncertainty (including the risk of
war);
4. greater price volatility, substantially less liquidity and significantly
smaller market capitalization of securities markets;
5. currency exchange rate fluctuations and the lack of available currency
hedging instruments;
6. higher rates of inflation;
7. controls on foreign investment and limitations on repatriation of invested
capital and on the Fund's ability to exchange local currencies for U.S.
dollars;
8. greater governmental involvement in and control over the economy;
9. the fact that emerging market companies may be smaller, less seasoned and
newly organized;
10. the difference in, or lack of, auditing and financial reporting standards
which may result in unavailability of material information about issuers;
11. the fact that the securities of many companies may trade at prices
substantially above book value, at high price/earnings ratios, or at prices
that do not reflect traditional measures of value;
12. the fact that statistical information regarding the economy of many
emerging market countries may be inaccurate or not comparable to
statistical information regarding the United States or other economies;
13. less extensive regulation of the securities markets;
14. certain considerations regarding the maintenance of Fund portfolio
securities and cash with foreign subcustodians and securities depositories;
15. the risk that it may be more difficult, or impossible, to obtain and/or
enforce a judgment than in other countries;
16. the risk that the Fund may be subject to income or withholding taxes
imposed by emerging market counties or other foreign governments. The Fund
intends to elect, when eligible, to "pass through" to the Fund's
shareholders the amount of foreign income tax and similar taxes paid by the
Fund. The foreign taxes passed through to a shareholder would be included
in the shareholder's income and may be claimed as a deduction or credit.
Other taxes, such as transfer taxes, may be imposed on the Fund, but would
not give rise to a credit or be eligible to be passed through to the
shareholders;
17. the fact that the Fund also is permitted to engage in foreign currency
hedging transactions and to enter into stock options on stock index futures
transactions, each of which may involve special risks, although these
strategies cannot at the present time be used to a significant extent by
the Fund in the markets in which the Fund will principally invest;
18. enterprises in which the Fund invests may be or become subject to unduly
burdensome and restrictive regulation affecting the commercial freedom of
the invested company and thereby diminishing the value of the Fund's
investment in it. Restrictive or over regulation may therefore be a form of
indirect nationalization;
19. businesses in emerging markets only have a very recent history of operating
within a market-oriented economy. Overall, relative to companies operating
in western economies, companies in emerging markets are characterized by a
lack of (i) experienced management, (ii) modern technology and (iii) a
sufficient capital base with which to develop and expand
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their operations. It is unclear what will be the effect on companies in
emerging markets, if any, of attempts to move towards a more
market-oriented economy;
20. investments in equity securities are subject to inherent market risks and
fluctuations in value due to earnings, economic conditions, quality ratings
and other factors beyond the control of the Adviser or Adviser. As a
result, the return and net asset value of the Fund will fluctuate;
21. the Adviser may engage in hedging transactions in an attempt to hedge
selected Funds' foreign securities investments back to the U.S. dollar
when, in its judgment, currency movements affecting particular investments
are likely to harm the performance of the Fund. Possible losses from
changes in currency exchange rates are primarily a risk of unhedged
investing in foreign securities. While a security may perform well in a
foreign market, if the local currency declines against the U.S. dollar,
gains from the investment can disappear or become losses. Typically,
currency fluctuations are more extreme than stock market fluctuations.
Accordingly, the strength or weakness of the U.S. dollar against foreign
currencies may account for part of the Fund's performance even when the
Adviser attempts to minimize currency risk through hedging activities.
While currency hedging may reduce portfolio volatility, there are costs
associated with such hedging, including the loss of potential profits,
losses on hedging transactions, and increased transaction expenses; and
22. disposition of illiquid securities often takes more time than for more
liquid securities, may result in higher selling expenses and may not be
able to be made at desirable prices or at the prices at which such
securities have been valued by the Fund. As a non-fundamental policy the
Fund will not invest more than 15% of its net assets in illiquid
securities.
RESTRICTED SECURITIES. The Gold and Natural Resource Funds and the China Region
Fund may, from time to time, purchase securities that are subject to
restrictions on resale. While such purchases may be made at an advantageous
price and offer attractive opportunities for investment not otherwise available
on the open market, the Fund may not have the same freedom to dispose of such
securities as in the case of the purchase of securities in the open market or in
a public distribution. These securities may often be resold in a liquid dealer
or institutional trading market, but the Fund may experience delays in its
attempts to dispose of such securities. If adverse market conditions develop,
the Fund may not be able to obtain as favorable a price as that prevailing at
the time the decision is made to sell. In any case, where a thin market exists
for a particular security, public knowledge of a proposed sale of a large block
may depress the market price of such securities.
CONVERTIBLE SECURITIES. The Gold and Natural Resource Funds and the Equity Funds
may invest in convertible securities, that is, bonds, notes, debentures,
preferred stocks and other securities that are convertible into or exchangeable
for another security, usually common stock. Convertible debt securities and
convertible preferred stocks, until converted, have general characteristics
similar to both debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities typically increases or
declines as the market value of the underlying common stock increases or
declines, although usually not to the same extent. Convertible securities
generally offer lower yields than non-convertible fixed income securities of
similar quality because of their conversion or exchange features. Convertible
bonds and convertible preferred stock typically have lower credit ratings than
similar non-convertible securities because they are generally subordinated to
other similar but non-convertible fixed income securities of the same issuer.
OTHER RIGHTS TO ACQUIRE SECURITIES. The Gold and Natural Resource Funds and the
Equity Funds may also invest in other rights to acquire securities, such as
options and warrants. These securities represent the right to acquire a fixed or
variable amount of a particular issue of securities at a fixed or formula price
either during specified periods or only immediately before termination. These
securities are generally exercisable at premiums above the value of the
underlying securities at the time the right is issued. These rights are more
volatile than the underlying stock and will result in a total loss of the Fund's
investment if they expire without being exercised because the value of the
underlying security does not exceed the exercise price of the right.
REPURCHASE AGREEMENTS
In a repurchase agreement, the Fund purchases securities subject to the seller's
agreement to repurchase such securities at a specified time (normally one day)
and price. The repurchase price reflects an agreed upon interest rate during the
time of investment. All repurchase agreements must be collateralized by United
States government or government agency securities, the market values of which
equal or exceed 102% of the principal amount of the repurchase obligation. If an
institution enters
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an insolvency proceeding, the resulting delay in liquidation of securities
serving as collateral could cause the Fund some loss if the value of the
securities declined before liquidation. To reduce the risk of loss, the Fund
will enter into repurchase agreements only with institutions and dealers the
board of trustees considers creditworthy.
LENDING OF PORTFOLIO SECURITIES
The Funds will not lend portfolio securities unless collateral secures the loan
(consisting of any combination of cash, United States government securities or
irrevocable letters of credit) in an amount at least equal (on a daily
marked-to-market basis) to the current market value of the securities lent. In
case of bankruptcy or breach of agreement by the borrower of the securities, the
Fund could experience delays and costs in recovering the securities lent. The
Fund will not enter into securities lending agreements unless its custodian
bank/lending agent will fully indemnify the Fund against loss due to borrower
default. The Fund may not lend securities with an aggregate market value of more
than one-third of the Fund's total net assets. For the China Region Fund only,
this is a fundamental policy that cannot be changed without a vote by
shareholders.
BORROWING
The Funds may have to deal with unpredictable cashflows as shareholders purchase
and redeem shares. Under adverse conditions, the Funds might have to sell
portfolio securities to raise cash to pay for redemptions at a time when
investment considerations would not favor such sales. In addition, frequent
purchases and sales of portfolio securities tend to decrease the Funds'
performance by increasing transaction expenses.
The Gold Shares Fund, World Gold Fund, China Region Fund, and All American Fund
may deal with unpredictable cashflows by borrowing money. Through such
borrowings these Funds may avoid selling portfolio securities to raise cash to
pay for redemptions at a time when investment considerations would not favor
such sales. In addition, the Funds' performance may be improved due to a
decrease in the number of portfolio transactions. After borrowing money, if
subsequent shareholder purchases do not provide sufficient cash to repay the
borrowed monies, the Fund will liquidate portfolio securities in an orderly
manner to repay the borrowed monies.
To the extent that a Fund borrows money prior to selling securities, the Fund
would be leveraged such that the Fund's net assets may appreciate or depreciate
in value more than an unleveraged portfolio of similar securities. Since
substantially all of a Fund's assets will fluctuate in value and whereas the
interest obligations on borrowings may be fixed, the net asset value per share
of the Fund will increase more when the Fund's portfolio assets increase in
value and decrease more when the Fund's portfolio assets decrease in value than
would otherwise be the case. Moreover, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the returns which the Funds earn on portfolio securities. Under adverse
conditions, the Funds might be forced to sell portfolio securities to meet
interest or principal payments at a time when market conditions would not be
conducive to favorable selling prices for the securities.
The Funds will not purchase any security while borrowings represent more than 5%
of their total assets outstanding.
STRATEGIC TRANSACTIONS
The Gold and Natural Resources Funds and Equity Funds may purchase and sell
exchange-listed and over-the-counter put and call options on securities, equity
and fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and options thereon, and enter into various currency
transactions such as currency forward contracts, currency futures contracts,
options on currencies or currency futures (collectively, all the above are
called "Strategic Transactions"). The Gold and Natural Resources Funds and
Equity Funds may engage in Strategic Transactions for hedging, risk management,
or portfolio management purposes, but not for speculation, and it will comply
with applicable regulatory requirements when implementing these strategies,
techniques and instruments.
Strategic Transactions may be used to attempt (1) to protect against possible
changes in the market value of securities held in or to be purchased for a
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, (2) to protect a Fund's unrealized gains in the value of its
portfolio securities, (3) to facilitate the sale of such securities for
investment purposes, (4) to manage the effective maturity or duration of a
Fund's portfolio, or (5) to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. The Gold
and Natural
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Resources Funds and Equity Funds' ability to successfully use these Strategic
Transactions will depend upon the Adviser's ability to predict pertinent market
movements, and cannot be assured. Engaging in Strategic Transactions will
increase transaction expenses and may result in a loss that exceeds the
principal invested in the transactions.
Strategic Transactions have risk associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to the Fund.
For example, selling call options may force the sale of portfolio securities at
inopportune times or for lower prices than current market values. Selling call
options may also limit the amount of appreciation a Fund can realize on its
investments or cause a Fund to hold a security it might otherwise sell. The use
of currency transactions can result in a Fund incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Fund's position. In addition, futures and
option markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction, and substantial losses might
be incurred. However, the use of futures and options transactions for hedging
should tend to minimize the risk of loss due to a decline in the value of a
hedged position. At the same time they tend to limit any potential gain that
might result from an increase in value of such position. Finally, the daily
variation margin requirement for futures contracts would create a greater on
going potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been used.
The Gold and Natural Resources Funds and Equity Funds' activities involving
Strategic Transactions may be limited by the requirements of Subchapter M of the
Internal Revenue Code for qualification as a regulated investment company.
PUT AND CALL OPTIONS. The Gold and Natural Resources Funds and Equity Funds may
purchase and sell (issue) both put and call options. The Funds may also enter
into transactions to close out its investment in any put or call options.
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the issuer of the option the obligation to buy the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
a Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the issuer the obligation to sell, the underling instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An "American style" put or call option may be exercised at any time
during the option period while a "European style" put or call option may be
exercised only upon expiration or during a fixed period prior thereto.
The Gold and Natural Resources Funds and Equity Funds is authorized to purchase
and sell both exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. OTC options are purchased from
or sold to securities dealers, financial institutions or other parties
["Counterparty(ies)"] through direct bilateral agreement with the Counterparty.
In contrast to exchange listed options, which generally have standardized terms
and performance mechanics, all the terms of an OTC option are set by negotiation
of the parties. Unless the parties provide for it, there is no central clearing
or guaranty function in an OTC option.
The Gold and Natural Resources Funds and Equity Funds' ability to close out its
position as a purchaser or seller of a put or call option is dependent, in part,
upon the liquidity of the market for that particular option. Exchange listed
options, because they are standardized and not subject to Counterparty credit
risk, are generally more liquid than OTC options. There can be no guarantee that
a Fund will be able to close out an option position, whether in exchange listed
options or OTC options, when desired. An inability to close out its options
positions may reduce a Fund's anticipated profits or increase its losses.
Page 16
<PAGE>
If the Counterparty to an OTC option fails to make or take delivery of the
security, currency or other instrument underlying an OTC option it has entered
into with a Fund, or fails to make a cash settlement payment due in accordance
with the terms of that option, a Fund may lose any premium it paid for the
option as well as any anticipated benefit of the transaction. Accordingly, the
Adviser must assess the creditworthiness of each such Counterparty or any
guarantor or credit enhancement of the Counterparty's credit to determine the
likelihood that the terms of the OTC option will be satisfied.
The Gold and Natural Resources Funds and Equity Funds will realize a loss equal
to all or a part of the premium paid for an option if the price of the
underlying security, commodity, index, currency or other instrument security
decreases or does not increase by more than the premium (in the case of a call
option), or if the price of the underlying security, commodity, index, currency
or other instrument increases or does not decrease by more than the premium (in
the case of a put option). A Fund will not purchase any option if, immediately
thereafter, the aggregate market value of all outstanding options purchased by
that Fund would exceed 5% of that Fund's total assets.
If the Gold and Natural Resources Funds and Equity Funds sells (i.e., issues) a
call option, the premium that it receives may serve as a partial hedge, to the
extent of the option premium, against a decrease in the value of the underlying
securities or instruments in its portfolio, or may increase a Fund's income. If
a Fund sells (i.e., issues) a put option, the premium that it receives may serve
to reduce the cost of purchasing the underlying security, to the extent of the
option premium, or may increase a Fund's capital gains. All options sold by a
Fund must be "covered" (i.e., the Fund must either be long (when selling a call
option) or short (when selling a put option), the securities or futures contract
subject to the calls or must meet the asset segregation requirements described
below as long as the option is outstanding. Even though a Fund will receive the
option premium to help protect it against loss or reduce its cost basis, an
option sold by a Fund exposes the Fund during the term of the option to possible
loss. When selling a call, a Fund is exposed to the loss of opportunity to
realize appreciation in the market price of the underlying security or
instrument, and the transaction may require the Fund to hold a security or
instrument that it might otherwise have sold. When selling a put, a Fund is
exposed to the possibility of being required to pay greater than current market
value to purchase the underlying security, and the transaction may require the
Fund to maintain a short position in a security or instrument it might otherwise
not have maintained. The Gold and Natural Resources Funds and Equity Funds will
not write any call or put options if, immediately afterwards, the aggregate
value of a Fund's securities subject to outstanding call or put options would
exceed 25% of the value of a Fund's total assets.
FUTURES CONTRACTS. The Gold and Natural Resources Funds and Equity Funds may
enter into financial futures contracts or purchase or sell put and call options
on such futures as a hedge against anticipated interest rate, currency or equity
market changes, for duration management and for risk management purposes.
Futures are generally bought and sold on the commodities exchange where they are
listed with payment of an initial variation margin as described below. The sale
of a futures contract creates a firm obligation by a Fund, as seller, to deliver
to the buyer the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). Options on
futures contracts are similar to options on securities except that an option on
a futures contract gives the purchaser the right in return for the premium paid
to assume a position in a futures contract and obligates the seller to deliver
such position.
The Gold and Natural Resources Funds and Equity Funds' use of financial futures
and options thereon will in all cases be consistent with applicable regulatory
requirements and in particular the rules and regulations of the CFTC and will be
entered into only for bonafide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires a Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) that initially is typically 1% to 10% of
the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the marked-to-market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the
purchaser. If a Fund exercises an option on a futures contract, it will be
obligated to post initial margin (and potentially subsequent variation margin)
for the resulting futures position just as it would for any futures position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction, but there can be no assurance that the position can be
offset, before settlement, at an advantageous price, nor that delivery will
occur.
The Gold and Natural Resources Funds and Equity Funds will not enter into a
futures contract or related option (except for closing transactions) if,
immediately afterwards, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value). However, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
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FOREIGN CURRENCY TRANSACTIONS. The Gold and Natural Resources Funds and Equity
Funds may engage in currency transactions with Counterparties in an attempt to
hedge an investment in an issuer incorporated or operating in a foreign country
or in a security denominated in the currency of a foreign country against a
devaluation of that country's currency. Currency transactions include forward
currency contracts, exchange listed currency futures, and exchange listed and
OTC options on currencies. A Fund's dealing in forward currency contracts and
other currency transactions such as futures, options, and options on futures
generally 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 a Fund, 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 Gold and Natural Resources Funds and Equity Funds may 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 in which a Fund
has (or expects to have) portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings or portfolio securities, the Gold and Natural Resources
Funds and Equity Funds may engage in proxy hedging. Proxy hedging may be used
when the currency to which a Fund's portfolio is exposed is difficult to hedge.
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 in which
some or all of a Fund's portfolio securities are, or are expected to be
denominated, and to buy U.S. dollars.
To hedge against a devaluation of a foreign currency, the Gold and Natural
Resources Funds and Equity Funds may enter into a forward market contract to
sell to banks a set amount of such currency at a fixed price and at a fixed time
in the future. If, in foreign currency transactions, the foreign currency sold
forward by a Fund is devalued below the price of the forward market contract and
more than any devaluation of the U.S. dollar during the period of the contract,
a Fund will realize a gain as a result of the currency transaction. In this way,
a Fund might reduce the impact of any decline in the market value of its foreign
investments attributable to devaluation of foreign currencies.
The Gold and Natural Resources Funds and Equity Funds may sell foreign currency
forward only as a means of protecting its foreign investments or to hedge in
connection with the purchase and sale of foreign securities, and may not
otherwise trade in the currencies of foreign countries. Accordingly, a Fund may
not sell forward the currency of a particular country to an extent greater than
the aggregate market value (at the time of making such sale) of the securities
held in its portfolio denominated in that particular foreign currency (or issued
by companies incorporated or operating in that particular foreign country) plus
an amount equal to the value of securities it anticipates purchasing less the
value of securities it anticipates selling, denominated in that particular
currency.
As a result of hedging through selling foreign currencies forward, in the event
of a devaluation, it is possible that the value of a Fund's portfolio would not
depreciate as much as the portfolio of a Fund holding similar investments that
did not sell foreign currencies forward. Even so, the forward market contract is
not a perfect hedge against devaluation because the value of a Fund's portfolio
securities may decrease more than the amount realized by reason of the foreign
currency transaction. To the extent that a Fund sells forward currencies that
are thereafter revalued upward, the value of that Fund's portfolio would
appreciate to a lesser extent than the comparable portfolio of a Fund that did
not sell those foreign currencies forward. If, in anticipation of a devaluation
of a foreign currency, a Fund sells the currency forward at a price lower than
the price of that currency on the expiration date of the contract, that Fund
will suffer a loss on the contract if the currency is not devalued, during the
contract period, below the contract price. Moreover, it will not be possible for
a Fund to hedge against a devaluation that is so generally anticipated that the
Fund is not able to contract to sell the currency in the future at a price above
the devaluation level it anticipates. It is possible that, under certain
circumstances, a Fund may have to limit its currency transactions to permit that
Fund to qualify as a "regulated investment company" under the Internal Revenue
Code of 1986, as amended ("Code"). Foreign currency transactions would involve a
cost to the Funds, which would vary with such factors as the currency involved,
the length of the contact period and the market conditions then prevailing.
The Gold and Natural Resources Funds and Equity Funds will not attempt to hedge
all its foreign investments by selling foreign currencies forward and will do so
only to the extent deemed appropriate by the Adviser.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Gold and Natural Resources
Funds and Equity Funds segregate liquid high grade assets with its custodian to
the extent that the Fund's obligations are not otherwise "covered" through
ownership of the underlying security, financial
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<PAGE>
instrument or currency. In general, either the full amount of any obligation of
a Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or subject to
any regulatory restrictions, an amount of cash or liquid high grade debt
securities at least equal to the current amount of the obligation must either be
identified as being restricted in a Fund's accounting records or physically
segregated in a separate account at that Fund's custodian. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. For the purpose of
determining the adequacy of the liquid securities that have been restricted, the
securities will be valued at market or fair value. If the market or fair value
of such securities declines, additional cash or liquid securities will be
restricted on a daily basis so that the value of the restricted cash or liquid
securities, when added to the amount deposited with the broker as margin, equals
the amount of such commitments by a Fund.
PORTFOLIO TRANSACTIONS
The Advisory Agreement between the Trust and the Adviser requires that the
Adviser, in executing portfolio transactions and selecting brokers or dealers,
seek the best overall terms available. In assessing the terms of a transaction,
consideration may be given to various factors, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer (for a specified transaction and on
a continuing basis), the reasonableness of the commission, if any, and the
brokerage and research services provided to the Trust and/or other accounts over
which the Adviser or an affiliate of the Adviser exercises investment
discretion. Under the Advisory Agreement, the Adviser is permitted, in certain
circumstances, to pay a higher commission than might otherwise be obtained in
order to acquire brokerage and research services. The Adviser must determine in
good faith, however, that such commission is reasonable in relation to the value
of the brokerage and research services provided -- viewed in terms of that
particular transaction or in terms of all the accounts over which investment
discretion is exercised. In such case, the Board of Trustees will review the
commissions paid by each Fund of the Trust to determine if the commissions paid
over representative periods of time were reasonable in relation to the benefits
obtained. The advisory fee of the Adviser would not be reduced by reason of its
receipt of such brokerage and research services. To the extent that research
services of value are provided by broker-dealers through or with whom the Trust
places portfolio transactions the Adviser may be relieved of expenses which it
might otherwise bear.
The Trust may, in some instances, purchase securities that are not listed on a
national securities exchange or quoted on NASDAQ, but rather are traded in the
over-the-counter market. When the transactions are executed in the
over-the-counter market, it is intended generally to seek first to deal with the
primary market makers. However, the services of brokers will be utilized if it
is anticipated that the best overall terms can thereby be obtained. Purchases of
newly issued securities for the Tax Free Fund and Near-Term Tax Free Fund
usually are placed with those dealers from which it appears that the best price
or execution will be obtained. Those dealers may be acting as either agents or
principals.
The brokerage fees paid by the following Funds for the three fiscal periods
ended June 30, 1997, were as follows:
1995 1996 1997
-------- -------- --------
Gold Shares Fund ........... $456,685 $261,378 $481,476
World Gold Fund ............ $408,918 $383,831 $704,381
Global Resources Fund ...... $ 66,061 $130,955 $ 90,646
China Region Fund .......... $195,345 $ 78,718 $115,788
All American Fund .......... $ 20,744 $ 9,800 $ 8,080
Income Fund ................ $ 5,600 $ 30,965 $ 50,565
Real Estate Fund ........... $ 60,630 $ 75,940 $ 97,602
MANAGEMENT OF THE FUNDS
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Except as otherwise indicated, the
business address of each is 7900 Callaghan Road, San Antonio, Texas 78229.
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<PAGE>
NAME AND ADDRESS TRUST POSITION PRINCIPAL OCCUPATION
- ----------------- -------------- -----------------------------------------
John P. Allen Trustee President, Deposit Development Associates
5600 San Pedro Inc., a bank marketing firm. President,
San Antonio, TX Paragon Press. Partner, Rio Cibolo Ranch,
Inc.
E. Douglas Hodo Chairman of Chief Executive Officer of Houston
7706 Fondren the Board of Baptist University. Formerly Dean and
Houston, TX Trustees Professor of Economics and Finance,
College of Business, University of Texas
at San Antonio.
Charles Z. Mann Trustee Business consultant since January 1,
Turning Point 1993. Chairman, Bermuda Monetary
13 Knapton Authority from 1986 to 1992. Executive
Estates Rd. Vice President of International Median
Smiths, Bermuda Limited, a private investment holding
HS01 company, from 1979 to 1985 and previously
general manager of Bank of N.T.
Butterfield & Son, Ltd., a Bermuda-based
bank. Currently a Director of Bermuda
Electric Light Company, Ltd.; Overseas
Imports, Ltd.; Tyndall International
(Bermuda) Ltd.; Old Court International
Reserves Ltd.; XL Investments Limited,
Glaxo (Bermuda) Limited.
W.C.J. van Rensburg Trustee Professor of Geological Science and
6010 Sierra Arbor Petroleum Engineering, University of
Court Texas at Austin. Former Associate
Austin, TX Director, Bureau of Economic Geology,
University of Texas. Former Chairman,
Department of Geosciences, West Texas
State University. Former technical
director of South African Minerals Bureau
and British Petroleum Professor of Energy
Economics at the Ran Afrikaans
University, Johannesburg, South Africa.
Frank E. Holmes (1) Trustee, Chairman of the Board of Directors and
President, Chief Executive Officer of the Adviser.
Chief Since October 1989 Mr. Holmes has served
Executive and continues to serve in various
Officer positions with the Adviser, its
subsidiaries and the investment companies
it sponsors. Director of Franc-Or
Resource Corp. from November 1994 to
November 1996. Director of Adventure
Capital Limited from January 1996 to July
1997 and Director of Vedron Gold, Inc.
from August 1996 to March 1997. Director
of 71316 Ontario, Inc. since April 1987
and of F. E. Holmes Organization, Inc.
since July 1978. Director of Marleau,
Lemire Inc. from January 1995 to January
1996. Director of United Services Canada,
Inc. since February 1995 and Chief
Executive Officer from February to August
1995.
Susan B. McGee Executive Vice Executive Vice President, Corporate
President, Secretary and General Counsel of the
Secretary, Adviser. Since September 1992 Ms. McGee
General has served and continues to serve in
Counsel various positions with the Adviser, its
subsidiaries, and the investment
companies it sponsors. Before September
1992 Ms. McGee was a student at St.
Mary's Law School.
David J. Clark Treasurer Chief Financial Officer, Chief Operating
Officer of the Adviser. Since May 1997
Mr. Clark has served and continues to
serve in various positions with the
Adviser and the investment companies it
sponsors. Foreign Service Officer with
U.S. Agency for International Development
in the U.S. Embassy, Bonn, West Germany
from May 1992 to May 1997. Audit
Supervisor for University of Texas Health
Science Center from April 1991 to April
1992. Auditor-in-Charge for Texaco, Inc.
from August 1987 to June 1990.
- ------------------------------------
(1) This Trustee may be deemed an "interested person" of the Trust as defined
in the Investment Company Act of 1940.
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<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
As of October 10, 1997, the officers and trustees of the Funds as a group owned
less than 1% of the outstanding shares of each fund. The Trust is aware of the
following persons who owned of record, or beneficially, more than 5% of the
outstanding shares of any Fund at October 10, 1997:
World Gold Fund Charles Schwab & Co., Inc. 19.58% Record(1)
San Francisco, CA 94104
National Financial Services Corp. 05.35% Record(2)
New York, NY 10008-3908
Global Resources Fund Charles Schwab & Co., Inc. 15.44% Record(1)
San Francisco, CA 94104
National Financial Services Corp. 07.08% Record(2)
New York, NY 10008-3908
China Region Fund Charles Schwab & Co., Inc. 25.06% Record(1)
San Francisco, CA 94104
Gold Shares Fund Donaldson Lufkin Jenrette 5.67% Record(3)
Securities Corporation
Jersey City, NJ 07303-2052
Charles Schwab & Co., Inc. 5.26% Record(1)
San Francisco, CA 94104
Income Fund Charles Schwab & Co., Inc. 16.13% Record(1)
San Francisco, CA 94104
Real Estate Fund Charles Schwab & Co., Inc. 26.79% Record(1)
San Francisco, CA 94104
Near-Term Tax Free Fund Stewart Fordham 11.56% Record
Los Angeles, CA
- ----------------------------
(1) Charles Schwab & Co., Inc., a broker-dealer, has advised that no individual
client owns more than 5% of the Fund.
(2) National Financial Corp., a broker-dealer, has advised that no individual
client owns more than 5% of the Fund.
(3) Donaldson Lufkin Jenrette Securities Corporation, a broker-dealer, has
advised that no individual client owns more than 5% of the Fund.
INVESTMENT ADVISORY SERVICES
The investment adviser to the Funds is U.S. Global Investors, Inc., a Texas
corporation, pursuant to an Advisory Agreement dated as of October 27, 1989.
Frank E. Holmes, Chief Executive Officer and a Director of the Adviser, as well
as a Trustee, President and Chief Executive Officer of the Trust, beneficially
owns more than 25% of the outstanding voting stock of the Adviser and may be
deemed to be a controlling person of the Adviser.
In addition to the services described in each Fund's prospectus, the Adviser
will provide the Trust with office space, facilities and simple business
equipment, and will provide the services of executive and clerical personnel for
administering the affairs
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<PAGE>
of the Trust. It will compensate all personnel, officers and trustees of the
Trust if such persons are employees of the Adviser or its affiliates, except
that the Trust will reimburse the Adviser for a portion of the compensation of
the Adviser's employees who perform certain legal services for the Trust,
including state securities law regulatory compliance work, based upon the time
spent on such matters for the Trust. The Adviser pays the expense of printing
and mailing the prospectus and sales materials used for promotional purposes.
The Trust pays all other expenses for its operations and activities. Each of the
Funds of the Trust pays its allocable portion of these expenses. The expenses
borne by the Trust include the charges and expenses of any transfer agents and
dividend disbursing agents, custodian fees, legal and auditors' expenses,
bookkeeping and accounting expenses, brokerage commissions for portfolio
transactions, taxes, if any, the advisory fee, extraordinary expenses, expenses
of issuing and redeeming shares, expenses of shareholder and trustee meetings,
and of preparing, printing and mailing proxy statements, reports and other
communications to shareholders, expenses of registering and qualifying shares
for sale, fees of trustees who are not "interested persons" of the Adviser,
expenses of attendance by officers and trustees at professional meetings of the
Investment Company Institute, the No-Load Mutual Fund Association or similar
organizations, and membership or organization dues of such organizations,
expenses of preparing and setting in type the prospectus and periodic reports
and expenses of mailing them to current shareholders, fidelity bond premiums,
cost of maintaining the books and records of the Trust, and any other charges
and fees not specifically enumerated.
For the services and facilities provided to each of the Funds by the Adviser,
each Fund may pay to the Adviser a monthly fee at the rate set forth below based
upon the monthly average daily net assets of such Fund for such calendar month.
Some of these fees have been voluntarily reduced or waived until further notice.
See the "The Management Firm" section in the prospectus.
SUB-ADVISERS
The advisory agreement between the Adviser and the Trust permits the Adviser
from time to time to engage one or more sub-advisers to assist in the
performance of its services. Pursuant to the advisory agreement, the Adviser has
engaged Goodman & Company N.Y. Ltd. as Sub-Adviser to the Real Estate Fund, as
approved by shareholders on January 26, 1998. It is wholly owned by Goodman &
Company Ltd., which is ultimately wholly owned by Dundee Bancorp Inc., an
Ontario incorporated Canadian company listed on the Toronto Stock Exchange. Mr.
Nathan Edward "Ned" Goodman, Chairman of Goodman & Company N.Y. Ltd., is the
"controlling person" of Goodman & Company N.Y. Ltd. and Goodman & Company Ltd.
("Goodman & Company").
Under the terms of the sub-advisory agreement, the Sub-Adviser is required to
furnish the Adviser information and advice, including advice on the allocation
of investments among real estate related securities, relating to that portion of
the Fund's assets as the Adviser shall from time to time designate; furnish
continuously an investment program with respect to such assets; and to otherwise
manage the Fund's investments in accordance with the investment objectives and
policies as stated in the Fund's Prospectus and Statement of Additional
Information. Goodman & Company bears all expenses in connection with the
performance of the services under the sub-advisory agreement. Goodman & Company
manages the Fund's entire portfolio, with the exception of daily cash management
services, which services are provided by the Adviser.
The sub-advisory agreement remains in effect pursuant to its terms for two years
from the date of shareholder approval and from year to year thereafter so long
as such continuation is specifically approved at least annually (i) by either
the Trustees of the Trust or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund, and (ii) in either event by
the vote of a majority of the Trustees of the Trust who are not parties to this
agreement or "interested persons" (as defined in the 1940 Act) of any such
party, cast in person at a meeting called for the purpose of voting on such
approval.
The sub-advisory agreement is terminable, without penalty, by the Board, by a
Majority Vote of the Fund's shareholders, by the Adviser or by Goodman &
Company, in each case on not more than sixty nor less than thirty days' written
notice to the other party and to the Fund. The sub-advisory agreement terminates
automatically in the event of its assignment (as defined in the 1940 Act).
For the sub-advisory services, the Adviser pays Goodman & Company 50 percent of
the Management Fee (as defined in the advisory agreement) paid by the Fund to
the Adviser, net of all mutually agreed upon fee waivers and reimbursements and
reimbursements required by applicable law. The fee paid to Goodman & Company is
paid by the Adviser out of its management fee and does not increase the expenses
of the Fund.
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<PAGE>
ADVISORY FEE SCHEDULE
ANNUAL PERCENTAGE OF
NAME OF FUND AVERAGE DAILY NET ASSETS
- ---------------------------------------- -----------------------------------
Gold Shares, All American Equity, Income, 0.75% of the first $250,000,000 and
Tax Free, and Real Estate Funds 0.50% of the excess
Treasury Securities Cash, and Government 0.50% of the first $250,000,000 and
Securities Savings Funds 0.375% of the excess
World Gold and Global Resources Funds 1.00% of the first $250,000,000 and
0.50% of the excess
Near-Term Tax Free Fund 0.50%
China Region Opportunity Fund 1.25%
The Adviser may, out of profits derived from its management fee, pay certain
financial institutions (which may include banks, securities dealers and other
industry professionals) a "servicing fee" for performing certain administrative
servicing functions for Fund shareholders to the extent these institutions are
allowed to do so by applicable statute, rule or regulation. These fees will be
paid periodically and will generally be based on a percentage of the value of
the institutions' client Fund shares. The Glass-Steagall act prohibits banks
from engaging in the business of underwriting, selling or distributing
securities. However, in the adviser's opinion, such laws should not preclude a
bank from performing shareholder administrative and servicing functions as
contemplated herein.
The board of trustees of the Trust (including a majority of the "disinterested
trustees") recently approved continuation of the October 27, 1989, advisory
agreement through October 1998. The advisory agreement provides that it will
continue initially for two years, and from year to year thereafter, with respect
to each Fund, as long as it is approved at least annually both (i) by a vote of
a majority of the outstanding voting securities of such Fund (as defined in the
1940 Act) or by the board of trustees of the Trust, and (ii) by a vote of a
majority of the trustees who are not parties to the advisory agreement or
"interested persons" of any party thereto, cast in person at a meeting called
for the purpose of voting on such approval. The advisory agreement may be
terminated on 60 days' written notice by either party and will terminate
automatically if it is assigned.
The Trust pays the adviser a separate management fee for each Fund in the Trust.
Such fee is based on varying percentages of average net assets. For the three
fiscal periods ended June 30, 1995, June 30, 1996 and June 30, 1997, the Trust
incurred advisory fees (net of expenses paid by the adviser or voluntary fee
waivers) of $5,233,507, $5,216,589, and $5,195,746 respectively, for all Funds.
For the three fiscal periods ended June 30, 1995, June 30, 1996 and June 30,
1997, the Funds paid the adviser the following advisory fees (net of expenses
paid by the adviser or voluntary fee waivers):
1995 1996 1997
---------- ---------- ----------
Gold Shares Fund ........... $1,969,645 $1,727,462 $1,173,225
World Gold Fund ............ $1,900,764 $2,238,255 $2,380,969
Global Resources Fund ...... $ 218,438 $ 219,018 $ 281,264
China Region Fund .......... $ 84,569 $ 58,700 $ 270,994
All American Fund .......... $ 0 $ 0 $ 0
Income Fund ................ $ 80,223 $ 73,521 $ 70,067
Real Estate Fund ........... $ 85,225 $ 64,381 $ 101,214
Tax Free Fund .............. $ 0 $ 0 $ 0
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<PAGE>
1995 1996 1997
---------- ---------- ----------
Near-Term Tax
Free Fund ................ $ 0 $ 0 $ 0
Government Securities
Savings Fund ............. $ 0 $ 0 $ 91,782
Treasury Securities
Cash Fund ................ $ 894,643 $ 835,252 $ 826,231
TRANSFER AGENCY AND OTHER SERVICES
The Transfer Agency Agreement with the Trust provides for each Fund to pay
United Shareholder Services, Inc. ( "USSI") an annual fee of $23.00 per account
(1/12 of $23.00 monthly). In connection with obtaining and/or providing
administrative services to the beneficial owners of Trust shares through
broker-dealers, banks, trust companies and similar institutions which provide
such services and maintain an omnibus account with the Transfer Agent, each Fund
shall pay to the Transfer Agent a monthly fee equal to one-twelfth (1/12) of
12.5 basis points (.00125) of the value of the shares of the Funds held in
accounts at the institutions, which payment shall not exceed $1.92 multiplied by
the average daily number of accounts holding Trust shares at the institution.
These fees cover the usual transfer agency functions. In addition, the Funds
bear certain other Transfer Agent expenses such as the costs of record retention
and postage, plus the telephone and line charges (including the toll-free 800
service) used by shareholders to contact the Transfer Agent. For the fiscal
period ended June 30, 1997, the Funds paid the following amounts for transfer
agency fees and expenses:
Gold Shares Fund ................................... $1,194,230
World Gold Fund .................................... $ 814,580
Global Resources Fund .............................. $ 208,714
China Region Fund .................................. $ 184,492
All American Fund .................................. $ 6,958
Income Fund ........................................ $ 46,713
Real Estate Fund ................................... $ 58,281
Government Securities Savings Fund ................. $ 835,234
Treasury Securities Cash Fund ...................... $ 440,131
The two tax-free funds paid $0 due to the Adviser's expense
limit guarantees.
Prior to November 1997, USSI performed bookkeeping and accounting services, and
determined the daily net asset value for each of the Funds. Bookkeeping and
accounting services were provided to the Funds at a sliding scale fee based upon
average net assets and subject to an annual minimum fee. For the fiscal period
ended June 30, 1997, the Funds paid the following amounts for bookkeeping and
accounting services:
Gold Shares Fund ................................. $ 107,570
World Gold Fund .................................. $ 165,745
Global Resources Fund ............................ $ 51,549
China Region Fund ................................ $ 68,313
All American Fund ................................ $ 35,550
Income Fund ...................................... $ 33,268
Real Estate Fund ................................. $ 31,911
Tax Free Fund .................................... $ 20,063
Government Securities Savings Fund ............... $ 177,295
Treasury Securities Cash Fund .................... $ 67,493
The Near-Term Tax Free Fund paid $0 due to the Adviser's expense
limit guarantees.
Beginning November 1997, Brown Brothers Harriman & Co. , an independent service
provider, began providing the Funds with bookkeeping and accounting services and
determined the daily net asset value for each of the Funds.
In addition to the services performed for the Funds and the Trust under the
Advisory Agreement, the Adviser, through its subsidiary USSI, provides transfer
agent and dividend disbursement agent services pursuant to the Transfer Agency
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Agreement as described in the funds' prospectus under "Fund Details." In
addition, lockbox and statement printing services are provided by USSI. The
Board of Trustees recently approved the Transfer Agency and related agreements
through October 1998. For the three fiscal years ended June 30, 1995, 1996 and
1997, the Trust paid USSI total transfer agency fees and expenses of $2,480,073,
$2,617,240 and $3,789,333, respectively, for all Funds.
All fees paid to the Adviser during the fiscal year ended June 30, 1997,
(including management, transfer agency and accounting fees but net of
reimbursements) totaled $9,725,305.
A & B Mailers, Inc., a wholly-owned corporation of the Adviser, provides the
Trust with certain mail handling services. The charges for such services have
been negotiated by the Audit Committee and A & B Mailers, Inc. Each service is
priced separately. For the fiscal years ended June 30, 1995, 1996 and 1997, the
Trust paid A&B Mailers $77,773, $90,053 and $591,339, respectively, for all
Funds.
CERTAIN PURCHASES OF SHARES OF THE FUNDS
Shares of all the Funds are continuously offered by the Trust at their net asset
value next determined after an order is accepted. The methods available for
purchasing shares of the Funds are described in the prospectus. In addition,
shares of each Fund, except the Treasury Securities Cash Fund, the Tax Free
Fund, the Government Securities Savings Fund, may be purchased using stock, so
long as the securities delivered to the Trust meet the investment objectives and
concentration policies of the appropriate Fund, and are otherwise acceptable to
the Adviser, which reserves the right to reject all or any part of the
securities offered in exchange for shares of such Funds. On any such "in kind"
purchase, the following conditions will apply:
1. the securities offered by the investor in exchange for shares of the Fund
must not be in any way restricted as to resale or otherwise be illiquid;
2. securities of the same issuer must already exist in the Fund's portfolio;
3. the securities must have a value which is readily ascertainable (and not
established only by evaluation procedures) as evidenced by a listing on the
AMEX and the NYSE, or NASDAQ;
4. any securities so acquired by any Fund shall not comprise over 5% of that
Fund's net assets at the time of such exchange;
5. no over-the-counter securities will be accepted unless the principal
over-the-counter market is in the United States; and
6. the securities are acquired for investment and not for resale.
The Trust believes that this ability to purchase shares of each Fund, except the
Treasury Securities Cash Fund, the Tax Free Fund, and the Government Securities
Savings Fund using securities provides a means by which holders of certain
securities may obtain diversification and continuous professional management of
their investments without the expense of selling those securities in the public
market.
An investor who wishes to make an "in kind" purchase should furnish (either in
writing or by telephone) to the Trust a list with a full and exact description
of all of the securities which he or she proposes to deliver. The Trust will
advise him or her as to those securities which it is prepared to accept and will
provide the investor with the necessary forms to be completed and signed by the
investor. The investor should then send the securities, in proper form for
transfer, with the necessary forms to the Trust and certify that there are no
legal or contractual restrictions on the free transfer and sale of the
securities. The securities will be valued as of the close of business on the day
of receipt by the Trust in the same manner as portfolio securities of the
applicable Fund are valued. See the"Valuation of Shares" section in the
prospectus. The number of shares of the appropriate Fund, having a net asset
value as of the close of business on the day of receipt equal to the value of
the securities delivered by the investor, will be issued to the investor, less
applicable stock transfer taxes, if any.
The exchange of securities by the investor pursuant to this offer will
constitute a taxable transaction and may result in a gain or loss for Federal
income tax purposes. Each investor should consult his or her tax adviser to
determine the tax consequences under Federal and state law of making such an "in
kind" purchase.
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ADDITIONAL INFORMATION ON REDEMPTIONS
WIRE REDEMPTIONS--TREASURY SECURITIES CASH FUND AND GOVERNMENT SECURITIES
SAVINGS FUND ONLY. When shares of the Treasury Securities Cash Fund and
Government Securities Savings Fund are redeemed by wire, proceeds will normally
be wired on the next business day after receipt of the telephone instruction. To
place a request for a wire redemption, the shareholder may instruct USSI by
telephone (if this option was elected on the application accompanying the
prospectus), or by mailing instructions to U.S. Global Investors Funds, P.O. Box
781234, San Antonio, Texas 78278-1234. A bank processing fee for each bank wire
will be charged to the shareholder's account. The shareholder may change the
account which has been designated to receive amounts withdrawn under this
procedure at any time by writing to USSI with signature(s) guaranteed as
described in the prospectus. Further documentation will be required to change
the designated account when shares are held by a corporation or other
organization, fiduciary or institutional investor.
CHECK REDEMPTIONS--TREASURY SECURITIES CASH FUND AND GOVERNMENT SECURITIES
SAVINGS FUND ONLY. Upon receipt of a completed application indicating election
of the check writing feature, shareholders will be provided with a free supply
of temporary checks. A shareholder may order additional checks for a nominal
charge.
The checkwriting withdrawal procedure enables a shareholder to receive dividends
declared on the shares to be redeemed until such time as the check is processed.
For this reason, checks should never be used to close an account, since the
shareholder cannot know what the exact balance in the account will be on the
date that the check clears. If there are not sufficient shares to cover a check,
the check will be returned to the payee and marked "insufficient funds." Checks
written against shares which have been in the account less than 7 days and were
purchased by check will be returned as uncollected funds. A shareholder may
avoid this 7-day requirement by purchasing by bank wire or cashiers check.
The Trust reserves the right to terminate generally, or alter generally, the
check writing service or to impose a service charge upon 30 days' prior notice
to shareholders.
REDEMPTION IN KIND. The Trust reserves the right to redeem shares of the Gold
Shares Fund or the China Region Fund in cash or in kind. However, the Trust has
elected to be governed by Rule 18f-1 under the Investment Company Act of 1940,
pursuant to which the Trust is obligated to redeem shares of the Gold Shares
Fund or China Region Fund solely in cash up to the lesser of $250,000 or one
percent of the net asset value of the Trust during any 90-day period for any one
shareholder. Any shareholder of the Gold Shares Fund or China Region Fund
receiving a redemption in kind would then have to pay brokerage fees in order to
convert the Fund investment into cash. All redemptions in kind will be made in
marketable securities of the Fund.
SUSPENSION OF REDEMPTION PRIVILEGES. The Trust may suspend redemption privileges
or postpone the date of payment for up to seven days, but cannot do so for more
than seven days after the redemption order is received except during any period
(1) when the NYSE is closed, other than customary weekend and holiday closings,
or trading on the Exchange is restricted as determined by the Securities and
Exchange Commission ("SEC"), (2) when an emergency exists, as defined by the
SEC, which makes it not reasonably practicable for the Trust to dispose of
securities owned by it or fairly to determine the value of its assets, or (3) as
the SEC may otherwise permit.
CALCULATION OF PERFORMANCE DATA
Treasury Securities Cash Fund and Government Securities Savings Fund
shareholders and prospective investors in these Funds will be interested in
learning, from time to time, the current yield of the Funds, based on dividends
declared daily from net investment income. To obtain a current yield quotation,
call the Adviser toll free at 1-800-873-8637 (local residents call 308-1222).
The yield of that Fund is calculated by determining the net change in the value
of a hypothetical pre-existing account in the Fund having a balance of one share
at the beginning of a historical seven-calendar-day period, dividing the net
change by the value of the account at the beginning of the period to obtain the
base period return, and multiplying the base period return by 365/7. The net
change in the value of an account in the Fund reflects the value of additional
shares purchased with dividends from the original share and any such additional
shares, and all fees charged to all shareholder accounts in proportion to the
length of the base period and the Fund's average account size, but does not
include realized gains and losses, or unrealized appreciation and depreciation.
The Funds may also calculate their effective annualized yield (in effect, a
compound yield) by dividing the base period return (calculated as above) by
seven, adding one, raising the sum to the 365th power and subtracting one.
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The Treasury Securities Cash and Government Securities Savings Funds' net
income, from the time of the immediately preceding dividend declaration,
consists of interest accrued or discount earned during such period (including
both original issue and market discount) on the Fund's securities, less
amortization of premium and the estimated expenses of the Fund applicable to
that dividend period. The yield quoted at any time represents the amount being
earned on a current basis and is a function of the types of instruments in the
Fund's portfolio, their quality and length of maturity, their relative values,
and the Fund's operating expenses. The length of maturity for the portfolio is
the average dollar-weighted maturity of the portfolio. This means that the
portfolio has an average maturity of a stated number of days for all of its
issues.
The yield fluctuates daily as the income earned on the investments of the
Treasury Securities Cash Fund and the Government Securities Savings Fund
fluctuates. Accordingly, there is no assurance that the yield quoted on any
given occasion will remain in effect for any period of time, nor is there any
guarantee that the net asset value or any stated rate of return will remain
constant. A shareholder's investment in the Treasury Securities Cash Fund and
the Government Savings Fund is not insured, although the underlying portfolio
securities are, of course, backed by the United States Government or, in the
case of the Government Securities Savings Fund, by a government agency.
Investors comparing results of the Treasury Securities Cash Fund and Government
Securities Savings Fund with investment results and yields from other sources,
such as banks or savings and loan associations, should understand this
distinction.
The seven-day yield and effective yield for the Treasury Securities Cash Fund
and the Government Securities Savings Fund at June 30, 1997 were 4.52% and
4.62%, and 5.29% and 5.43%, respectively, with an average weighted maturity of
investments on that date of 64 and 74 days, respectively.
TOTAL RETURN
The Gold Shares Fund, Global Resources Fund, World Gold Fund, Income Fund, Tax
Free Fund, the Real Estate Fund, and the Near-Term Tax Free Fund may each
advertise performance in terms of average annual total return for 1-, 5- and
10-year periods, or for such lesser periods as any of such Funds have been in
existence. Average annual total return is computed by finding the average annual
compounded rates of return over the periods that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the 1-, 5- or 10-year periods
at the end of the year or period.
The calculation assumes all charges are deducted from the initial $1,000 payment
and assumes all dividends and distributions by each Fund are reinvested at the
price stated in the prospectus on the reinvestment dates during the period, and
includes all recurring fees that are charged to all shareholder accounts.
The average annual compounded rate of return for each Fund for the following
years ended as of June 30, 1997, is as follows:
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
Gold Shares Fund ........... (46.5)% (13.0)% (14.1)%
World Gold Fund ............ (20.1)% 12.3% (0.4)%
Global Resources Fund ...... 19.0% 9.7% 1.9%
China Region Fund .......... 34.4% (3.6)%* n/a
All American Fund .......... 33.7% 16.7% 8.4%
Income Fund ................ 15.6% 10.9% 10.3%
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1 YEAR 5 YEARS 10 YEARS
------ ------- --------
Real Estate Fund ........... 32.4% 9.7% 7.2%
Tax Free Fund .............. 7.9% 6.2% 7.8%
Near-Term Tax
Free Fund ................ 5.9% 5.1% 5.9%**
* (02/10/94 inception)
** (12/01/90 inception
YIELD
The Income Fund, Real Estate Fund, Tax Free Fund and the Near-Term Tax Free Fund
each may advertise performance in terms of a 30-day yield quotation. The 30-day
yield quotation is computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last day
of the period, according to the following formula:
A-B 6
YIELD = 2[(--- + 1) -1]
CD
Where: A = dividends and interest earned during the period
B = expenses accrued for the period (net of reimbursement)
C = the average daily number of shares outstanding during the
period that were entitled to receive dividends
D = the maximum offering price per share on the last day of the
period
The 30-day yield for the 30 days ended June 30, 1997, for each Fund was as
follows:
Income Fund ........................................ 2.24%
Real Estate Fund ................................... 3.41%
Tax Free Fund ...................................... 3.54%
Near-Term Tax Free Fund ............................ 4.77%
TAX EQUIVALENT YIELD
The Tax Free Fund's tax equivalent yield for the 30 days ended June 30, 1997,
was 5.86% based on a Federal income tax rate of 39.6%.
The Near-Term Tax Free Fund's tax equivalent yield for the 30 days ended June
30, 1997, was 7.90% based on a Federal income tax rate of 39.6%.
The tax equivalent yield is computed by dividing that portion of the yield of
the Tax Free Fund (computed as described under "Yield" above) which is
tax-exempt, by one minus the Federal income tax rate of 39.6% (or other relevant
rate) and adding the result to that portion, if any, of the yield of the Fund
that is not tax-exempt. The compliment, for example, of a tax rate of 39.6% is
60.4%, that is [1.00 - .396 = .604].
NONSTANDARDIZED TOTAL RETURN
Each Fund may provide the above described standard total return results for a
period which ends as of not earlier than the most recent calendar quarter end
and which begins either twelve months before or at the time of commencement of
each Fund's operations. In addition, each Fund may provide nonstandardized total
return results for differing periods, such as for the most recent six months.
Such nonstandardized total return is computed as otherwise described under
"Total Return" except that no annualization is made.
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<PAGE>
DISTRIBUTION RATES
In its sales literature, each Fund, except for the money market funds, may also
quote its distribution rate along with the above described standard total return
and yield information. The distribution rate is calculated by annualizing the
latest distribution and dividing the result by the offering price per share as
of the end of the period to which the distribution relates. A distribution can
include gross investment income from debt obligations purchased at a premium and
in effect include a portion of the premium paid. A distribution can also include
gross short-term capital gains without recognition of any unrealized capital
losses. Further, a distribution can include income from the sale of options by
each Fund even though such option income is not considered investment income
under generally accepted accounting principals.
Because a distribution can include such premiums, capital gains and option
income, the amount of the distribution may be susceptible to control by the
Adviser through transactions designed to increase the amount of such items.
Also, because the distribution rate is calculated in part by dividing the latest
distribution by net asset value, the distribution rate will increase as the net
asset value declines. A distribution rate can be greater than the yield rate
calculated as described above.
EFFECT OF FEE WAIVER AND EXPENSE REIMBURSEMENT
All calculations of performance data in this section reflect the Adviser's fee
waivers or reimbursement of a portion of the Fund's expenses, as the case may
be.
TAX STATUS
TAXATION OF THE FUNDS--IN GENERAL
As stated in its prospectus, each Fund intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended ("Code"). Accordingly, each Fund will not be liable for Federal income
taxes on its taxable net investment income and capital gain net income that are
distributed to shareholders, provided that a Fund distributes at least 90% of
its net investment income and net short-term capital gain for the taxable year.
To qualify as a regulated investment company, each Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities or currencies ("90% test"); (b) derive in each taxable year less than
30% of its gross income from the sale or other disposition of stock, securities
or certain options, futures or foreign currencies held less than three months
("30% test"), and (c) satisfy certain diversification requirements at the close
of each quarter of the Fund's taxable year. Furthermore, in order to be entitled
to pay tax-exempt interest income dividends to shareholders, the Tax Free Fund
and Near-Term Tax Free Fund must satisfy the requirement that, at the close of
each quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations the interest of which is exempt from Federal income tax.
The Tax Free and Near-Term Tax Free Funds intend to satisfy this requirement.
The Code imposes a non-deductible 4% excise tax on a regulated investment
company that fails to distribute during each calendar year an amount equal to
the sum of (1) at least 98% of its ordinary income for the calendar year, (2) at
least 98% of its capital gain net income for the twelve-month period ending on
October 31 of the calendar year and (3) any portion not taxable to the Fund of
the respective balance from the preceding calendar year. Because the excise tax
is based upon undistributed taxable income, it will not apply to tax-exempt
income received by the Tax Free and Near-Term Tax Free Funds. The Funds intend
to make such distributions as are necessary to avoid imposition of this excise
tax.
Mutual Funds are potentially subject to a nondeductible 4% excise tax calculated
as a percentage of certain undistributed amounts of taxable ordinary income and
capital gains net of capital losses. The Fund intends to make such distributions
as may be necessary to avoid this excise tax.
A possibility exists that exchange control regulations imposed by foreign
governments may restrict or limit the ability of a Fund to distribute net
investment income or the proceeds from the sale of its investments to its
shareholders.
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<PAGE>
TAXATION OF THE FUNDS' INVESTMENTS
A Fund's ability to make certain investments may be limited by provisions of the
Code that require inclusion of certain unrealized gains or losses in the Fund's
income for purposes of the 90% test, the 30% test and the distribution
requirements of the Code, and by provisions of the Code that characterize
certain income or loss as ordinary income or loss rather than capital gain or
loss. Such recognition, characterization and timing rules generally apply to
investments in certain forward currency contracts, foreign currencies and debt
securities denominated in foreign currencies.
For Federal income tax purposes, debt securities purchased by a Fund may be
treated as having original issue discount. Original issue discount can generally
be defined as the excess of the stated redemption price at maturity of a debt
obligation over the issue price. Original issue discount is treated as interest
for Federal income tax purposes as earned by a Fund, whether or not any income
is actually received, and therefore, is subject to the distribution requirements
of the Code. However, original issue discount with respect to tax-exempt
obligations generally will be excluded from a Fund's taxable income, although
such discount will be included in gross income for purposes of the 90% test and
the 30% test described above. Original issue discount with respect to tax-exempt
securities is accrued and added to the adjusted tax basis of such securities for
purposes of determining gain or loss upon sale or at maturity. Generally, the
amount of original issue discount is determined on the basis of a constant yield
to maturity which takes into account the compounding of accrued interest. Under
section 1286 of the Code, an investment in a stripped bond or stripped coupon
will result in original issue discount.
Debt securities may be purchased by a Fund at a discount which exceeds the
original issue price plus previously accrued original issue discount remaining
on the securities, if any, at the time a Fund purchases the securities. This
additional discount represents market discount for income tax purposes. To the
extent that a Fund purchases municipal bonds at a market discount, the
accounting accretion of such discount may generate taxable income for the Fund
and its shareholders. In the case of any debt security issued after July 18,
1984, having a fixed maturity date of more than one year from the date of issue
and having market discount, the gain realized on disposition will be treated as
interest income for purposes of the 90% test to the extent it does not exceed
the accrued market discount on the security (unless the Fund elects to include
such accrued market discount in income in the tax year to which it is
attributable). Generally, market discount is accrued on a daily basis.
A Fund whose portfolio is subject to the market discount rules may be required
to capitalize, rather than deduct currently, part or all of any direct interest
expense incurred to purchase or carry any debt security having market discount,
unless the Fund makes the election to include market discount currently. Because
a Fund must take into account all original issue discount for purposes of
satisfying various requirements for qualifying as a regulated investment company
under Subchapter M of the Code, it will be more difficult for a Fund to make the
distributions required under Subchapter M of the Code and to avoid the 4% excise
tax described above. To the extent that a Fund holds zero coupon or deferred
interest bonds in its portfolio, or bonds paying interest in the form of
additional debt obligations, the Fund would recognize income currently even
though the Fund received no cash payment of interest, and would need to raise
cash to satisfy the obligations to distribute such income to shareholders from
sales of portfolio securities.
The Funds may purchase debt securities at a premium, i.e., at a purchase price
in excess of face amount. With respect to tax-exempt securities, the premium
must be amortized to the maturity date but no deduction is allowed for the
premium amortization. Instead, the amortized bond premium will reduce the Fund's
adjusted tax basis in the securities. For taxable securities, the premium may be
amortized if the Fund so elects. The amortized premium on taxable securities is
allowed as a deduction, and, generally for securities issued after September 27,
1985, must be amortized under an economic accrual method.
If a Fund owns shares in a foreign corporation that is a "passive foreign
investment company" for U.S. Federal income tax purposes and that Fund does not
elect to treat the foreign corporation as a "qualified electing Fund" within the
meaning of the Code, that Fund may be subject to U.S. Federal income tax on part
of any "excess distribution" it receives from the foreign corporation or any
gain it derives from the disposition of such shares, even if the Fund
distributes such income as a taxable dividend to its U.S. shareholders. The Fund
may also be subject to additional tax similar to an interest charge with respect
to deferred taxes arising from such distributions or gains. Any tax paid by the
Fund because of its ownership of shares in a "passive foreign investment
company" will not lead to any deduction or credit to the Fund or any
shareholder. If the Fund owns shares in a "passive foreign investment company"
and the Fund does elect to treat the foreign corporation as a "qualified
electing Fund" under the Code, the Fund may be required to include part of the
ordinary income and net capital gains in its income each year, even if this
income is not distributed to the Fund. Any such income would be subject to the
distribution requirements described above even if the Fund did not receive any
income to distribute.
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<PAGE>
TAXATION OF THE SHAREHOLDER
Taxable distributions generally are included in a shareholder's gross income for
the taxable year in which they are received. However, dividends declared in
October, November or December and made payable to shareholders of record in such
a month will be deemed to have been received on December 31, if a Fund pays the
dividends during the following January.
Since none of the net investment income of the Tax Free Fund, the Treasury
Securities Cash Fund, the Government Securities Savings Fund, or the Near-Term
Tax Free Fund is expected to arise from dividends on domestic common or
preferred stock, none of these Funds' distributions will qualify for the 70%
corporate dividends-received deduction.
Distributions by a Fund, other than the Treasury Securities Cash Fund and the
Government Securities Savings Fund, will result in a reduction in the fair
market value of the Fund's shares. Should a distribution reduce the fair market
value below a shareholder's cost basis, such distribution nevertheless would be
taxable to the shareholder as ordinary income or long-term capital gain, even
though, from an investment standpoint, it may constitute a partial return of
capital. In particular, investors should be careful to consider the tax
implications of buying shares of such Funds just prior to a distribution. The
price of such shares purchased at that time includes the amount of any
forthcoming distribution. Those investors purchasing the Fund's shares just
prior to a distribution may receive a return of investment upon distribution
which will nevertheless be taxable to them.
To the extent that the Tax Free and Near-Term Tax Free Funds' dividends
distributed to shareholders are derived from interest income exempt from Federal
income tax and are designated as "exempt-interest dividends" by the Fund, they
will be excludable from a shareholder's gross income for Federal income tax
purposes. Shareholders who are recipients of Social Security benefits should be
aware that exempt-interest dividends received from the Fund are includible in
their "modified adjusted gross income" for purposes of determining the amount of
such Social Security benefits, if any, that are required to be included in their
gross income.
All distributions of investment income during the year will have the same
percentage designated as tax exempt. This method is called the "average annual
method." Since the Tax Free Fund and the Near-Term Tax Free Fund invest
primarily in tax-exempt securities, the percentage is expected to be
substantially the same as the amount actually earned during any particular
distribution period.
A shareholder of a Fund should be aware that a redemption of shares (including
any exchange into another U.S. Global Investors fund) is a taxable event and,
accordingly, a capital gain or loss may be recognized. If a shareholder of the
Tax Free Fund or the Near-Term Tax Free Fund receives an exempt-interest
dividend with respect to any share and such share has been held for six months
or less, any loss on the redemption or exchange will be disallowed to the extent
of such exempt-interest dividend. Similarly, if a shareholder of a Fund receives
a distribution taxable as mid-term or long-term capital gain, as applicable,
with respect to shares of the Fund and redeems or exchanges shares before he has
held them for more than six months, any loss on the redemption or exchange (not
otherwise disallowed as attributable to an exempt-interest dividend) will be
treated as mid-term or long-term capital loss to the extent of the mid-term or
long-term capital gain, as applicable, recognized.
The Tax Free Fund and the Near-Term Tax Free Fund may invest in private activity
bonds. Interest on private activity bonds issued after August 7, 1986, is
subject to the Federal alternative minimum tax ("AMT"), although the interest
continues to be excludable from gross income for other purposes. AMT is a
supplemental tax designed to ensure that taxpayers pay at least a minimum amount
of tax on their income, even if they make substantial use of certain tax
deductions and exclusions (referred to as "tax preference items"). Interest from
private activity bonds is one of the tax preference items that is added into
income from other sources for the purposes of determining whether a taxpayer is
subject to the AMT and the amount of any tax to be paid. Prospective investors
should consult their own tax advisors with respect to the possible application
of the AMT to their tax situation.
Opinions relating to the validity of tax-exempt securities and the exemption of
interest thereon from Federal income tax are rendered by recognized bond counsel
to the issuers. Neither the Adviser's nor the Fund's counsel makes any review of
proceedings relating to the issuance of tax-exempt securities or the basis of
such opinions.
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<PAGE>
CURRENCY FLUCTUATIONS--"SECTION 988" GAINS OR LOSSES
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues interest or other receivables, or
accrues expenses or other liabilities denominated in a foreign currency and the
time the Fund actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses from the
disposition of foreign currencies or from the disposition of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the currency or security
and the date of disposition also are treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "section 988" gains or losses,
increase or decrease the amount of the Fund's net investment income (which
includes, among other things, dividends, interest and net short-term capital
gains in excess of net long-term capital losses, net of expenses) available to
be distributed to its shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If section 988 losses
exceed such other net investment income during a taxable year, any distributions
made by the Fund could be recharacterized as a return of capital to
shareholders, rather than as an ordinary dividend, reducing each shareholder's
basis in his Fund shares. To the extent that such distributions exceed such
shareholder's basis, they will be treated as a gain from the sale of shares. As
discussed below, certain gains or losses with respect to forward foreign
currency contracts, over-the-counter options or foreign currencies and certain
options graded on foreign exchanges will also be treated as section 988 gains or
losses.
Forward currency contracts and certain options entered into by the Fund may
create "straddles" for U.S. Federal income tax purposes and this may affect the
character of gains or losses realized by the Fund on forward currency contracts
or on the underlying securities and cause losses to be deferred. Transactions in
forward currency contracts may also result in the loss of the holding period of
underlying securities for purposes of the 30% of gross income test. The Fund may
also be required to "mark-to-market" certain positions in its portfolio (i.e.,
treat them as if they were sold at year end). This could cause the Fund to
recognize income without having the cash to meet the distribution requirements.
FOREIGN TAXES
Income received by a Fund from sources within any countries outside the United
States in which the issuers of securities purchased by the Fund are located may
be subject to withholding and other taxes imposed by such countries.
If a Fund is liable for foreign income and withholding taxes that can be treated
as income taxes under U.S. Federal income tax principles, the Fund expects to
meet the requirements of the Code for "passing-through" to its shareholders such
foreign taxes paid, but there can be no assurance that the Fund will be able to
do so. Under the Code, if more than 50% of the value of the Fund's total assets
at the close of its taxable year consists of stocks or securities of foreign
corporations, the Fund will be eligible for, and intends to file, an election
with the Internal Revenue Service to "pass-through" to the Fund's shareholders
the amount of such foreign income and withholding taxes paid by the Fund.
Pursuant to this election a shareholder will be required to: (1) include in
gross income (in addition to taxable dividends actually received) his pro rata
share of such foreign taxes paid by the Fund; (2) treat his pro rata share of
such foreign taxes as having been paid by him; and (3) either deduct his pro
rata share of such foreign taxes in computing his taxable income or use it as a
foreign tax credit against his U.S. Federal income taxes. No deduction for such
foreign taxes may be claimed by a shareholder who does not itemize deductions.
Each shareholder will be notified within 60 days after the close of the Fund's
taxable year whether the foreign taxes paid by the Fund will "pass-through" for
that year and, if so, such notification will designate (a) the shareholder's
portion of the foreign taxes paid to each such country; and (b) the portion of
dividends that represents income derived from sources within each such country.
The amount of foreign taxes for which a shareholder may claim a credit in any
year will be subject to an overall limitation which is applied separately to
"passive income," which includes, among other types of income, dividends and
interest.
The foregoing is only a general description of the foreign tax credit under
current law. Because applicability of the credit depends on the particular
circumstances of each shareholder, shareholders are advised to consult their own
tax advisers.
The foregoing discussion relates only to generally applicable Federal income tax
provisions in effect as of the date of the prospectus and SAI. Shareholders
should consult their tax advisers about the status of distributions from the
Fund in their own states and localities.
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CUSTODIAN, FUND ACCOUNTANT, AND ADMINISTRATOR
Beginning November 1997 Brown Brothers Harriman & Co. began serving as
custodian, fund accountant and administrator for all Funds of the Trust
described in this Statement of Additional Information. With respect to the Funds
that own foreign securities Brown Brothers Harriman & Co. may hold securities of
the Funds outside the United States pursuant to sub-custody arrangements
separately approved by the Trust. Prior to November Bankers Trust provided
custody services and USSI provided fund accounting and administrative services.
Services with respect to the retirement accounts will be provided by Security
Trust and Financial Company of San Antonio, Texas, a wholly owned subsidiary of
the Adviser.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL
Price Waterhouse LLP, 700 North St. Mary's Street, Suite 900, San Antonio, Texas
78205 serves as the independent accountants for the Trust.
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts 02109, serves
as legal counsel to the Trust.
FINANCIAL STATEMENTS
The financial statements for year ended June 30, 1997, are hereby incorporated
by reference from the Annual Report to Shareholders of that date which has been
delivered with this Statement of Additional Information, unless previously
provided. In that case, the Trust will promptly provide another copy, free of
charge, upon request to: U.S. Global Investors, Inc., P.O. Box 781234, San
Antonio, Texas 78278-1234, 1-800-873-8637 or (210) 308-1234.
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