As filed with the Securities and Exchange commission on April 1, 1998
Registration No. 333-9217
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 4 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 6 [X]
ORCHARD SERIES FUND
(Exact Name of Registrant as Specified in Charter)
8515 E. Orchard Road, Englewood, Colorado 80111
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (303) 689-3000
W.T. McCallum
President and Chief Executive Officer
Great-West Life & Annuity Insurance Company
8515 E. Orchard Road
Englewood, Colorado 80111
(Name and Address of Agent for Service)
Copies of Communications to:
James F. Jorden, Esquire
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
1025 Thomas Jefferson St. N. W., Suite 400 East
Washington, D. C. 20007-0805
Approximate Date of Proposed Public Offering: Upon this Registration
Statement being declared effective.
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485 [ ] on
pursuant to paragraph (b) of Rule 485 [X] 60 days after filing pursuant to
paragraph (a)(1) of Rule 485 [ ] on pursuant to paragraph (a)(1) of Rule
485 [ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485 [ ]
on pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Pursuant to the provisions of Rule 24f-2 of the Investment Company Act of 1940,
Registrant has elected to register an indefinite number of shares.
<PAGE>
ORCHARD SERIES FUND
REGISTRATION STATEMENT ON FORM N-1A
CROSS-REFERENCE SHEET
PROSPECTUS
(PART A)
Item Caption
1 Cover Page
2 Summary of Expenses
3 Important Information about Your Investment - How the Funds Report
Performance
4 Investment Objectives and Policies; Common Investment Policies,
Practices and Risk Factors
5 Management of the Funds; Back Cover
6 Management of the Funds; Important Information about Your Investment
- Dividends, Other Distributions and Taxes
7 Investing in the Funds - How to Buy Shares; Investing in the Funds How
to Exchange Shares; Investing in the Funds - Other Information;
Important Information about Your Investment - How the Funds Value Their
Shares
8 Investing in the Funds - How to Buy Shares; Investing in the Funds
Other Information; Important Information about Your Investment - How
the Funds Value Their Shares
9 Not Applicable
STATEMENT OF ADDITIONAL INFORMATION
(PART B)
Item Caption
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Investment Objectives; Investment Policies and Practices; Investment
Limitations
14 Management of the Funds
15 Management of the Funds
16 Management of the Funds
17 Portfolio Transactions
18 Other Information
19 Valuation of Portfolio Securities; Additional Purchase and
Redemption Information
20 Dividends, Distributions and Taxes
21 Not Applicable
22 Investment Performance
23 Financial Statements
<PAGE>
OTHER INFORMATION
(PART C)
Item Caption
24 Financial Statements and Exhibits
25 Persons Controlled by or under Common Control
26 Number of Holders of Securities
27 Indemnification
28 Business and Other Connections of Investment adviser
29 Principal Underwriter
30 Location of Accounts and Records
31 Management Services
32 Undertakings
<PAGE>
This Post-Effective Amendment relates only to the prospectus of the Orchard
Value Fund. It shall not supersede or effect this Registration Statement as it
applies to the Orchard Money Market Fund, Orchard Preferred Stock Fund, Orchard
Index 500 Fund, Orchard Index 600 Fund, Orchard Index European Fund and Orchard
Index Pacific Fund. The prospectus relating to these funds is incorporated by
reference to Registrant's Post-Effective Amendment No 3.
<PAGE>
ORCHARD SERIES FUNDSM
8515 East Orchard Road
Englewood, Colorado 80111
(800) 338-4015
PROSPECTUS
The Orchard Series Fund is an open-end management investment company organized
as a Delaware business trust (the "Trust"). The Trust offers seven diversified
investment portfolios, commonly known as mutual funds (the "Orchard Funds"). The
Orchard Funds are "no-load," meaning you pay no sales charges or distribution
fees. GW Capital Management, LLC("GW Capital Management"), a wholly-owned
subsidiary of Great-West Life & Annuity Insurance Company, serves as the Orchard
Funds' investment adviser. This prospectus covers the Orchard Value Fund only
(the "Value Fund" or the "Fund"). A brief description of its investment
objective follows.
Orchard Value Fund. This Fund seeks to achieve long-term capital appreciation
by investing primarily in common stocks issued by U.S. companies when it is
believed that such stocks are undervalued.
This prospectus gives you information about the Value Fund that you should know
before investing. You should read this prospectus carefully and retain it for
future reference. A Statement of Additional Information dated as of the date of
this Prospectus has been filed with the Securities and Exchange Commission and
is incorporated herein by reference. It provides additional information about
the Orchard Value Fund and is available free of charge upon request. To obtain a
copy call (303) 689-3000 or write: Orchard Series Fund, 8515 East Orchard Road,
Englewood, Colorado 80111.
Shares of the Orchard Value Fund are not deposits or obligations of, or
guaranteed by, any depository institution. Shares are not insured by the FDIC,
the federal reserve board, or any other agency, and are subject to investment
risk, including the possible loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is June 1, 1998.
To learn more about this Fund and its investments, you may obtain the
Statement of Additional Information which has been filed with the Securities
and Exchange Commission (SEC) along with other related materials
on the SEC's Internet Web sit (http://www.sec.gov).
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY OF EXPENSES..........................................................1
INVESTMENT OBJECTIVE AND POLICIES............................................2
INVESTMENT POLICES, PRACTICES AND RISK FACTORS...............................5
MANAGEMENT OF THE FUND.......................................................7
IMPORTANT INFORMATION ABOUT YOUR INVESTMENT..................................8
HOW THE FUND VALUE ITS SHARES...........................................8
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES................................9
HOW THE FUND REPORTS PERFORMANCE........................................9
INVESTING IN THE FUND.......................................................10
HOW TO BUY SHARES......................................................10
HOW TO SELL SHARES.....................................................11
OTHER INFORMATION......................................................12
<PAGE>
SUMMARY OF EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases...........................................NONE
Sales Load Imposed on Reinvested Dividends................................NONE
Deferred Sales Load.......................................................NONE
Redemption Fees...........................................................NONE
Exchange Fees.............................................................NONE
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Value
Fund
Management Fees 1.00%
12b-1 Fees NONE
Other Expenses 0.00%
Total Fund
Operating Expenses 1.00%
"Other Expenses" are based on estimated amounts for the Fund's fiscal year.
Example
To illustrate the various expenses that you will bear by investing in shares of
the Fund, assume that the Fund's annual return is 5% and that its operating
expenses are exactly as just described. Then, for every $1,000 you invested, the
following shows how much you would have to pay in total expenses if you redeemed
your investment after the number of years indicated.
Fund 1 Year 3 Years
- -------------------- ------ -------
Value Fund $ 10 $ 34
THIS EXAMPLE ILLUSTRATES THE EFFECT OF EXPENSES AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF ACTUAL OR EXPECTED EXPENSES OR RETURNS. ACTUAL EXPENSES AND
RETURNS MAY VARY.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Orchard Value Fund is a diversified investment portfolio of the Trust, an
open-end investment management company organized as a Delaware business trust on
July 23, 1996. The Fund is commonly known as a mutual fund. By investing in a
mutual fund, you and other shareholders pool money together to be invested
toward a specified investment objective.
The Value Fund has its own investment objective and policies. In addition, the
Value Fund is subject to certain fundamental investment restrictions that cannot
be changed without shareholder approval. These are set forth in the Statement of
Additional Information. All investment policies not designated in the Statement
of Additional Information as being fundamental may be changed without
shareholder approval.
The following is a description of the Value Fund's investment objective and
policies. There is no assurance that the Value Fund will meet its investment
objective. Additional investment policies, as well as various investment
practices and techniques in which the Value Fund may engage, are described under
"INVESTMENT POLICIES, PRACTICES AND RISKS FACTORS."
Orchard Value Fund
The investment objective of the Orchard Value Fund is to achieve long-term
capital appreciation by investment in stocks that are believed to be
undervalued. To achieve this objective, the Fund will invest primarily in common
stocks issued by U.S. companies traded on the various U.S. stock exchanges and,
to a limited extent, in the over-the-counter markets. The Fund seeks above
average returns while attempting to minimize market risk.
CIC Asset Management, Inc. (the "Sub-Adviser) serves as sub-adviser to
the Fund. As such, it is responsible for the day-to-day management of the
Fund, subject to the overall supervision of the Fund's Board of Trustees and
GW Capital Management.
The Fund invests primarily in common stocks which the Sub-Adviser believes
are undervalued at the time of acquisition. The stocks are normally sold when it
is believed that they are fairly valued. Using this approach, the Sub-Adviser
seeks to identify, in advance of purchase, stocks which are inexpensive and a
catalyst which will drive the price back to fair value. In making this
determination, the Sub-Adviser will look for dividend yields greater than the
S&P 500 Index, price/earnings ratios less than the S&P 500 Index and
price-to-book ratios less than the S&P 500 Index. In keeping with a long-term
approach, a security will not be sold because of a short-term earnings
disappointment.
The Fund may invest a limited portion of its assets in debt securities
(both domestic and foreign debt securities) including mortgage-and asset-backed
securities, zero coupon and high-yield/high-risk bonds (commonly referred to as
"junk bonds"). Debt securities in which the Fund may invest may be both
investment grade and below investment grade. Lower rated fixed-income securities
generally provide higher yields, but are subject to greater credit and market
risk than higher quality fixed-income securities and are considered
predominately speculative with respect to the ability of the issuer to meet
principal and interest payments. In addition, the secondary market may be less
liquid for lower-rated fixed-income securities which may make the valuation and
sale of these securities more difficult. Securities in the lowest investment
grade category--BBB by Standard & Poor's Corporation ("S&P") or Baa by Moody's
Investor Service, Inc. ("Moody's")--have some speculative characteristics.
The Fund may invest in certain foreign securities. Investments in foreign
securities involve risks that differ in some respects from investment in
securities of U.S. issuers. See "Foreign Investing" in this prospectus.
The Fund also may invest in money market securities for temporary or
emergency purposes or solely as a cash reserve. The Fund may also invest to a
lesser degree in restricted or preferred stock or warrants. Warrants are options
to buy a stated number of shares of common stock at a specified price anytime
during the life of the warrants (generally, two or more years).
The Fund may enter into futures contracts on financial indices and foreign
currencies and options on such contracts ("futures contracts") and may invest in
options on securities, financial indices and foreign currencies ("options"),
forward contracts and interest rate swaps and swap-related products
(collectively "derivative instruments"). The Fund intends to use these
derivative instruments primarily to hedge the value of the Fund against
potential adverse movements in securities prices, foreign currency markets or
interest rates. To a limited extent, the Fund may also use derivative
instruments for non-hedging purposes such as seeking to increase the Fund's
income or otherwise seeking to enhance returns. The Fund may engage in "short
sales against the box." See "Adjusting Investment Exposure" in this prospectus.
INVESTMENT POLICES, PRACTICES AND RISK FACTORS
The following pages contain more detailed information about certain types of
instruments in which the Value Fund may invest, strategies which may be employed
in pursuit of the Fund's investment objective, and a summary of related risks.
Any investment limitations listed supplement those discussed earlier. A complete
listing of investment limitations and more detailed information about the Value
Fund's investment practices are contained in the Statement of Additional
Information. Securities that met applicable investment policies and limitations
when acquired need not be sold in the event of a later change in circumstances.
All of these securities may not be bought and/or all of these techniques may not
be used unless it is believed that they are consistent with the Fund's
investment objective and policies and that doing so will help the Fund achieve
its objective.
Money Market Instruments and Temporary Investment Strategies
The Fund may hold cash or cash equivalents and may invest in short-term,
high-quality debt instruments (that is in "money market instruments") as deemed
appropriate, or may invest any or all of its assets in money market instruments
as deemed necessary for temporary defensive purposes.
The types of money market instruments in which the Fund may invest include,
but are not limited to: (1) bankers' acceptances; (2) obligations of U.S. and
non-U.S. governments and their agencies and instrumentalities; (3) short-term
corporate obligations, including commercial paper, notes, and bonds; (4)
obligations of U.S. banks and non-U.S. branches of such banks (Eurodollars),
U.S. branches and agencies of non-U.S. banks (Yankee dollars), and non-U.S.
branches of non-U.S. banks; (5) asset-backed securities; and (6) repurchase
agreements.
Repurchase Agreements
The Fund may enter into repurchase agreements. In a repurchase agreement, the
Fund buys a security at one price and simultaneously agrees to sell it back at a
higher price. If the seller of the agreement defaults and the value of the
collateral declines, or if the seller enters an insolvency proceeding,
realization of the value of the collateral by the Fund may be delayed or
limited.
Equity Securities
The Fund invests directly or indirectly in equity securities, such as common
stocks, preferred stocks, convertible stocks, and warrants. Although equity
securities have a history of long-term growth in value, their prices fluctuate
based on changes in a company's financial condition and on overall market and
economic conditions. Equity securities of smaller companies are especially
sensitive to these factors.
Illiquid Securities
The Fund may invest up to 15% of its net assets in illiquid securities. The term
"illiquid securities" means securities that cannot be sold in the ordinary
course of business within seven days at approximately the price used in
determining the Fund's net asset value. Under the supervision of the Board of
Trustees, GW Capital Management determines the liquidity of portfolio securities
and, through reports from GW Capital Management, the Board of Trustees monitors
investments in illiquid securities. Certain types of securities are generally
considered to be illiquid. Included among these are "restricted securities"
which are securities whose public resale is subject to legal restrictions.
However, certain types of restricted securities (commonly known as "Rule 144A
securities") that can be resold to qualified institutional investors may be
treated as liquid if they are determined to be readily marketable pursuant to
policies and guidelines of the Board of Trustees.
The Fund may be unable to sell illiquid securities when desirable or may be
forced to sell them at a price that is lower than the price at which they are
valued or that could be obtained if the securities were more liquid. In
addition, sales of illiquid securities may require more time and may result in
higher dealer discounts and other selling expenses than do sales of securities
that are not illiquid. Illiquid securities may also be more difficult to value
due to the unavailability of reliable market quotations for such securities.
Adjusting Investment Exposure
The Fund can use various techniques to increase or decrease its exposure to
changing security prices, currency exchange rates, or other factors that affect
security values. These techniques may involve derivative transactions such as
buying and selling options and futures contracts, including futures on market
indexes and options on such futures on market indexes, and entering into
currency exchange contracts.
These practices can be used to adjust the risk and return characteristics of the
Fund's portfolio of investments. If the Sub-Adviser judges market conditions
incorrectly or employs a strategy that does not correlate well with the Fund's
investments, these techniques could result in a loss, regardless of whether the
intent was to reduce risk or increase return. These techniques may increase the
Fund's volatility and may involve a small investment relative to the magnitude
of the risk assumed. In addition, these techniques could result in a loss if the
counterparty to the transaction does not perform as promised. The Fund will not
enter into futures contracts or options if the aggregate initial margin and
premium required to do so will exceed 5% of the Fund's total assets.
<PAGE>
Foreign Investments
The Fund may invest in foreign securities and securities issued by U.S. entities
with substantial foreign operations in a manner consistent with its investment
objective and policies. Such foreign investments may involve additional risks
and considerations. These include risks relating to political or economic
conditions in foreign countries, fluctuations in foreign currencies, withholding
or other taxes, operational risks, increased regulatory burdens, and the
potentially less stringent investor protection and disclosure standards of
foreign markets. Furthermore, the securities of some foreign companies and
foreign securities markets are less liquid and at times more volatile than
securities of comparable U.S. companies and U.S. securities markets. Foreign
brokerage commissions and other fees are also generally higher than those
imposed in the United States. There are also special tax considerations that
apply to securities of foreign issuers and securities principally traded
overseas.
The Fund's investments in foreign securities may include investments in
countries whose economies or securities markets are not yet highly developed.
Investments in these "emerging market securities" include additional risks to
those generally associated with foreign investing. The extent of economic
development, political stability, and market liquidity varies widely in
comparison to more developed nations. The economies of these countries may be
subject to greater social, economic, and political uncertainties or may be based
only a few industries. These factors can make emerging market securities more
volatile.
Lending
The Fund may lend its portfolio securities to brokers or dealers and other
institutions as a means of earning interest income. The Fund may lend securities
only if (i) the loan is at all times fully collateralized by cash, cash
equivalents, U.S. government securities or other high-quality debt securities,
and (ii) the value of all loaned securities is not more than 33 1/3 percent of
the Fund's total assets at the time of the loan.
Borrowing
The Fund may borrow from banks for temporary and emergency purposes, but not in
an amount exceeding 33 1/3 percent of its total assets. If the Fund borrows
money, its share price may be subject to greater fluctuation until the borrowing
is paid off. The Fund will repay all borrowings in excess of 5 percent of its
total assets before any investments are made.
Other Risk Factors
As a mutual fund, the Fund is subject to market risk. The value of the Fund's
shares will fluctuate in response to changes in economic conditions, interest
rates, and the market's perception of the Fund's underlying portfolio
securities.
The Fund should not be considered to be a complete investment program by itself.
You should consider your own investment objectives as well as your other
investments when deciding whether to purchase shares of the Fund.
<PAGE>
MANAGEMENT OF THE FUND
The Trust is governed by the Board of Trustees which is responsible for overall
management of the Fund's business affairs. The Trustees meet at least 4 times
during the year to, among other things, oversee all of the Orchard Funds'
activities, review contractual arrangements with companies that provide services
to all the Orchard Funds, and review performance.
Investment Adviser
The Orchard Funds are managed by GW Capital Management, which selects the
Orchard Funds' portfolio investments and handles their business affairs. GW
Capital Management is a registered investment adviser under the Investment
Advisers Act of 1940. Paul Desmarais and his associates, a group of private
holding companies, have indirect voting control over GW Capital Management.
GW Capital Management is a wholly-owned subsidiary of Great-West Life & Annuity
Insurance Company ("GWL&A"). GW Capital Management serves as the investment
adviser for: Maxim Series Fund, Inc., a registered open-end management
investment company (shares of the Maxim Series Fund are sold only in connection
with certain insurance contracts); Great-West Variable Annuity Account A, a
separate account of GWL&A, registered as a management investment company; and
certain non-registered, tax-qualified corporate pension plan separate accounts
of GWL&A.
GW Capital Management provides investment advisory services and pays all the
expenses, except extraordinary expenses, incurred for providing such services
for the Orchard Funds. As compensation for its services, GW Capital Management
receives monthly compensation at the annual rate of 1.00% for the Orchard Value
Fund.
Sub-Adviser
CIC Asset Management, Inc. is a 100% employee owned and managed firm, registered
with the Securities and Exchange Commission as an investment adviser under the
Investment Advisers Act of 1940. It is a California corporation with its
principal business address at 633 West Fifth Street, Suite 1180, 11th Floor, Los
Angeles, California 90017. Subject generally to review and supervision by GW
Capital Management and the Board of Trustees, CIC is responsible for the daily
management of the Value Fund and for making decisions to buy, sell or hold any
particular security.
CIC bears all expenses in connection with the performance of its services, such
as compensating and furnishing office space for its officers and employees
connected with investment and economic research, trading and investment
management of the Orchard Value Fund.
CIC utilizes teams of portfolio managers and analysts acting together to manage
the assets of the Value Fund. The team meets regularly to review portfolio
holdings and to discuss purchase and sale activity. The team adjusts holdings in
the Fund's portfolio as it deems appropriate in pursuit of the Fund's investment
objective.
The Investment Adviser is responsible for compensating CIC, which receives
monthly compensation from the Investment Adviser at the annual rate of .50% of
the average daily net asset value of the Orchard Value Fund up to $25 million,
.40% on the next $75 million and .30% of such value in excess of $100 million.
Other Information
The Trust has authorized capital of an unlimited number of shares of beneficial
interest in the Trust. Shares may be issued in one or more series of shares, and
each series may be issued in one or more classes of shares. Presently, the Fund
represents one of several separate series of shares of the Trust. The Trust may
establish additional series or classes in the future.
The Trust is not required to hold an annual shareholders meetings, although
special meetings may be called for a specific series (such as the Fund) or the
Trust as a whole for purposes such as electing or removing trustees, changing
fundamental investment policies, or approving a new or amended investment
advisory agreement. As a shareholder, you receive one vote for each share of the
Fund you own and a proportionate vote for each fractional interest you own.
Shareholder inquiries can be made by telephone at (800) 338-4015, or by mail to
the Trust at 8515 East Orchard Road, Englewood, Colorado 80111.
One Orchard Equities, Inc. distributes and markets the Orchard Funds. Financial
Administrative Services Corporation ("FASCorp" or the "Transfer Agent") performs
transfer agent servicing functions for the Orchard Funds. FASCorp is a wholly
owned subsidiary and One Orchard Equities is an indirect wholly owned subsidiary
of GWL&A.
IMPORTANT INFORMATION ABOUT YOUR INVESTMENT
HOW THE FUND VALUES ITS SHARES
The price of the Fund's shares is based on the net asset value of the Fund. The
Fund's per share net asset value is determined by dividing the value of its net
assets by the number of its outstanding shares. The Fund's net asset value per
share will normally be determined as of the close of regular trading on the New
York Stock Exchange ("NYSE") (currently 4:00 p.m. Eastern Time) Monday through
Friday, except on holidays on which the NYSE is closed.
Assets of the Fund are valued primarily on the basis of market quotations.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded, and are translated from the local currency into U.S.
Dollars using current exchange rates. If quotations are not readily available,
or if values have been materially affected by events occurring after the close
of a foreign market, assets are valued by a method that the Board of Trustees
believes accurately reflects fair value.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES
You are entitled to your share of the earnings of the Fund which are passed
along to shareholders as "distributions." Earnings from net investment income,
such as stock dividends and interest from short-term debt instruments and other
investments, are passed along as "dividend distributions." Earnings realized
when the Fund sells securities for a higher price than it paid for them are
passed along as "capital gains distributions." The Fund distributes
substantially all of its net investment income and capital gains to shareholders
each year.
The Value Fund ordinarily distributes dividends semi-annually. The Fund also
generally distributes capital gains, if any, in the fiscal year in which they
were earned.
<PAGE>
Distribution Option
Shareholders of the Fund can either receive distributions in cash or reinvest
them in additional shares of the Fund at the net asset value in effect on the
reinvestment date. Unless you elect, by writing to the Trust or Transfer Agent,
to receive your distributions in cash, they will be automatically reinvested.
You can change your election at any time by writing to the Trust or Transfer
Agent.
Taxes
As with any investment, you should consider how your investment in the Fund will
be taxed.
Taxes on distributions. Distributions are subject to federal income tax, and may
also be subject to state or local taxes. If you live outside the United States,
your distributions could also be taxed by the country in which you reside. Your
distributions are taxable when they are paid, whether you take them in cash or
reinvest them. However, distributions declared in December and paid in January
are taxable as if they were paid on December 31.
For federal tax purposes, the Fund's dividend distributions are taxed as
dividends and gain distributions are taxed as long-term capital gains. A portion
of the dividend distributions (but not capital gains distributions) paid by the
Fund may be eligible for the dividends received deduction for corporate
shareholders to the extent that such distributions are attributable to dividends
paid by United States corporations and are so designated by the Fund.
Every January, the Trust will send you and the IRS a statement showing the
taxable distributions paid to you in the previous year.
Taxes on transactions. Redemptions and exchanges of shares in the Fund may be
subject to federal income tax. In general, your gain or loss on any redemption,
sale, or other exchange will equal the difference between the cost of the shares
you redeem, sell or exchange, and the price you receive when you redeem, sell,
or exchange them.
You will receive a consolidated transaction statement at least quarterly. You
should keep your regular account statements, because the information they
contain will be essential in calculating the amount and character of your gains
and losses. However, it is the responsibility of you and your tax preparer to
determine whether a given transaction will result in taxable gain or loss and
the amount of tax to be paid, if any.
"Buying a dividend." If you buy shares shortly before the Fund declares a
distribution from its net asset value, you will pay the full price for the
shares and then receive a portion of the price back in the form of a taxable
distribution. Any capital loss arising from the sale or redemption of shares
held for six months or less will be disallowed to the extent of exempt-interest
dividends received on such shares, and (to the extent not disallowed) generally
will be treated as long-term capital loss to the extent of the amount of capital
gain dividends received on such shares.
Effect of foreign taxes. Dividends and interest received by the Fund on foreign
securities may give rise to withholding and other taxes imposed by foreign
governments. These taxes generally will reduce the amount of distributions.
There are tax requirements that all investment companies must follow in order to
avoid federal taxation. In order to comply with these requirements, the Fund may
be required to limit its investment activity in some types of instruments.
HOW THE FUND REPORTS PERFORMANCE
From time to time, the Trust may include the Fund's yield and total return in
advertisements, sales literature, and shareholder reports. These measures of the
Fund's performance are based on past results and are not intended to indicate
future performance.
Yield
The Fund's "yield" refers to the income generated by an investment in the Fund
over a specified 30-day period expressed as an annual percentage rate.
Total Return
The Fund's "total return" refers to the average annual rate of return of an
investment in the Fund. Total return is computed by calculating the percentage
change in the value of an investment of $1,000 to the end of a specified period,
assuming all dividends and capital gain distributions are reinvested.
Annual and Semi-Annual Shareholder Reports
The fiscal year of the Fund ends on October 31 of each year. Twice a year
shareholders of the Fund will receive a report containing a summary of the
Fund's performance and other information.
INVESTING IN THE FUND
HOW TO BUY SHARES
Shares of the Fund can be purchased at the next share price calculated after
your order is received in good order by the Transfer Agent. Because you pay no
commissions or sales charges when you purchase shares, the Fund's share price is
equivalent to the Fund's net asset value per share.
If you do not already have an account with the Trust, you can purchase shares by
mailing a completed account application to the Transfer Agent. In addition, you
must either (i) include with your application a check or money order made
payable to the Fund in the amount that you wish to invest, or (ii) wire (that is
electronically transfer) such amount to an account designated by the Transfer
Agent.
Once you have an account with the Trust, you can purchase shares by mailing a
check or money order made payable to the Fund to the Transfer Agent, together
with instructions specifying the name and number of the account. You can also
purchase shares by wiring the amount that you wish to invest to your account.
If you wish to make an initial purchase of shares by wiring your investment, you
must first telephone the Transfer Agent at 1-800-338-4015 between the hours of
8:00 a.m. and 4:00 p.m. (Eastern Time) on any day that the NYSE is open for
trading to receive an account number with the Trust. You will be asked to
provide the following information: the name in which the account will be
established, the account holder's address, tax identification number, and
dividend distribution election. If requested, the Transfer Agent will provide
the instructions that your bank will need to complete the transfer.
The Fund and Transfer Agent reserve the right to reject any order to purchase
shares, and the Fund reserves the right to cancel any purchase order for which
payment has not been received within three business days following receipt of
the order. If the Transfer Agent deems it appropriate, additional documentation
or verification of authority may be required and an order will not be deemed
accepted unless and until such additional documentation or verification is
received by the Transfer Agent.
Your bank may charge a fee for its services. Presently, the Transfer Agent does
not charge a fee for its wire transfer services, but reserves the right to
charge for these services.
HOW TO SELL SHARES
You can withdraw money from your account by selling (that is by "redeeming")
some or all of your shares. Your shares will be sold at the next share price
calculated after your order is received in good order by the Transfer Agent.
Because you pay no commissions or sales charges when you sell shares of the
Fund, the Fund's share price is equivalent to the Fund's net asset value per
share. You can arrange to sell shares of the Fund only by mail. Redemptions may
not be made by telephone.
By Mail
You can redeem shares by sending a "letter of instruction" by regular or express
mail to the Transfer Agent at 8515 East Orchard Road, Englewood, Colorado 80111.
The letter should include: (1) the name of the account from which shares are to
be redeemed; (2) the account number; (3) the name of the Fund; (4) the dollar
amount or number of shares to be redeemed; (5) any special payment instructions;
(6) the signatures of the person or persons authorized to effect redemptions of
shares held by the account; and (7) any special requirements or documents
requested by the Transfer Agent to assure proper authorization of such persons.
HOW TO EXCHANGE SHARES
You can exchange shares of the Fund that you own for shares of another Fund.
There are no sales charges or distribution fees. To complete the exchange,
shares of the Fund to be exchanged will be sold, and shares of the other Fund
designated by you will be purchased, at their respective share prices next
calculated after the exchange request is received by the Transfer Agent. The
minimum amount that may exchanged is the lesser of $500 or the remaining value
of the investment in the Fund.
You can request an exchange in writing or by telephone. Written requests should
be submitted to the Transfer Agent by mail at 8515 East Orchard Road, Englewood,
Colorado 80111. The form must be signed by the account owner(s) and include the
following information: (1) the name of the account for which shares are to be
exchanged; (2) the account number; (3) the name of the Fund, the shares of which
are to be exchanged; (4) the dollar amount or number of shares to be exchanged;
(5) the name of the Fund(s) to be acquired in the exchange; (6) the signatures
of the person or persons authorized to effect exchanges of shares held by the
account; and (7) any special requirements or documents requested by the Transfer
Agent to assure proper authorization of such persons.
You can request an exchange by telephoning the Transfer Agent at 1-800-338-4015.
The Fund reserves the right to refuse exchanges if, in the Board of Trustees' or
GW Capital Management's judgment, the Fund would be unable to invest the money
effectively in accordance with its investment objective and policies, or would
potentially be otherwise adversely affected.
Exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the Fund.
Although the Fund will attempt to provide prior notice whenever it is reasonably
able to do so, it may impose these restrictions at any time. The Fund reserves
the right to terminate or modify the exchange privilege in the future.
OTHER INFORMATION
Telephone transaction privileges for purchases or exchanges may be modified,
suspended, or terminated by the Fund at any time. If an account has more than
one owner of record, the Fund and the Transfer Agent may rely on the
instructions of any one owner. Each account owner has telephone transaction
privileges unless the Transfer Agent receives cancellation instructions from an
account owner.
The Transfer Agent will record telephone calls and has adopted other procedures
to confirm that telephone instructions are genuine. The Fund will not be liable
for losses or expenses arising from unauthorized telephone transactions,
provided they use reasonable procedures to avoid such losses or expenses. If you
are unable to reach the Transfer Agent during periods of unusual market
activity, severe weather, or other unusual, extreme, or emergency conditions,
you may not be able to complete a telephone transaction and should consider
placing your order by mail.
PERFORMANCE RELATED INFORMATION
The Fund may advertise certain performance related information. The Fund may
include total return in advertisements or other sales materials regarding the
fund.
The following table sets forth the composite performance data relating to the
historical performance of institutional private accounts managed by the
Sub-Adviser that have investment objectives, policies, strategies and risks
substantially similar to those of the Orchard Value Fund. The data is provided
to illustrate the past performance of the Sub-Adviser in managing substantially
similar accounts as measured against specified market indices and does not
represent the performance of the Orchard Value Fund. Investors should not
consider this performance data as an indication of future performance of the
Fund or of the Sub-Adviser.
All returns are calculated on a total return basis and include all dividends and
interest, accrued income and realized and unrealized gains and losses. All
returns reflect the deduction of investment advisory fees, brokerage commissions
and execution costs paid by the Sub-Adviser's institutional private accounts,
without provision for federal or state income taxes. Custodial fees, if any, are
not included in the calculation. The Sub-Adviser's composites include all actual
fee-paying, discretionary institutional private accounts managed by the
Sub-Adviser that have investment objectives, policies and strategies and risks
substantially similar to those of the Orchard Value Fund. Securities
transactions are accounted for on the trade date and accrual accounting is
utilized. Cash and equivalents are included in performance returns.
The institutional private accounts that are included in the Sub-Adviser's
composite are not subject to the same types of expenses to which the Orchard
Value Fund is subject nor to the diversification requirements, specific tax
restrictions and investment limitations imposed on the Fund by the Investment
Company Act or Subchapter M of the Internal Revenue Code. Consequently, the
performance results for the Sub-Adviser's composites could have been adversely
affected if the institutional private accounts included in the composites had
been regulated as investment companies under the federal securities laws. The
investment results of the Sub-Adviser's composites presented below are unaudited
and are not intended to predict or suggest the returns that might be experienced
by the Orchard Value Fund or an individual investor investing in the Fund.
Investors should also be aware that the use of a methodology different from that
used below to calculate performance could result in different performance data.
Since
1 Year 3 Years 5 Years 10
------ -------- ------- --
Years Inception*
Orchard Value Fund Composite 33.55% 31.12% 18.99% N/A
16.85%+
S&P 500 Index** 33.36% 31.07% 20.27% 18.05%
N/A
* Commencement of investment operations was May 31, 1990.
+ Through December 31, 1997.
** The S&P 500 Index is an unmanaged index comprised of 500 stocks chosen for
their general
representation of the stock market composition by Standard & Poor's
Corporation.
<PAGE>
INVESTMENT ADVISER
GW Capital Management, LLC
8515 East Orchard Road
Englewood, Colorado 80111
------------------------
DISTRIBUTOR
One Orchard Equities, Inc.
8515 East Orchard Road
Englewood, Colorado 80111
------------------------
TRANSFER AGENT
Financial Administrative Services Corporation
8515 East Orchard Road
Englewood, Colorado 80111
------------------------
CUSTODIAN
Bank of New York
One Wall Street
New York, New York 10286
------------------------
AUDITORS
Deloitte & Touche LLP
555 17th Street
Suite 3600
Denver, Colorado 80202
<PAGE>
ORCHARD SERIES FUND
(the "Trust")
Orchard Money Market Fund
Orchard Preferred Stock Fund
Orchard Index 600 Fund
Orchard Index 500 Fund
Orchard Index Pacific Fund
Orchard Index European Fund
Orchard Value Fund
(the "Funds")
STATEMENT OF ADDITIONAL INFORMATION
The date of the Trust's current Prospectus to which this Statement of
Additional Information relates and the date of this Statement of
Additional Information is
June 1, 1998
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Trust's current
Prospectus. A copy of the Prospectus may be obtained by writing the Trust
at 8515 East Orchard Road, Englewood, Colorado
80111, or by calling (303) 689-3000.
<PAGE>
i
TABLE OF CONTENTS
Cross-reference
to page(s) in
Page Prospectus
INVESTMENT OBJECTIVES ..................... 1 9
INVESTMENT POLICIES AND PRACTICES ......... 1 9
INVESTMENT LIMITATIONS .................... 15 9
MANAGEMENT OF THE FUND .................... 18 18
PORTFOLIO TRANSACTIONS .................... 21 18
VALUATION OF PORTFOLIO SECURITIES ......... 24 19
INVESTMENT PERFORMANCE .................... 25 22
ADDITIONAL PURCHASE
AND REDEMPTION INFORMATION ............. 28 22
DIVIDENDS, DISTRIBUTION AND TAXES ......... 29 20
OTHER INFORMATION ......................... 36 24
PRICE MAKE-UP SHEETS ...................... 39 --
APPENDIX .................................. 45 --
FINANCIAL STATEMENTS ...................... 49 --
<PAGE>
4040
INVESTMENT OBJECTIVES
The Orchard Series Fund is an open-end management investment company organized
as a Delaware business trust (the Trust). The Trust offers seven diversified
investment portfolios, commonly known as mutual funds (the Funds). The Funds are
"no-load," meaning you pay no sales charges or distribution fees. GW Capital
Management, LLC("GW Capital Management"), a wholly-owned subsidiary of
Great-West Life & Annuity Insurance Company ("GWL&A"), serves as the Funds'
investment adviser. The Funds and a brief description of their investment
objectives are listed below.
Orchard Money Market Fund. This Fund seeks as high a level of current income as
is consistent with the preservation of capital and liquidity by investing in
high-quality, short-term debt securities. An investment in the Fund is neither
insured nor guaranteed by the U.S. government. While the Fund seeks to maintain
a stable net asset value of $1.00 per share, there is no assurance that it will
be able to do so.
Orchard Preferred Stock Fund. This Fund seeks a high level of dividend income
qualifying for the corporate dividends received deduction under applicable
federal tax law by investing primarily in cumulative preferred stocks issued by
domestic corporations.
The Orchard Stock Index Funds. Each of the following Funds (the "Index Funds")
seeks long-term growth of capital and a modest level of income by investing in
the common stocks that comprise a specified benchmark index.
Fund Benchmark
Orchard Index 600 Fund S&P Small-Cap 600 Stock Index
Orchard Index 500 Fund S&P 500 Composite Stock Price
Index
Orchard Index Pacific Fund Financial Times/S&P-Actuaries
Large-Cap Pacific Index
Orchard Index European Fund Financial Times/S&P-Actuaries
Large-Cap European Index
Orchard Value Fund. This Fund seeks to achieve long-term capital appreciation
by investing primarily in common stocks issued by U.S. companies when it is
believed that such stocks are undervalued.
INVESTMENT POLICIES AND PRACTICES
Except as described below and except as otherwise specifically stated in the
Prospectus or this Statement of Additional Information, the Funds' investment
policies set forth in the Prospectus and in this Statement of Additional
Information are not fundamental and may be changed without shareholder approval.
A listing of the Funds' fundamental investment limitations is contained in this
Statement of Additional Information under "INVESTMENT LIMITATIONS." These
limitations are fundamental policies of each Fund, which means that they may not
be changed without shareholder approval. Securities that met applicable
investment policies and limitations when acquired need not be sold in the event
of a later change in circumstances.
The following pages contain more detailed information about types of securities
in which the Funds may invest, investment practices and techniques that GW
Capital Management may employ in pursuit of the Funds' investment objectives,
and a discussion of related risks. GW Capital Management may not buy all of
these securities or use all of these techniques to the full extent permitted
unless it believes that they are consistent with the Funds' investment
objectives and policies and that doing so will help the Funds achieve their
objectives. Unless otherwise provided, each Fund may invest in all these
securities or use all of these techniques.
Asset-Backed Securities. Asset-backed securities may be classified as
pass-through certificates of collateralized obligations. They depend primarily
on the credit quality of the assets underlying such securities, how well the
entity issuing the security is insulated from the credit risk of the originator
or any other affiliated entities and the amount and quality of any credit
support provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of principal payments
received on the underlying assets which in turn may be affected by a variety of
economic and other factors. As a result, the yield on any asset-backed security
is difficult to predict with precision and actual yield to maturity may be more
or less than the anticipated yield to maturity.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in any underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
pass-through certificates represent an ownership interest in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support.
Asset-backed securities issued in the form of debt instruments, also known as
collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purposes of owning such assets and
issuing such debt. Such assets are most often trade, credit card or automobile
receivables. The assets collateralizing the debt instrument are pledged to a
trustee or custodian for the benefit of the holders thereof. Such issuers
generally hold no assets other than those underlying the security and any credit
support provided. As a result, although payments on such securities are
obligations of the issuers, in the event of a default on the underlying assets
not covered by credit support, the issuing entities are unlikely to have
sufficient assets to satisfy their obligations on the related asset-backed
securities.
Bankers' Acceptances. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage of
goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. The Funds generally will not invest in
acceptances with maturities exceeding 7 days where to do so would tend to create
liquidity problems.
Certificates of Deposit. A certificate of deposit generally is a short-term,
interest bearing negotiable certificate issued by a commercial bank or savings
and loan association against funds deposited in the issuing institution.
Commercial Paper. Commercial paper is a short-term promissory note issued by
a corporation primarily to finance short-term credit needs.
Eurodollar Certificates of Deposit. A Eurodollar certificate of deposit is a
short-term obligation of a foreign subsidiary of a U.S. bank payable in U.S.
dollars.
Foreign Currency Transactions. The Funds, other than the Money Market Fund, may
conduct foreign currency transactions on a spot (i.e., cash) basis or by
entering into forward contracts to purchase or sell foreign currencies at a
future date and price. The Funds will convert currency on a spot basis from time
to time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers generally do not charge a fee for conversion,
they do realize a profit based on the difference between the prices at which
they are buying and selling various currencies. Thus, a dealer may offer to sell
a foreign currency to a Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer. Forward
contracts are generally traded in an interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. The
parties to a forward contract may agree to offset or terminate the contract
before its maturity, or may hold the contract to maturity and complete the
contemplated currency exchange.
A Fund may use currency forward contracts for any purpose consistent with its
investment objective. The following discussion summarizes the principal currency
management strategies involving forward contracts that could be used by a Fund.
A Funds may also use options and futures contracts relating to foreign
currencies for the same purposes.
When a Fund agrees to buy or sell a security denominated in a foreign currency,
it may desire to "lock in" the U.S. dollar price for the security. By entering
into a forward contract for the purchase or sale, for a fixed amount of U.S.
dollars, of the amount of foreign currency involved in the underlying security
transaction, the Fund will be able to protect itself against an adverse change
in foreign currency values between the date the security is purchased or sold
and the date on which payment is made or received. This technique is sometimes
referred to as a "settlement hedge" or "transaction hedge." The Funds may also
enter into forward contracts to purchase or sell a foreign currency in
anticipation of future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected by GW
Capital Management.
The Funds may also use forward contracts to hedge against a decline in the value
of existing investments denominated in foreign currency. For example, if a Fund
owned securities denominated in pounds sterling, it could enter into a forward
contract to sell pounds sterling in return for U.S. dollars to hedge against
possible declines in the pound's value. Such a hedge, sometimes referred to as a
"position hedge," would tend to offset both positive and negative currency
fluctuations, but would not offset changes in security values caused by other
factors. A Fund could also hedge the position by selling another currency
expected to perform similarly to the pound sterling, for example, by entering
into a forward contract to sell Deutsche marks or European Currency Units in
return for U.S. dollars. This type of hedge, sometimes referred to as a "proxy
hedge," could offer advantages in terms of cost, yield, or efficiency, but
generally would not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged securities
are denominated.
Each Fund may enter into forward contracts to shift its investment exposure from
one currency into another. This may include shifting exposure from U.S. dollars
into a foreign currency, or from one foreign currency into another foreign
currency. For example, if a Fund held investments denominated in Deutschemarks,
the Fund could enter into forward contracts to sell Deutschemarks and purchase
Swiss Francs. This type of strategy, sometimes known as a "cross-hedge," will
tend to reduce or eliminate exposure to the currency that is sold, and increase
exposure to the currency that is purchased, much as if the Fund had sold a
security denominated in one currency and purchased an equivalent security
denominated in another. Cross-hedges protect against losses resulting from a
decline in the hedged currency, but will cause the Fund to assume the risk of
fluctuations in the value of the currency it purchases.
Under certain conditions, SEC guidelines require mutual funds to set aside
appropriate liquid assets in a segregated custodial account to cover currency
forward contracts. As required by SEC guidelines, the Funds will segregate
assets to cover currency forward contracts, if any, whose purpose is essentially
speculative. The Funds will not segregate assets to cover forward contracts
entered into for hedging purposes, including settlement hedges, position hedges,
and proxy hedges.
Successful use of currency management strategies will depend on GW Capital
Management's skill in analyzing and predicting currency values. Currency
management strategies may substantially change a Fund's investment exposure to
changes in currency exchange rates, and could result in losses to the Fund if
currencies do not perform as GW Capital Management anticipates. For example, if
a currency's value rose at a time when GW Capital Management had hedged a Fund
by selling that currency in exchange for dollars, the Fund would be unable to
participate in the currency's appreciation. If GW Capital Management hedges
currency exposure through proxy hedges, a Fund could realize currency losses
from the hedge and the security position at the same time if the two currencies
do not move in tandem. Similarly, if GW Capital Management increases a Fund's
exposure to a foreign currency, and that currency's value declines, the Fund
will realize a loss. There is no assurance that GW Capital Management's use of
currency management strategies will be advantageous to the Funds or that it will
hedge at an appropriate time.
Foreign Securities. Each Fund, except the Money Market Fund, may invest in
foreign securities and securities issued by U.S. entities with substantial
foreign operations in a manner consistent with its investment objective and
policies. Such foreign investments may involve significant risks in addition
to those risks normally associated with U.S. equity investments.
There may be less information publicly available about a foreign corporate or
government issuer than about a U.S. issuer, and foreign corporate issuers are
not generally subject to accounting, auditing and financial reporting standards
and practices comparable to those in the United States. The securities of some
foreign issuers are less liquid and at times more volatile than securities of
comparable U.S. issuers. Foreign brokerage commissions and securities custody
costs are often higher than those in the United States, and judgments against
foreign entities may be more difficult to obtain and enforce. With respect to
certain foreign countries, there is a possibility of governmental expropriation
of assets, confiscatory taxation, political or financial instability and
diplomatic developments that could affect the value of investments in those
countries. The receipt of interest on foreign government securities may depend
on the availability of tax or other revenues to satisfy the issuer's
obligations.
A Fund's investments in foreign securities may include investments in countries
whose economies or securities markets are not yet highly developed. Special
considerations associated with these investments (in addition to the
considerations regarding foreign investments generally) may include, among
others, greater political uncertainties, an economy's dependence on revenues
from particular commodities or on international aid or developmental assistance,
currency transfer restrictions, illiquid markets, delays and disruptions in
securities settlement procedures.
Most foreign securities in a Fund will be denominated in foreign currencies or
traded in securities markets in which settlements are made in foreign
currencies. Similarly, any income on such securities is generally paid to a Fund
in foreign currencies. The value of these foreign currencies relative to the
U.S. dollar varies continually, causing changes in the dollar value of a Fund's
investments (even if the price of the investments is unchanged) and changes in
the dollar value of a Fund's income available for distribution to its
shareholders. The effect of changes in the dollar value of a foreign currency on
the dollar value of a Fund's assets and on the net investment income available
for distribution may be favorable or unfavorable.
A Fund may incur costs in connection with conversions between various
currencies. In addition, a Fund may be required to liquidate portfolio assets,
or may incur increased currency conversion costs, to compensate for a decline in
the dollar value of a foreign currency occurring between the time when a Fund
declares and pays a dividend, or between the time when a Fund accrues and pays
an operating expense in U.S. dollars.
American Depository Receipts ("ADRs"), as well as other "hybrid" forms of ADRs
including European depository Receipts and Global Depository Receipts, are
certificates evidencing ownership of shares of a foreign issuer. These
certificate are issued by depository banks and generally trade on an established
market in the United States or elsewhere. The underlying shares are held in
trust by a custodian bank or similar financial institution in the issuer's home
country. The depository bank may not have physical custody of the underlying
security at all times and may charge fees for various services, including
forwarding dividends and interest and corporate actions. ADRs are an alternative
to directly purchasing the underlying foreign securities in their national
markets and currencies. However, ADRs continue to be subject to the risks
associated with investing directly in foreign securities. These risks include
foreign exchange risks as well as the political and economic risks of the
underlying issuer's country.
Futures. See "Futures and Options" below.
Illiquid Securities. Each Fund may invest up to 15% of its net assets in
illiquid securities, except the Money Market Fund which may invest up to 10% of
its net assets in illiquid securities. The term "illiquid securities" means
securities that cannot be sold in the ordinary course of business within seven
days at approximately the price used in determining a Fund's net asset value.
Under the supervision of the Board of Trustees, GW Capital Management determines
the liquidity of portfolio securities and, through reports from GW Capital
Management, the Board of Trustees monitors investments in illiquid securities.
Certain types of securities are considered generally to be illiquid. Included
among these are "restricted securities" which are securities whose public resale
is subject to legal restrictions. However, certain types of restricted
securities (commonly known as "Rule 144A securities") that can be resold to
qualified institutional investors may be treated as liquid if they are
determined to be readily marketable pursuant to policies and guidelines of the
Board of Trustees.
A Fund may be unable to sell illiquid securities when desirable or may be forced
to sell them at a price that is lower than the price at which they are valued or
that could be obtained if the securities were more liquid. In addition, sales of
illiquid securities may require more time and may result in higher dealer
discounts and other selling expenses than do sales of securities that are not
illiquid. Illiquid securities may also be more difficult to value due to the
unavailability of reliable market quotations for such securities.
Lending of Portfolio Securities. Each Fund from time-to-time may lend its
portfolio securities to brokers, dealers and financial institutions and receive
as collateral cash, U.S. Treasury securities or other high-qualify, short-term
securities which, at all times while the loan is outstanding, will be maintained
in amounts equal to at least 100% of the current market value of the loaned
securities. Any cash collateral will be invested in short-term securities, which
will increase the current income of the Fund. Such loans will not have terms
longer than 30 days and will be terminable at any time. The Fund will have the
right to regain record ownership of loaned securities to exercise beneficial
rights such as voting rights, subscription rights and rights to dividends,
interest or other distributions. The Fund may pay reasonable fees to persons
unaffiliated with the Fund for services in arranging such loans. Delays or
losses could result if the borrower becomes bankrupt or defaults on its
obligation to return the loaned securities.
Money Market Instruments and Temporary Investment Strategies. In addition to the
Money Market Fund, the other Funds each may hold cash or cash equivalents and
may invest in short-term, high-quality debt instruments (that is in "money
market instruments") as deemed appropriate by Capital management, or may invest
any or all of their assets in money market instruments as deemed necessary by GW
Capital Management for temporary defensive purposes.
The types of money market instruments in which the Funds may invest include,
but are not limited to: (1) acceptances; (2) obligations of U.S. and non-U.S.
governments and their agencies and instrumentalities; (3) short-term
corporate obligations, including commercial paper, notes, and bonds; (4)
obligations of U.S. banks, non-U.S. branches of such bank (Eurodollars), U.S.
branches and agencies of non-U.S. banks (Yankee dollars), and non-U.S.
branches of non-U.S. banks; (5) asset-backed securities; and (6) repurchase
agreements.
Mortgage-Backed Securities. Mortgage backed securities may be issued by
government and non-government entities such as banks, mortgage lenders, or other
financial institutions. A mortgage security is an obligation of the issuer
backed by a mortgage or pool of mortgages or a direct interest in an underlying
pool of mortgages. Some mortgage-backed securities, such as collateralized
mortgage obligations or CMOs, make payments of both principal and interest at a
variety of intervals; others make semi-annual interest payments at a
predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages including
those on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the
investment in such securities may be made if deemed consistent with investment
objectives and policies.
The value of mortgage-backed securities may change due to shifts in the market's
perception of issuers. In addition, regulatory or tax changes may adversely
affect the mortgage securities market as a whole. Non-government mortgage-backed
securities may offer higher yields than those issued by government entities, but
also may be subject to greater price changes than government issues.
Mortgage-backed securities are subject to prepayment risk. Prepayment, which
occurs when unscheduled or early payments are made on the underlying mortgages,
may shorten the effective maturities of these securities and may lower their
total returns.
Options. See "Futures and Options" below.
Repurchase Agreements. A repurchase agreement is an instrument under which the
purchaser acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a mutually agreed upon time and price. The total
amount received on repurchase is calculated to exceed the price paid by the
purchaser, reflecting an agreed upon market rate of interest for the period from
the time of purchase of the security to the settlement date (i.e., the time of
repurchase), and would not necessarily relate to the interest rate on the
underlying securities. A purchaser will only enter into repurchase agreements
with underlying securities consisting of securities of the U.S. government and
its agencies and instrumentalities, certificates of deposit, commercial paper,
bankers' acceptances, and other high-quality, short-term debt securities and
will be entered only with counterparties approved pursuant to creditworthiness
standards established by the Funds' board of trustees (the "Board of Trustees").
While investment in repurchase agreements may be made for periods up to 30 days,
it is expected that typically such periods will be for a week or less. The staff
of the Securities and Exchange Commission has taken the position that repurchase
agreements of greater than 7 days are illiquid securities; accordingly, such
repurchase agreements are subject to a Fund's policy regarding illiquid
securities.
Although repurchase transactions usually do not impose market risks on the
purchaser, the purchaser would be subject to the risk of loss if the seller
fails to repurchase the securities for any reason and the value of the
securities is less than the agreed upon repurchase price. In addition, if the
seller defaults, the purchaser may incur disposition costs in connection with
liquidating the securities. Moreover, if the seller is insolvent and bankruptcy
proceedings are commenced, under current law, the purchaser could be ordered by
a court not to liquidate the securities for an indeterminate period of time and
the amount realized by the purchaser upon liquidation of the securities may be
limited.
Reverse Repurchase Agreements. In a reverse repurchase agreement, the Fund sells
a portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, the Fund will
maintain appropriate liquid assets in a segregated custodial account to cover
its obligation under the agreement. The Fund will enter into reverse repurchase
agreements only with parties whose credit-worthiness has been found satisfactory
by GW Capital Management. Such transactions may increase fluctuations in the
market value of the Fund's assets and may be viewed as a form of leverage. The
Funds currently do not intend to invest in reverse repurchase agreements within
the coming year.
Stripped Treasury Securities. Each Fund may invest in zero-coupon bonds. These
securities are U.S. Treasury bonds which have been stripped of their unmatured
interest coupons, the coupons themselves, and receipts or certificates
representing interests in such stripped debt obligations and coupons. Interest
is not paid in cash during the term of these securities, but is accrued and paid
at maturity. Such obligations have greater price volatility than coupon
obligations and other normal interest-paying securities, and the value of zero
coupon securities reacts more quickly to changes in interest rates than do
coupon bonds. Since dividend income is accrued throughout the term of the zero
coupon obligation, but not actually received until maturity, a Fund may have to
sell other securities to pay said accrued dividends prior to maturity of the
zero coupon obligation. Zero coupon securities are purchased at a discount from
face value, the discount reflecting the current value of the deferred interest.
The discount is taxable even though there is no cash return until maturity.
Short Sales "Against the Box." If a Fund enters into a short sale against the
box, it will be required to set aside securities equivalent in kind and amount
to the securities sold short (or securities convertible or exchangeable into
such securities) and will be required to hold such securities while the short
sale is outstanding. The Fund will incur transaction costs, including interest
expenses, in connection with opening, maintaining, and closing short sales
against the box.
Time Deposits. A time deposit is a deposit in a commercial bank for a specified
period of time at a fixed interest rate for which a negotiable certificate is
not received.
U.S. Government Securities. These are securities issued or guaranteed as to
principal and interest by the U.S. government or its agencies or
instrumentalities. U.S. Treasury bills and notes and certain agency
securities, such as those issued by the Government National Mortgage
Association, are backed by the full faith and credit of the U.S. government.
Securities of other government agencies and instrumentalities are not backed
by the full faith and credit of U.S. government. These securities have
different degrees of government support and may involve the risk of
non-payment of principal and interest. For example, some are supported by
the agency's right to borrow from the U.S. Treasury under certain
circumstances, such as those of the Federal Home Loan Banks. Others are
supported by the discretionary authority of the U.S. government to purchase
certain obligations of the agency or instrumentality, such as those of the
Federal National Mortgage Association. Still other are supported only by the
credit of the agency that issued them, such as those of the Student Loan
Marketing Association. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities, and
consequently, the value of such securities may fluctuate.
Variable Amount Master Demand Notes. A variable amount master demand note is a
note which fixes a minimum and maximum amount of credit and provides for lending
and repayment within those limits at the discretion of the lender. Before
investing in any variable amount master demand notes, the liquidity of the
issuer must be determined through periodic credit analysis based upon publicly
available information.
Variable or Floating Rate Securities. These securities have interest rates that
are adjusted periodically, or which "float" continuously according to formulas
intended to stabilize their market values. Many of them also carry demand
features that permit the Funds to sell them on short notice at par value plus
accrued interest. When determining the maturity of a variable or floating rate
instrument, the Fund may look to the date the demand feature can be exercised,
or to the date the interest rate is readjusted, rather than to the final
maturity of the instrument.
Warrants. Warrants basically are options to purchase equity securities at a
specific price valid for a specific period of time. They do not represent
ownership of the securities, but only the right to buy them. Warrants are
speculative in that they have no voting rights, pay no dividends and have no
rights with respect to the assets of the corporation issuing them. Warrants
differ from call options in that warrants are issued by the issuer of the
security which may be purchased on their exercise, whereas call options may be
written or issued by anyone. The prices of warrants do not necessarily move
parallel to the prices of the underlying securities.
When-Issued and Delayed-Delivery Transactions. When-issued or delayed-delivery
transactions arise when securities are purchased or sold with payment and
delivery taking place in the future in order to secure what is considered to be
an advantageous price and yield at the time of entering into the transaction.
While the Funds generally purchase securities on a when-issued basis with the
intention of acquiring the securities, the Funds may sell the securities before
the settlement date if GW Capital Management deems it advisable. At the time a
Fund makes the commitment to purchase securities on a when-issued basis, the
Fund will record the transaction and thereafter reflect the value, each day, of
such security in determining the net asset value of the Fund. At the time of
delivery of the securities, the value may be more or less than the purchase
price. A Fund will maintain, in a segregated account, liquid assets having a
value equal to or greater than the Fund's purchase commitments; likewise a Fund
will segregate securities sold on a delayed-delivery basis.
Futures and Options
Futures Contracts. When a Fund purchases a futures contract, it agrees to
purchase a specified underlying instrument at a specified future date. When a
Fund sells a futures contract, it agrees to sell the underlying instrument at a
specified future date. The price at which the purchase and sale will take place
is fixed when the Fund enters into the contract. Futures can be held until their
delivery dates, or can be closed out before then if a liquid secondary market is
available.
The value of a futures contract tends to increase and decrease in tandem with
the value of its underlying instrument. Therefore, purchasing futures contracts
will tend to increase a Fund's exposure to positive and negative price
fluctuations in the underlying instrument, much as if it had purchased the
underlying instrument directly. When a Fund sells a futures contract, by
contrast, the value of its futures position will tend to move in a direction
contrary to the market.
Futures Margin Payments. The purchaser or seller of a futures contract is not
required to deliver or pay for the underlying instrument unless the contract is
held until the delivery date. However, both the purchaser and seller are
required to deposit "initial margin" with a futures broker, known as a futures
commission merchant ("FCM"), when the contract is entered into. Initial margin
deposits are typically equal to a percentage of the contract's value. If the
value of either party's position declines, that party will be required to make
additional "variation margin" payments to settle the change in value on a daily
basis. The party that has a gain may be entitled to receive all or a portion of
this amount. Initial and variation margin payments do not constitute purchasing
securities on margin for purposes of a Fund's investment limitations. In the
event of a bankruptcy of an FCM that holds margin on behalf of a Fund, the Fund
may be entitled to return of margin owed to it only in proportion to the amount
received by the FCM's other customers, potentially resulting in losses to the
Fund.
Index Futures Contracts. An index futures contract obligates the seller to
deliver (and the purchaser to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific index at the close
of the last trading day of the contract and the price at which the agreement is
made. No physical delivery of the underlying security in the index is made.
Purchasing Put and Call Options. By purchasing a put option, a Fund obtains the
right (but not the obligation) to sell the option's underlying instrument at a
fixed strike price. In return for this right, the Fund pays the current market
price for the option (known as the option premium). Options have various types
of underlying instruments, including specific securities, indices of securities
prices, and futures contracts. The Fund may terminate its position in a put
option it has purchased by allowing it to expire or by exercising the option. If
the option is allowed to expire, the Fund will lose the entire premium it paid.
If the Fund exercises the option, in completes the sale of the underlying
instrument at the strike price. A Fund may also terminate a put option position
by closing it out in the secondary market (that is by selling it to another
party) at its current price, if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain or security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put options,
except that the purchaser of a call option obtains the right to purchase, rather
than sell, the underlying instrument at the option's strike price. A call buyer
typically attempts to participate in potential price increases of the underlying
instrument with risk limited to the cost of the option if security prices fall.
At the same time, the buyer can expect to suffer a loss if security prices do
not rise sufficiently to offset the cost of the option.
Writing Put and Call Options. When a Fund writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Fund assumes the obligation to pay the strike price
for the option's underlying instrument if the other party to the option chooses
to exercise it. When writing an option on a futures contract, the Fund will be
required to make margin payments to an FCM as described above for futures
contracts. A Fund may seek to terminate its position in a put option it writes
before exercise by closing out the option in the secondary market at is current
price. If the secondary market is not liquid for a put option the Fund has
written, however, the Fund must continue to be prepared to pay the strike price
while the option is outstanding, regardless of price changes, and must continue
to set aside assets to cover its position.
If security prices rise, a put writer would generally expect to profit, although
its gain would be limited to the amount of the premium it received. If security
prices remain the same over time, it is likely that the writer will also profit,
because it should be able to close out the option at a lower price. If security
prices fall, the put writer would expect to suffer a loss from purchasing the
underlying instrument directly, which can exceed the amount of the premium
received.
Writing a call option obligates a Fund to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer can mitigate the effect of a price decline. At the same
time, because a call writer gives up some ability to participate in security
price increases.
OTC Options. Unlike exchange-traded options, which are standardized with respect
to the underlying instrument, expiration date, contract size, and strike price,
the terms of over-the-counter ("OTC") options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Funds greater flexibility to
tailor an option to its needs, OTC options generally involve greater credit risk
than exchange-traded options, which are guaranteed by the clearing organization
of the exchanges where they are traded.
Options and Futures Relating to Foreign Currencies. Currency futures contracts
are similar to forward currency exchange contracts, except that they are traded
on exchanges (and have margin requirements) and are standardized as to contract
size and delivery date. Most currency futures contracts call for payment or
delivery in U.S. dollars. The underlying instrument of a currency option may be
a foreign currency, which generally is purchased or delivered in exchange for
U.S. dollars, or may be a futures contract. The purchaser of a currency call
option obtains the right to purchase the underlying currency, and the purchaser
of a currency put obtains the right to sell the underlying currency.
The uses and risks of currency options and futures are similar to options and
futures relating to securities or indices, as discussed above. The Funds may
purchase and sell currency futures and may purchase and write currency options
to increase or decrease their exposure to different foreign currencies. A Fund
may also purchase and write currency options in conjunction with each other or
with currency futures or forward contracts. Currency futures and options values
can be expected to correlate with exchange rates, but may not reflect other
factors that affect the value of a Fund's investments. A currency hedge, for
example, should protect a Yen-denominated security from a decline in the Yen,
but will not protect a Fund against a price decline resulting from deterioration
in the issuer's creditworthiness. Because the value of a Fund's
foreign-denominated investments changes in response to many factors other than
exchange rates, it may not be possible to match the amount of currency options
and futures to the value of the Fund's investments exactly over time.
Asset Coverage for Futures and Options Positions. The Funds will comply with
guidelines established by the Securities and Exchange Commission with respect to
coverage of options and futures strategies by mutual Funds, and if the
guidelines so require will set aside appropriate liquid assets in a segregated
custodial account in the amount prescribed. Securities held in a segregated
account cannot be sold while the futures or option strategy is outstanding,
unless they are replaced with other suitable assets. As a result, there is a
possibility that segregation of a large percentage of a Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
Combined Positions. A Fund may purchase and write options in combination with
each other, or in combination with futures or forward contracts, to adjust the
risk and return characteristics of the overall position. For example, a Fund may
purchase a put option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined position
would involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in the
event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Correlation of Price Changes. Options and futures prices can also diverge from
the prices of their underlying instruments, even if the underlying instruments
match a Fund's investments well. Options and futures prices are affected by such
factors as current and anticipated short-term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. A Fund may purchase or sell options and
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in order to attempt to compensate differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in a Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
Limitations on Futures and Options Transactions. The Trust has filed a notice of
eligibility for exclusion from the definition of the term "commodity pool
operator" with the Commodity Futures Trading Commission and the National Futures
Association, which regulate trading in the futures markets. The Funds intend to
comply with Rule 4.5 under the Commodity Exchange Act, which limits the extent
to which the Funds can commit assets to initial margin deposits and option
premiums. Accordingly, to the extent that a Fund may invest in futures contracts
and options, a Fund may only enter into futures contract and option positions
for other than bona fide hedging purposes to the extent that the aggregate
initial margin and premiums required to establish such positions will not exceed
5% of the liquidation value of the Fund. This limitation on a Fund's permissible
investments in futures contracts and options is not a fundamental investment
limitation and may be changed as regulatory agencies permit.
Liquidity of Options and Futures Contracts. There is no assurance that a liquid
secondary market will exist for any particular option or futures contract at any
particular time. Options may have relatively low trading volume and liquidity if
their strike prices are not close to the underlying instrument's current price.
In addition, exchanges may establish daily price fluctuation limits for options
and futures contracts, and may halt trading if a contract's price moves upward
or downward more than the limit in a given day. On volatile trading days when
the price fluctuation limit is reached or a trading halt is imposed, it may be
impossible for a Fund to enter into new positions or close out existing
positions. If the secondary market for a contract is not liquid because of price
fluctuation limits or otherwise, it could prevent prompt liquidation of
unfavorable positions, and potentially could require a Fund to continue to hold
a position until delivery or expiration regardless of changes in its value. As a
result, a Fund's access to assets held to cover its options or futures positions
could also be impaired.
INVESTMENT LIMITATIONS
Below is a description of certain limitations that constitute the Funds'
fundamental policies, which means that they may not be changed with respect to
any Fund without approval by vote of a majority of the outstanding voting shares
of such Fund. For this purpose, "majority" means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding share
are represented or (ii) more than 50% of the outstanding shares.
Each Fund will not:
(1) Invest more than 25% of its total assets (taken at market value at the
time of each investment) in the securities of issuers primarily engaged in
the same industry; provided that with respect to the Money Market Fund
there shall be no limitation on the purchase of U.S. government securities
or of certificates of deposit and bankers' acceptances; utilities will be
divided according to their services; for example, gas, gas transmission,
electric and telephone each will be considered a separate industry for
purposes of this restriction.
(2) Purchase or sell interests in commodities, commodities contracts, oil, gas
or other mineral exploration or development programs, or real estate,
except that a Fund may purchase securities of issuers which invest or deal
in any of the above; provided, however, that the Funds, except the Money
Market Fund, may invest in futures contracts on financial indexes, foreign
currency transactions and options on permissible futures contracts.
(3) (a) purchase any securities on margin, (b) make short sales of securities,
or (c) maintain a short position, except that a Fund (i) may obtain such
short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities, (ii) other than the Money Market Fund, may
make margin payments in connection with transactions in futures contracts
and currency futures contracts and enter into permissible options
transactions, and (iii) may make short sales against the box.
(4) Make loans, except as provided in limitation (5) below and except through
the purchase of obligations in private placements (the purchase of
publicly-traded obligations are not being considered the making of a loan)
and through repurchase agreements.
(5) Lend its portfolio securities in excess of 33 1/3% of its total assets,
taken at market value at the time of the loan, provided that such loan
shall be made in accordance with the guidelines set forth under "Lending
of Portfolio Securities" in this Statement of Additional Information.
(6) Borrow, except that a Fund may borrow for temporary or emergency purposes.
The Fund will not borrow unless immediately after any such borrowing there
is an asset coverage of at least 300 percent for all borrowings of the
Fund. If such asset coverage falls below 300 percent, the Fund will within
three days thereafter reduce the amount of its borrowings to an extent
that the asset coverage of such borrowings will be at least 300 percent.
Reverse repurchase agreements and other investments which are "covered" by
a segregated account or an offsetting position in accordance with
applicable SEC requirements ("covered investments") do not constitute
borrowings for purposes of the 300% asset coverage requirement. The Fund
will repay all borrowings in excess of 5% of its total assets before any
additional investments are made. Covered investments will not be
considered borrowings for purposes of applying the limitation on making
additional investments when borrowings exceed 5% of total assets.
(7) Mortgage, pledge, hypothecate or in any manner transfer, as security for
indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in limitation (6) above,
and then such mortgaging, pledging or hypothecating may not exceed 10% of
the Fund's total assets, taken at market value at the time thereof. A Fund
will not, as a matter of operating policy, mortgage, pledge or hypothecate
its portfolio securities to the extent that at any time the percentage of
the value of pledged securities will exceed 10% of the value of the Fund's
shares. This limitation shall not apply to segregated accounts.
(8) Underwrite securities of other issuers except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
(9) Issue senior securities. The issuance of more than one series or classes
of shares of beneficial interest, obtaining of short-term credits as may
be necessary for the clearance of purchases and sales of portfolio
securities, short sales against the box, the purchase or sale of
permissible options and futures transactions (and the use of initial and
maintenance margin arrangements with respect to futures contracts or
related options transactions), the purchase or sale of securities on a
when issued or delayed delivery basis, permissible borrowings entered into
in accordance with a Fund's investment objectives and policies, and
reverse repurchase agreements are not deemed to be issuances of senior
securities.
Diversified Portfolio of Securities
Each Fund will operate as a diversified investment portfolio of the Trust,
meaning that at least 75% of the value of its total assets will be represented
by cash and cash items (including receivables), U.S. government securities,
securities of other investment companies, and other securities, the value of
which with respect to any one issuer is neither more than 5% of the Fund's total
assets nor more than 10% of the outstanding voting securities of such issuer.
<PAGE>
MANAGEMENT OF THE FUND
Investment Adviser
GW Capital Management, LLC(GW Capital Management), a Colorado corporation,
located at 8515 East Orchard Road, Englewood, Colorado 80111, serves as
investment adviser to the Trust pursuant to an Investment Advisory Agreement
dated December 5, 1997. GW Capital Management is a wholly-owned subsidiary of
GWL&A, which is a wholly-owned subsidiary of The Great-West Life Assurance
Company ("Great-West"), a Canadian stock life insurance company. Great-West is a
99.4% owned subsidiary of Great-West Lifeco Inc., which in turn is an 86.4%
owned subsidiary of Power Financial Corporation, Montreal, Quebec. Power
Corporation of Canada, a holding and management company, has voting control of
Power Financial Corporation of Canada. Mr. Paul Desmarais, and his associates, a
group of private holding companies, have voting control of Power Corporation of
Canada.
Trustees and Officers
The trustees and executive officers of the Trust, their ages, position(s) with
the Trust, and principal occupations during the past 5 years (or as otherwise
indicated) are set forth below. The business address of each trustee and officer
is 8515 East Orchard Road, Englewood, Colorado 80111 (unless otherwise
indicated). Those trustees and officers who are "interested persons" (as defined
in the Investment Company Act of 1940, as amended) by virtue of their
affiliation with either the Trust or GW Capital Management are indicated by an
asterisk (*).
Rex Jennings (72), Trustee; President Emeritus, Denver Metro Chamber of
Commerce.
Richard P. Koeppe (65), Trustee; Retired Superintendent, Denver Public
Schools.
*Douglas L. Wooden (40), Trustee; Senior Vice President, Financial Services
of GWL&A.
*James D. Motz (47), Trustee and President; Senior Vice President, Employee
Benefits, of GWL&A.
Sanford Zisman (57), Trustee; Attorney, Zisman & Ingraham, P.C.
*Glen R. Derback (45), Treasurer; Vice President, Financial Control, of GWL&A.
*Mark J. Pavlik (36), Controller, is Manager, Financial Control, of GWL&A.
*Beverly A. Byrne (41), Secretary, is Assistant Counsel and Assistant
Secretary of GWL&A.
Compensation
The Trust pays no salaries or compensation to any of its officers or Trustees
affiliated with GW Capital Management or its affiliates. The chart below sets
forth the annual fees paid or expected to be paid to the non-interested Trustees
and certain other information.
R.P. Koeppe R. Jennings S. Zisman
Compensation
Received from the
Trust $8,000 $7,500 $8,000
Pension or
Retirement
Benefits Accrued as
Fund Expense* $0 $0 $0
Total Compensation
Received from the
Trust and All
Affiliated Funds* $16,500 $16,000 $16,000
* As of October 31 , 1997 there were forty funds for which the Trustees
serve as Trustees or Directors of which six are Funds of the Trust. The
total compensation paid is comprised of the amount estimated to be paid
during the Trust's current fiscal year by the Trust and all affiliated
investment companies.
As of October 31, 1997, no person owns of record or beneficially 5% or more of
the shares outstanding of the Trust or any Fund except GW Capital Management and
its affiliates which owned 100% of the Funds' outstanding shares as of the date
of this Statement of Additional Information. Therefore, GWL&A would be deemed to
control each Fund as the term "control" is defined in the Investment Company Act
of 1940. As of the date of this Statement of Additional Information, the
trustees and officers of the Trust, as a group, owned of record or beneficially
less than 1% of the outstanding share of each Fund.
Investment Advisory Agreement
The Investment Advisory Agreement became effective on December 5, 1997 and as
amended effective March 1, 1998. As approved, the Agreement will remain in
effect until December 4, 1998, and will continue in effect from year to year if
approved annually by the Board of Trustees including the vote of a majority of
the trustees who are not parties to the Agreement or interested persons of any
such party, or by vote of a majority of the outstanding shares of each Fund. Any
amendment to the Agreement becomes effective with respect to a Fund upon
approval by vote of a majority of the voting securities of the Fund. The
agreement is not assignable and may be terminated without penalty with respect
to any Fund either by the Board of Trustees or by vote of a majority of the
outstanding voting securities of such Fund or by GW Capital Management, each on
60 days notice to the other party.
The Investment Advisory Agreement provides that GW Capital Management, subject
to the direction of the Board of Trustees, is responsible for selecting the
Funds' investments and for managing their business affairs. GW Capital
Management provides the Funds' portfolio managers who consider analyses from
various sources, make the necessary investment decisions, and effect
transactions accordingly. GW Capital Management also performs certain
administrative and management services for the Fund and provides all the office
space, facilities, equipment and personnel necessary to perform its duties under
the Agreement.
The Investment Advisory Agreement provides that GW Capital Management shall not
be subject to any liability in connection with the performance of its services
thereunder in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations and duties.
Management Fees
Each Fund pays a management fee to GW Capital Management for managing its
investments and business affairs. GW Capital Management is paid monthly at an
annual rate of a Fund's average net assets according to the following schedule.
<PAGE>
MANAGEMENT FEE
(as a percentage of average net assets)
-------------------
Money Market Fund 0.20%
Preferred Stock Fund 0.90%
Index 600 Fund 0.60%
Index 500 Fund 0.60%
Index Pacific Fund 1.00%
Index European Fund 1.00%
Value Fund 1.00%
For the period February 3, 1997 to October 31, 1997, the Investment Adviser was
paid a fee for its services as follows: Money Market $4,526; Preferred Stock
$27,298; Index 600 $21,804; Index 500 $53,983; Index Pacific $198,749; and,
Index European $219,272.
Sub-Adviser
CIC Management, Inc. serves as the sub-adviser to the Value Fund pursuant to a
sub-advisory agreement dated March 1, 1998. CIC is a 100% employee owned and
managed firm, registered with the Securities and Exchange Commission as an
investment adviser under the Investment Advisers Act of 1940. It is a California
corporation with its principal business address at 707 Wilshire Boulevard, 55th
Floor, Los Angeles, California 90017.
The Sub-Adviser provides investment advisory assistance and portfolio management
advice to the Investment Adviser for the Value Fund. Subject to review and
supervision by the Investment Adviser and the Board of Trustees, the Sub-Adviser
is responsible for the actual management of the Value Fund and for making
decisions to buy, sell or hold any particular securities. The Sub-Adviser bears
all expenses in connection with the performance of its services, such as
compensating and furnishing office space for its employees and officers
connected with the investment and economic research, trading and investment
management for the Value Fund.
Sub-Advisory Fees
The method of computing the sub-advisory fees is fully described in the
Prospectus.
Expenses of the Funds
In addition to the management fees paid to GW Capital Management, the Trust pays
certain other costs including, but not limited to, (a) brokerage commissions;
(b) federal, state and local taxes, including issue and transfer taxes incurred
by or levied on the Funds; (c) interest charges on borrowing; (d) fees and
expenses of registering the shares of the Funds under the applicable federal
securities laws and of qualifying shares of the Fund under applicable state
securities laws including expenses attendant upon renewing and increasing such
registrations and qualifications; (e) expenses of printing and distributing the
Funds' prospectus and other reports to shareholders; (f) costs of proxy
solicitations; (g) transfer agent fees; (h) charges and expenses of the Trust's
custodian; (i) compensation and expenses of the "independent" trustees; and (j)
such nonrecurring items as may arise, including expenses incurred in connection
with litigation, proceedings and claims and the obligations of the Trust to
indemnify its trustees and officers with respect thereto.
Subject to revision, GW Capital Management has voluntarily agreed to reimburse
the Index Pacific Fund, the Index European Fund, and the Money Market Fund to
the extent that total operating expenses, but excluding interest, taxes,
brokerage commissions, and extraordinary expenses, exceed 1.20%, 1.20%, and
0.46%, respectively, of average net assets.
PORTFOLIO TRANSACTIONS
Subject to the direction of the Board of Trustees, GW Capital Management is
primarily responsible for placement of Funds' portfolio transactions. GW Capital
Management has no obligation to deal with any broker, dealer or group of brokers
or dealers in the execution of transactions in portfolio securities. In placing
orders, it is the policy of the Trust to obtain the most favorable net results,
taking into account various factors, including price, dealer spread or
commissions, if any, size of the transaction and difficulty of execution. While
GW Capital Management generally will seek reasonably competitive spreads or
commissions, the Funds will not necessarily pay the lowest spread or commission
available.
Transactions on U.S. futures and stock exchanges and other agency transactions
involve the payment of negotiated brokerage commissions. Commissions vary among
different brokers and dealers, which may charge different commissions according
to such factors as the difficulty and size of the transaction. Transactions in
foreign securities often involve the payment of fixed brokerage commissions,
which may be higher than those for negotiated transactions in the United States.
Prices for over-the-counter transactions usually include an undisclosed
commission or "mark-up" that is retained by the broker or dealer effecting the
trade. The cost of securities purchased from an underwriter or from a dealer in
connection with an underwritten offering usually includes a fixed commission
which is paid by the issuer to the underwriter or dealer. Transactions in U.S.
government securities occur usually through issuers and underwriters of and
major dealers in such securities, acting as principals. These transactions are
normally made on a net basis and do not involve payment of brokerage
commissions.
In placing portfolio transactions, GW Capital Management may give consideration
to brokers or dealers which provide supplemental investment research, in
addition to such research obtained for a flat fee, and pay commissions to such
brokers or dealers furnishing such services which are in excess of commissions
which another broker or dealer may charge for the same transaction. Such
supplemental research ordinarily consists of assessments and analyses of the
business or prospects of a company, industry, or economic sector. Supplemental
research obtained through brokers or dealers will be in addition to and not in
lieu of the services required to be performed by GW Capital Management. The
expenses of GW Capital Management will not necessarily be reduced as a result of
the receipt of such supplemental information. GW Capital Management may use any
supplemental investment research obtained for the benefit of the Funds in
providing investment advice to its other investment advisory accounts, and may
use such information in managing its own accounts. Conversely, such supplemental
information obtained by the placement of business for GW Capital Management will
be considered by and may be useful to GW Capital Management in carrying out its
obligations to the Trust.
If in the best interests of both one or more Funds and other client accounts of
GW Capital Management, GW Capital Management may, to the extent permitted by
applicable law, but need not, aggregate the purchases or sales of securities for
these accounts to obtain favorable overall execution. When this occurs, GW
Capital Management will allocate the securities purchased and sold and the
expenses incurred in a manner that it deems equitable to all accounts. In making
this determination, GW Capital Management may consider, among other things, the
investment objectives of the respective client accounts, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally, and the
opinions of persons responsible for managing the Funds and other client
accounts. The use of aggregated transactions may adversely affect the size of
the position obtainable for the Funds, and may itself adversely affect
transaction prices to the extent that it increases the demand for the securities
being purchased or the supply of the securities being sold.
Portfolio Turnover
The turnover rate for each Fund is calculated by dividing (a) the lesser of
purchases or sales of portfolio securities for the fiscal year by (b) the
monthly average value of portfolio securities owned by the Fund during the
fiscal year. In computing the portfolio turnover rate, certain U.S. government
securities (long-term for periods before 1986 and short-term for all periods)
and all other securities, the maturities or expiration dates of which at the
time of acquisition are one year or less, are excluded.
There are no fixed limitations regarding the portfolio turnover of the Funds.
Portfolio turnover rates are expected to fluctuate under constantly changing
economic conditions and market circumstances. Securities initially satisfying
the basic policies and objectives of each Fund may be disposed of when
appropriate in GW Capital Management's judgment.
With respect to any Fund, a higher portfolio turnover rate may involve
correspondingly greater brokerage commissions and other expenses which might be
borne by the Fund and, thus, indirectly by its shareholders. Higher portfolio
turnover may also increase a shareholder's current tax liability for capital
gains by increasing the level of capital gains realized by a Fund.
Based upon the formula for calculating the portfolio turnover rate, as stated
above, the annualized portfolio turnover rate for each Fund (other than the
Money Market Fund) in 1997 is as follows:
Fund 1997
- ---- ----
Preferred Stock Fund 10.05%
Index 600 Fund 21.58%
Index 500 Fund 0.45%
Index Pacific Fund 0.04%
Index European Fund 5.69%
Although it is not possible to predict future portfolio turnover rates
accurately, and such rates may vary from year to year, the portfolio turnover
rate of the Value Fund is not expected to exceed 100% in the coming year.
VALUATION OF PORTFOLIO SECURITIES
The net asset value of each Fund is determined in the manner described in the
Prospectus. Securities held by each Fund other than the Money Market Fund will
be valued as follows: portfolio securities which are traded on stock exchanges
are valued at the last sale price on the principal exchange as of the close of
business on the day the securities are being valued, or, lacking any sales, at
the mean between the bid and asked prices. Securities traded in the
over-the-counter market and included in the National Market System are valued at
the mean between the bid and asked prices which may be based on the valuations
furnished by a pricing service or from independent securities dealers.
Otherwise, over-the-counter securities are valued at the mean between the bid
and asked prices or yield equivalent as obtained from one or more dealers that
make markets in the securities. Portfolio securities which are traded both in
the over-the-counter market and on an exchange are valued according to the
broadest and most representative market, and it is expected that for debt
securities this ordinarily will be the over-the-counter market. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under procedures or guidelines
established by the Board of Trustees, including valuations furnished by pricing
services retained by GW Capital Management.
The net asset value per share of the Money Market Fund is determined by using
the amortized cost method of valuing its portfolio instruments. Under the
amortized cost method of valuation, an instrument is valued at cost and the
interest payable at maturity upon the instrument is accrued daily as income over
the remaining life of the instrument. Neither the amount of daily income nor the
net asset value is affected by unrealized appreciation or depreciation of the
Fund's investments assuming the instrument's obligation is paid in full on
maturity. In periods of declining interest rates, the indicated daily yield on
shares of the portfolio computed using amortized cost may tend to be higher than
a similar computation made using a method of valuation based upon market prices
and estimates. In periods of rising interest rates, the indicated daily yield on
shares of the portfolio computed using amortized costs may tend to be lower than
a similar computation made using a method of valuation based upon market prices
and estimates. For all Funds, securities with remaining maturities of not more
than 60 days are valued at amortized cost, which approximates market value.
The amortized cost method of valuation permits the Money Market Fund to maintain
a stable $1.00 net asset value per share. The Board of Trustees periodically
reviews the extent of any deviation from the $1.00 per share value that would
occur if a method of valuation based on market prices and estimates were used.
In the event such a deviation would exceed one-half of one percent, the Board of
Trustees will promptly consider any action that reasonably should be initiated
to eliminate or reduce material dilution or other unfair results to
shareholders. Such action may include selling portfolio securities prior to
maturity, not declaring earned income dividends, valuing portfolio securities on
the basis of current market prices, if available, or if not available, at fair
market value as determined in good faith by the Board of Trustees, and in kind
redemption of portfolio securities (considered highly unlikely by management of
the Trust).
INVESTMENT PERFORMANCE
The Funds may quote measure of investment performance in various ways. All
performance information supplied by the Funds in advertising is historical and
is not intended to indicated future returns.
Money Market Fund
In accordance with regulations prescribed by the SEC, the Trust is required to
compute the Money Market Fund's current annualized yield for a seven-day period
in a manner which does not take into consideration any realized or unrealized
gains or losses on its portfolio securities. This current annualized yield is
computed by determining the net change (exclusive of realized gains and losses
on the sale of securities and unrealized appreciation and depreciation) in the
value of a hypothetical account having a balance of one share of the Money
Market Fund at the beginning of such seven-day period, dividing such net change
in account value by the value of the account at the beginning of the period to
determine the base period return and annualizing this quotient on a 365-day
basis.
The SEC also permits the Trust to disclose the effective yield of the Money
Market Fund for the same seven-day period, determined on a compounded basis. The
effective yield is calculated by compounding the annualized base period return
by adding one to the base period return, raising the sum to a power equal to 365
divided by 7, and subtracting one from the result.
The yield on amounts held in the Money Market Fund normally will fluctuate on a
daily basis. Therefore, the disclosed yield for any given past period is not an
indication or representation of future yields or rates of return. The Fund's
actual yield is affected by changes in interest rates on money market
securities, average portfolio maturity of the Fund, the types and quality of
portfolio securities held by the Fund, and its operating expenses.
<PAGE>
Other Funds
Standardized Average Annual Total Return Quotations. Average annual total return
quotations for shares of a Fund are computed by finding the average annual
compounded rates of return that would cause a hypothetical investment made on
the first day of a designated period to equal the ending redeemable value of
such hypothetical investment on the last day of the designated period in
accordance with the following formula:
P(I+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $ 1,000
initial payment made at the beginning of the designated
period (or fractional portion thereof)
The computation above assumes that all dividends and distributions made by a
Fund are reinvested at net asset value during the designated period. The average
annual total return quotation is determined to the nearest 1/100 of 1%.
One of the primary methods used to measure performance is "total return." Total
return will normally represent the percentage change in value of a Fund, or of a
hypothetical investment in a Fund, over any period up to the lifetime of the
Fund. Unless otherwise indicated, total return calculations will usually assume
the reinvestment of all dividends and capital gains distributions and will be
expressed as a percentage increase or decrease from an initial value, for the
entire period or for one or more specified periods within the entire period.
Total return percentages for periods longer than one year will usually be
accompanied by total return percentages for each year within the period and/or
by the average annual compounded total return for the period. The income and
capital components of a given return may be separated and portrayed in a variety
of ways in order to illustrate their relative significance. Performance may also
be portrayed in terms of cash or investment values, without percentages. Past
performance cannot guarantee any particular result. In determining the average
annual total return (calculated as provided above), recurring fees, if any, that
are charged to all shareholder accounts are taken into consideration.
Each Fund's average annual total return quotations and yield quotations as they
may appear in the Prospectus, this Statement of Additional Information or in
advertising are calculated by standard methods prescribed by the SEC.
Each Fund may also publish its distribution rate and/or its effective
distribution rate. A Fund's distribution rate is computed by dividing the most
recent monthly distribution per share annualized, by the current net asset value
per share. A Fund's effective distribution rate is computed by dividing the
distribution rate by the ratio used to annualize the most recent monthly
distribution and reinvesting the resulting amount for a full year on the basis
of such ratio. The effective distribution rate will be higher than the
distribution rate because of the compounding effect of the assumed reinvestment.
A Fund's yield is calculated using a standardized formula, the income component
of which is computed from the yields to maturity of all debt obligations held by
the Fund based on prescribed methods (with all purchases and sales of securities
during such period included in the income calculation on a settlement date
basis), whereas the distribution rate is based on a Fund's last monthly
distribution. A Fund's monthly distribution tends to be relatively stable and
may be more or less than the amount of net investment income and short- term
capital gain actually earned by the Fund during the month.
Other data that may be advertised or published about each Fund include the
average portfolio quality, the average portfolio maturity and the average
portfolio duration.
Standardized Yield Quotations. The yield of a Fund is computed by dividing the
Fund's net investment income per share during a base period of 30 days, or one
month, by the maximum offering price per share on the last day of such base
period in accordance with the following formula:
2[( a - b + 1 )6 - 1 ]
(cd)
Where: a = net investment income earned during the period
b = net expenses accrued for the period
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share
Net investment income will be determined in accordance with rules established by
the SEC.
Performance Comparisons
Performance information contained in reports to shareholders, advertisement, and
other promotional materials may be compared to that of various unmanaged
indexes. These indexes may assume the reinvestment of dividends, but generally
do not reflect deductions for operating expenses.
Advertisements quoting performance rankings of a Fund as measured by financial
publications or by independent organizations such as Lipper Analytical Services,
Inc. and Morning Star, Inc., and advertisements presenting a Fund's the
historical performance, may form time to time be sent to investors or placed in
newspapers and magazines such as The New York Times, The Wall Street Journal,
Barons, Investor's Daily, Money Magazine, Changing Times, Business Week and
Forbes or any other media on behalf of the Funds.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Fund is open for business and its net asset value per share is calculated
each day that the New York Stock Exchange ("NYSE") is open for trading. The
Funds anticipates that the NYSE will be closed for trading on: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. Though it is expected that the same holiday
schedule will be observed in the future, the NYSE may modify its holiday
schedule at any time. In addition, the Funds will not process wire purchase and
redemptions on days when the Federal Reserve Wire System is closed, and may be
unable to do so during periods of severe weather or other emergency conditions.
Payment to shareholders for shares redeemed, that is sold back to a Fund, will
be made within seven days after receipt by the Transfer Agent of a request for
redemption in proper form, except that a Fund may suspend the right of
redemption or postpone the date of payment for more than seven days (a) for any
period (i) during which the New York Stock Exchange ("NYSE") is closed other
than customary week-end and holiday closings or (ii) during which trading on the
NYSE is restricted; (b) for any period during which an emergency exists as a
result of which (i) disposal by the Fund of securities owned by it is not
reasonably practicable or (ii) it is not reasonably practicable for the Fund
fairly to determine the value of its net assets; or (c) for such other period as
the SEC may permit for the protection of a Fund's shareholders.
If a Fund is requested to redeem shares for which it has not yet received good
payment, the Fund may delay the payment of redemption proceeds until such time
as it has received good funds for the purchase of the shares being redeemed.
The value of shares redeemed may be more or less than the shareholder's cost,
depending upon the market value of the portfolio securities at the time of
redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following is only a summary of certain tax considerations generally
affecting the Funds and their shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of any Fund or its shareholders, and this discussion is not intended
as a substitute for careful tax planning.
Qualification as a Regulated Investment Company
The Internal Revenue Code of 1986, as amended (the "Code"), provides that each
investment portfolio of a series investment company is to be treated as a
separate corporation. Accordingly, each of the Funds will seek to be taxed as a
regulated investment company under Subchapter M of the Code. As a regulated
investment company, each Fund will not be subject federal income tax on the
portion of its net investment income (i.e., its taxable interest, dividends and
other taxable ordinary income, net of expenses) and net realized capital gain
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) and at least 90% of its
tax-exempt income (net of expenses allocable thereto) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are described below. Each Fund will be subject to tax at regular
corporate rates on any income or gains that it does not distribute.
Distributions by a Fund made during the taxable year or, under specified
circumstances, within one month after the close of the taxable year, will be
considered distributions of income and gains of the taxable year and can
therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, each Fund must derive at
least 90% of its gross income from dividends, interest, certain payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies (to the extent such currency gains are
ancillary to the Fund's principal business of investing in stock and securities)
and other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities, currencies (the "Income Requirement").
Certain debt securities purchased by a Fund (such as zero-coupon bonds) may be
treated for federal income tax purposes as having original issue discount.
Original issue discount, generally defined as the excess of the stated
redemption price at maturity over the issue price, is treated as interest for
Federal income tax purposes. Whether or not a Fund actually receives cash, it is
deemed to have earned original issue discount income that is subject to the
distribution requirements of the Code. Generally, the amount of original issue
discount included in the income of a Fund each year is determined on the basis
of a constant yield to maturity that takes into account the compounding of
accrued interest.
In addition, a Fund may purchase debt securities at a discount that exceeds any
original issue discount that remained on the securities at the time the Fund
purchased the securities. This additional discount represents market discount
for income tax purposes. Treatment of market discount varies depending upon the
maturity of the debt security and the date on which it was issued. For a debt
security issued after July 18, 1984 having a fixed maturity date or more than
six months from the date of issue and having market discount, the gain realized
on disposition will be treated as interest to the extent it does not exceed the
accrued market discount on the security (unless a Fund elects for all its debt
securities having a fixed maturity date or more than one year from the date of
issue to include market discount in income in taxable years to which it is
attributable). Generally, market discount accrues on a daily basis. For any debt
security issued on or before July 18, 1984 (unless a Fund makes the election to
include market discount in income currently), or any debt security having a
fixed maturity date of not more than six months from the date of issue, the gain
realized on disposition will be characterized as long-term or short-term capital
gain depending on the period a Fund held the security. A Fund may be required to
capitalize, rather than deduct currently, part of all of any net direct interest
expense on indebtedness incurred or continued to purchase or carry any debt
security having market discount (unless such Fund makes the election to include
market discount in income currently).
At the close of each quarter of its taxable year, at least 50% of the value of a
Fund's assets must consist of cash or cash items, U.S. Government securities,
securities of other regulated investment companies and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of its
total assets in securities of such issuer and the Fund does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of its total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which the Fund controls and
which are engaged in the same or similar trades or businesses (the "Asset
Diversification Test").
If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the current and accumulated earnings and
profits of the Fund. In such event, such distributions generally will be
eligible for the dividends-received deductions in the case of corporate
shareholders.
If a Fund were to fail to qualify as a RIC for one or more taxable years, the
Fund could then qualify (or requalify) as a RIC for subsequent taxable year only
if the Fund had distributed to the Fund's shareholders a taxable dividend equal
to the full amount of any earnings or profits (less the interest charge
mentioned below, if applicable) attributable to such period. The Fund might also
be required to pay to the U.S. Internal Revenue Service interest on 50% of such
accumulated earnings and profits. In addition, pursuant to the Code and an
interpretative notice issued by the IRS, if the Fund should fail to qualify as a
RIC and should thereafter seek to requalify as a RIC, the Fund may be subject to
tax on the excess (if any) of the fair market of the Fund's assets over the
Fund's basis in such assets, as of the day immediately before the first taxable
year for which the Fund seeks to requalify as a RIC.
If a Fund determines that the Fund will not qualify as a RIC under Subchapter M
of the Code, the Fund will establish procedures to reflect the anticipated tax
liability in the Fund's net asset value.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on regulated investment companies that
fail to distribute in each calendar year an amount equal to 98% of ordinary
taxable income for the calendar year and 98% of capital gain net income for the
one-year period ended on October 31 of such calendar year. The balance of such
income must be distributed during the next calendar year. For the foregoing
purposes, a regulated investment company is treated as having distributed any
amount on which it is subject to income tax for any taxable year ending in such
calendar year.
U.S. Treasury regulations may permit a regulated investment company, in
determining its investment company taxable income and undistributed net capital
for any taxable year, to treat any capital loss incurred after October 31 as if
it had been incurred in the succeeding year. For purposes of the excise tax, a
regulated investment company may: (I) reduce its capital gain net income by the
amount of any net ordinary loss for any calendar year; and (ii) exclude foreign
currency gains and losses incurred after October 31 of any year in determining
the amount of ordinary taxable income for the current calendar year (and,
instead, include such gains and losses in determining ordinary taxable income
for the succeeding calendar year).
Each Fund intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. However, investors should
note that a Fund may in certain circumstances be required to liquidate portfolio
investments to make sufficient distributions to avoid excise tax liability.
Distributions
Each Fund anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes, but they will generally not qualify for the 70% dividends-received
deduction for corporations.
A Fund may either retain or distribute to shareholders the Fund's net capital
gain (i.e., the excess of net long-term capital gain over net short-term capital
loss) for each taxable year. Each Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his or her shares or
whether such gain was recognized by the Fund prior to the date on which the
shareholder acquired his or her shares. Conversely, if a Fund elects to retain
net capital gain, it will be taxed thereon (except to the extent of any
available capital loss carryovers) at the then current applicable corporate tax
rate. If a Fund elects to retain its net capital gain, it is expected the Fund
will also elect to have shareholders treated as having received a distribution
of such gain, with the result that the shareholders will be required to report
their respective shares of such gain on their returns as long-term capital gain,
will receive a refundable tax credit for their allocable share of tax paid by
the Fund on the gain, and will increase the tax basis for their shares by an
amount equal to the deemed distribution less the tax credit.
Investors should be careful to consider the tax implications of purchasing
shares just prior to the next dividend date of any ordinary income dividend or
capital gain dividend. Those purchasing just prior to an ordinary income
dividend or capital gain dividend will be taxed on the entire amount of the
dividend received, even though the net asset value per share on the date of such
purchase reflected the amount of such dividend.
Distributions by a Fund that do not constitute ordinary income dividends or
capital gain dividends will be treated as a return of capital to the extent of
(and will reduce) the shareholder's tax basis in his or her shares; any excess
will be treated as gain from the sale of his or her shares, as discussed below.
Distributions by a Fund will be treated in the manner described above regardless
of whether such distributions are paid in cash or reinvested in additional
shares of the Fund. Shareholders receiving a distribution in the form of
additional shares will be treated as receiving a distribution in an amount equal
to the fair market value of the shares received, determined as of the
reinvestment date. Ordinarily, shareholders are required to take distributions
by a Fund into account in the year in which the distributions are made. However,
distributions declared in October, November or December of any year and payable
to shareholders of record on a specified date in such month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31, of
such calendar year if such distributions are actually made in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
Sale or Redemption of Fund Shares
A shareholder will recognize gain or loss on the sale or redemption of shares in
an amount equal to the difference between the proceeds of the sale or redemption
and the shareholder's adjusted tax basis in the shares. In general, any gain or
loss arising from (or treated as arising from) the sale or redemption of shares
of a Fund will be considered capital gain or loss and will be long-term capital
gain or loss if the shares were held for longer than 18 months. However, any
capital loss arising from the sale or redemption of shares held for six months
or less will be disallowed to the extent of the amount of exempt-interest
dividends received on such shares and (to the extent not disallowed) will be
treated as long-term capital loss to the extent of the amount of capital gain
dividends received on such shares. For this purpose, special holding period
rules provided in Code Section 246(c)(3) and (4) generally will apply in
determining the holding period of shares. For shareholders who are individuals,
long term capital gains (those arising from sales of assets held for more than
18 months) are currently taxed at rates of 10-20%; mid-term gains (those arising
from sales of assets for more than 12 months) are currently taxed at the same
rate as the individual's ordinary income, subject to a maximum rate of 28
percent and the deduction of capital losses is subject to limitation. Each
January, the Fund will provide to each investor and to the IRS a statement
showing the tax characterization of distributions paid during the prior year.
Backup Withholding
Each Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (i) who has provided
either an incorrect tax identification number or no number at all, (ii) who is
subject to backup withholding by the Internal Revenue Service for failure to
report the receipt of interest or dividend income properly, or (iii) who has
failed to certify to the Fund that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient." Each Fund also reserves
the right to close accounts that fail to provide a certified tax identification
number, by redeeming such accounts in full at the current net asset value.
Foreign Shareholders
The U.S. federal income taxation of a shareholder who, as to the United States,
is a nonresident alien individual, foreign trust or estate, foreign corporation,
or foreign partnership ("foreign shareholder") depends on whether the income for
a Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by the foreign shareholder, ordinary income dividends will
be subject to U.S. withholding tax at the rate of 30% (or lower treaty rate, if
applicable) upon the gross amount of the dividend. Such foreign shareholders
generally would be exempt from U.S. federal income tax on gains realized on the
sale of shares of the Fund and on capital gain dividends and amounts retained by
the Fund that are designated as undistributed capital gains.
If the income from a Fund is effectively connected with a U.S. trade or business
carried on by the foreign shareholder, then ordinary income dividends, capital
gain dividends, and any gains realized upon the sale of shares of the Fund will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
and residents or domestic corporations.
In the case of foreign non-corporate shareholders, a Fund may be required to
withhold U.S. federal income tax at a rate of 20% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may differ from those described herein. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Funds, including the
applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and capital gain
dividends from regulated investment companies often differ from the rules for
U.S. federal income taxation described above. Shareholders are urged to consult
their tax advisers as to the consequences of these and other state and local tax
rules affecting investments in the Funds.
OTHER INFORMATION
Organization of the Trust
The Trust is an open-end management investment company organized as a Delaware
business trust on July 23, 1996. The Trust has authorized capital of an
unlimited number of shares of beneficial interest in the Trust. Shares may be
issued in one or more series of shares, and each series may be issued in one or
more classes of shares. Presently, each Fund represents a separate series of
shares. The Trust may establish additional series or classes in the future.
The assets of the Trust received for the sale of shares of a Fund and all
income, earnings, profits, and proceeds thereof, subject only to the rights of
creditors, are allocated to such Fund, and constitute the underlying assets of
such Fund. The underlying assets of a Fund are accounted for separately on the
books of the Trust, and are to be charged with the liabilities with respect to
such Fund and with a share of the general expenses of the Trust. Expenses with
respect to the Trust are to be allocated between the Funds in a manner deemed to
be fair and equitable by the Board of Trustees. In the event of dissolution or
liquidation of a Fund, the Board of Trustees will distribute the remaining
proceeds or assets of the Fund ratably among its shareholders.
Shareholder and Trustee Liability
Shareholders of a business trust such as the Trust may, under certain
circumstance, be held personally liable for the obligations of the trust. The
Declaration of Trust provides that the Trust shall not have any claim against
shareholders except for the payment of the purchase price of shares and requires
that every note, bond, contract or other undertaking entered into or executed by
the Trust or the trustees shall include a provision limiting the obligations
created thereby to the Trust and its assets. The Declaration of Trust provides
for indemnification out of each Fund's assets of any shareholders held
personally liable for the obligations of the Fund. The Declaration of Trust also
provides that each Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. In addition, under Delaware law, shareholders of the Funds
are entitled to the same limitation of personal liability extended to
stockholders of Delaware corporations. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations. In view of the
above, the risk of personal liability to shareholders is remote.
The Declaration of Trust further provides that the trustees will not be liable
for any neglect or wrongdoing, but nothing in the Declaration of Trust protects
the trustees against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
Voting Rights
The shares of the Funds have no preemptive or conversion rights. Voting and
dividends rights, the right or redemption, and exchange privileges are described
in the Prospectus. Shares are fully paid and nonassessable, except as set forth
under "Shareholder and Trustee Liability" above. Shareholders representing 10%
or more of the Trust or any Fund may, as set forth in the Declaration of Trust,
call meetings of the Trust or a Fund for any purpose related to the Trust or
Fund, as the case may be, including in the case of a meeting of the entire
Trust, the purpose of voting on removal of one or more trustees. The Trust or
any Fund may be terminated upon the sale of its assets to another investment
company (as defined in the Investment Company Act of 1940, as amended), or upon
liquidation and distribution of its assets, if approved by vote of the holders
of a majority of the outstanding shares of the Trust or the Fund. If not so
terminated, the Trust or the Fund will continue indefinitely.
Custodian
The Bank of New York, One Wall Street, New York, New York 10286, is custodian of
the Funds' assets. The custodian is responsible for the safekeeping of a Fund's
assets and the appointment of the subcustodian banks and clearing agencies. The
custodian takes no part in determining the investment policies of a Fund or in
deciding which securities are purchased or sold by a Fund. However, a Fund may
invest in obligations of the custodian and may purchase securities from or sell
securities to the custodian.
Independent Public Accountant
Deloitte & Touche LLP, 555 17th Street, Suite 3600, Denver, Colorado 80202,
serves as the Funds' independent public accountant. Deloitte & Touche LLP
examines financial statements for the Funds and provides other audit, tax, and
related services.
FINANCIAL STATEMENTS
The Trust's and each Fund's audited financial statements as of October 31, 1997,
together with the notes thereto and the report of Deloitte & Touche LLP are
incorporated by reference to Registrant's Post-Effective Amendment No. 3.
<PAGE>
43
Price Make-up Sheet
Orchard Money Market Fund
Period
Ended Per Share Amount
10/31/97
Undistributed Net Investment Income -
Beginning of Year
0
Dividend Income 0
Ordinary Income 121,136
Operational Expenses (10,409)
--------
Net Investment Income 110,727
Dividend Distribution - End of Year (110,727)
---------
Undistributed Net Investment Income -
End of Year
0
Net Short-Term Realized Gain (Loss) on
Investments - Beginning of Year
0
Net Short-Term Realized Gain (Loss) on
Investments - End of Year
0
Distribution from Net Short-Term Gain
Accumulated Undistributed Net
Short-Term Realized Gain (Loss) on
Investment 0
Net Long-Term Realized Gain (Loss) on
Investments - Beginning of Year
Net Long-Term Realized Gain (Loss) on
Investments - End of Year
0
Distribution from Net Long-Term
Realized Gain
Accumulated Undistributed Net
Long-Term Realized Gain (Loss) on
Investment 0
Net Unrealized Appreciation
(Depreciation) on Investments
0
Capital Stock at Par 3,110,727 1.0000
Additional Paid-in Capital 0 0.0000
------
Net Assets 3,110,727 1.0000
--------- ------
Shares Outstanding 3,110,727
<PAGE>
Price Make-up Sheet
Orchard Preferred Stock Fund
Period
Ended Per Share Amount
10/31/97
Undistributed Net Investment Income -
Beginning of Year
0
Dividend Income 205,885
Ordinary Income 5,953
Operational Expenses (27,297)
--------
Net Investment Income 184,541
Dividend Distribution - End of Year (184,541)
---------
Undistributed Net Investment Income -
End of Year
0
Net Short-Term Realized Gain (Loss) on
Investments - Beginning of Year
(8,998)
Net Short-Term Realized Gain (Loss) on
Investments - End of Year
0
Distribution from Net Short-Term Gain 0
Accumulated Undistributed Net
Short-Term Realized Gain (Loss) on
Investment (8,998) (0.0215)
------- --------
Net Long-Term Realized Gain (Loss) on
Investments - Beginning of Year
0
Net Long-Term Realized Gain (Loss) on
Investments - End of Year
0
Distribution from Net Long-Term 0
Realized Gain
Accumulated Undistributed Net
Long-Term Realized Gain (Loss) on
Investment 0
Net Unrealized Appreciation 66,221 0.1583
(Depreciation) on Investments
Capital Stock at Par 4,184,863 10.0004
Additional Paid-in Capital 0 0.0000
- ------
Net Assets 4,242,086 10.1372
--------- -------
Shares Outstanding 418,466
<PAGE>
Price Make-up Sheet
Orchard Index 500 Fund
Period
Ended Per Share Amount
10/31/97
Undistributed Net Investment Income -
Beginning of Year
0
Dividend Income 266,932
Ordinary Income 2,613
Operational Expenses (53,983)
--------
Net Investment Income 215,562
Dividend Distribution - End of Year (215,562)
---------
Undistributed Net Investment Income -
End of Year
0
Net Short-Term Realized Gain (Loss) on
Investments - Beginning of Year
0
Net Short-Term Realized Gain (Loss) on
Investments - End of Year
(1,000)
Distribution from Net Short-Term Gain 0
Accumulated Undistributed Net
Short-Term Realized Gain (Loss) on
Investment (1,000) (0.0000)
--------
Net Long-Term Realized Gain (Loss) on
Investments - Beginning of Year
0
Net Long-Term Realized Gain (Loss) on
Investments - End of Year
0
Distribution from Net Long-Term 0
Realized Gain
Accumulated Undistributed Net
Long-Term Realized Gain (Loss) on
Investment 0
Net Unrealized Appreciation (13,691,428) (0.3248)
(Depreciation) on Investments
Capital Stock at Par 506,558,760 12.0184
Additional Paid-in Capital 0 0.0000
- ------
Net Assets 492,866,332 11.6936
----------- -------
Shares Outstanding 42,148,295
<PAGE>
46
<PAGE>
Price Make-up Sheet
Orchard Index 600 Fund
Period
Ended Per Share Amount
10/31/97
Undistributed Net Investment Income -
Beginning of Year
0
Dividend Income 29,963
Ordinary Income 2,554
Operational Expenses (21,804)
--------
Net Investment Income 10,713
Dividend Distribution - End of Year (10,713)
--------
Undistributed Net Investment Income -
End of Year
0
Net Short-Term Realized Gain (Loss) on
Investments - Beginning of Year
0
Net Short-Term Realized Gain (Loss) on
Investments - End of Year
147,248
Distribution from Net Short-Term Gain 0
Accumulated Undistributed Net
Short-Term Realized Gain (Loss) on
Investment 147,248 0.3262
------- ------
Net Long-Term Realized Gain (Loss) on
Investments - Beginning of Year
0
Net Long-Term Realized Gain (Loss) on
Investments - End of Year
0
Distribution from Net Long-Term 0
Realized Gain
Accumulated Undistributed Net
Long-Term Realized Gain (Loss) on
Investment 0
Net Unrealized Appreciation 807,573 1.7893
(Depreciation) on Investments
Capital Stock at Par 4,515,098 10.0036
Additional Paid-in Capital 0 0.0000
- ------
Net Assets 5,469,919 12.1191
--------- -------
Shares Outstanding 451,349
<PAGE>
Price Make-up Sheet
Orchard Index Pacific Fund
Period
Ended Per Share Amount
10/31/97
Undistributed Net Investment Income -
Beginning of Year
0
Dividend Income 245,002
Ordinary Income 78,232
Operational Expenses (238,499)
---------
Net Investment Income 84,735
Dividend Distribution - End of Year (84,735)
--------
Undistributed Net Investment Income -
End of Year
0
Net Short-Term Realized Gain (Loss) on
Investments - Beginning of Year
0
Net Short-Term Realized Gain (Loss) on
Investments - End of Year
(1)
Distribution from Net Short-Term Gain 0
Accumulated Undistributed Net
Short-Term Realized Gain (Loss) on
Investment (1)
Net Long-Term Realized Gain (Loss) on
Investments - Beginning of Year
0
Net Long-Term Realized Gain (Loss) on
Investments - End of Year
0
Distribution from Net Long-Term 0
Realized Gain
Accumulated Undistributed Net
Long-Term Realized Gain (Loss) on
Investment 0
Net Unrealized Appreciation (11,498,520) (2.2113)
(Depreciation) on Investments
Capital Stock at Par 59,943,452 11.5280
Additional Paid-in Capital 0 0.0000
- ------
Net Assets 48,444,931 9.3167
---------- - ------
Shares Outstanding 5,199,803
<PAGE>
Price Make-up Sheet
Orchard Index European Fund
Period
Ended Per Share Amount
10/31/97
Undistributed Net Investment Income -
Beginning of Year
0
Dividend Income 393,856
Ordinary Income 52,427
Operational Expenses (263,126)
---------
Net Investment Income 183,157
Dividend Distribution - End of Year (183,157)
---------
Undistributed Net Investment Income -
End of Year
0
Net Short-Term Realized Gain (Loss) on
Investments - Beginning of Year
0
Net Short-Term Realized Gain (Loss) on
Investments - End of Year
8,353
Distribution from Net Short-Term Gain 0
Accumulated Undistributed Net
Short-Term Realized Gain (Loss) on
Investment 8,353 0.0016
----- - ------
Net Long-Term Realized Gain (Loss) on
Investments - Beginning of Year
0
Net Long-Term Realized Gain (Loss) on
Investments - End of Year
0
Distribution from Net Long-Term 0
Realized Gain
Accumulated Undistributed Net
Long-Term Realized Gain (Loss) on
Investment 0
Net Unrealized Appreciation 1,330,040 0.2486
(Depreciation) on Investments
Capital Stock at Par 60,809,185 11.3645
Additional Paid-in Capital 0 0.0000
- ------
Net Assets 62,147,578 11.6147
---------- -------
Shares Outstanding 5,350,769
<PAGE>
5050
APPENDIX
Corporate Bond Ratings by Moody's Investors Service, Inc.
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge". Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class. B - Bonds where are rated B generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Corporate Bond Ratings by Standard & Poor's Corporation
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity for bonds rated BBB than for bonds in the A category.
BB, B, CCC, and CC - Standard & Poor's describes the BB, B, CCC and CC rated
issues together with issues rated CCC and CC. Debt in these categories is
regarded on balance as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Commercial Paper Ratings by Moody's Investors Service, Inc.
Prime-1 - Commercial Paper issuers rated Prime-1 are judged to be of the best
quality. Their short-term debt obligations carry the smallest degree of
investment risk. Margins of support for current indebtedness are large or stable
with cash flow and asset protection well assured. Current liquidity provides
ample coverage of near-term liabilities and unused alternative financing
arrangements are generally available. While protective elements may change over
the intermediate or longer term, such changes are most unlikely to impair the
fundamentally strong position of short-term obligations.
Prime-2 - Issuers in the Commercial Paper market rated Prime-2 are high quality.
Protection for short-term holders is assured with liquidity and value of current
assets as well as cash generation in sound relationship to current indebtedness.
They are rated lower than the best commercial paper issuers because margins of
protection may not be as large or because fluctuations of protective elements
over the near or immediate term may be of greater amplitude. Temporary increases
in relative short and overall debt load may occur. Alternative means of
financing remain assured.
Prime-3 - Issuers in the Commercial Paper market rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earning and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Commercial Paper Ratings by Standard & Poor's Corporation
A - Issuers assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issuers in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2 - Capacity for timely payment for issuers with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated "A-1".
A-3 - Issuers carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designation.
<PAGE>
PART C
OTHER INFORMATION
<PAGE>
Item 24. Financial Statements and Exhibits.
(a) Financial Statements to be filed by amendment.
(b) Exhibits
Items (b)(1)-(2) and (b)(4) are incorporated by reference to
Registrant's Registration Statement dated July 30, 1996.
Item (b)(5) will be filed by amendment.
Items (b)(6), (b)(8)-(10) and (b)(13) are incorporated by reference
to Registrant's Pre-Effective Amendment No. 2 to its Registration
Statement dated January 28, 1997.
Items (b)(3), (b)(7), (b)(12) and (b)(14)-(18) are not applicable.
(11) Written Consent of Deloitte & Touche LLP,
Independent Auditors for the Trust.
Item 25. Persons Controlled by or under Common Control with Registrant.
See page C-2.
Item 26. Number of Holders of Securities.
Number of Record Holders
Title of Class as of October 31, 1997
-------------- -------------------------
Orchard Money Market Fund 1
Orchard Preferred Stock Fund 4
Orchard Index 600 Fund 10
Orchard Index 500 Fund 4
Orchard Index Pacific Fund 4
Orchard Index European Fund 6
Item 27. Indemnification.
Article X of the Declaration of Trust sets forth the reasonable and fair
means for determining whether indemnification shall be provided to any past or
present trustee or officer of the Trust. It states that the Registrant shall
indemnify any present or past trustee or officer to the fullest extent permitted
by law against liability and all expenses reasonably incurred by him or her in
connection with any claim, action suit or proceeding in
<PAGE>
ORGANIZATIONAL CHART
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Power Corporation of Canada
100% - Marquette Communications Corporation 100% - 171263 Canada Inc.
68.1% - Power Financial Corporation
77% - Great-West Lifeco Inc.
99.5% - The Great-West Life Assurance Company
100% - Great-West Life & Annuity Insurance
Company
100% - GW Capital Management, LLC
100% Orchard Capital Management, LLC
100% - Financial Administrative Services
Corporation
100% - One Corporation
100% - One Health Plan of Illinois,
Inc.
100% - One Health Plan of Texas,
Inc.
100% - One Health Plan of
California, Inc.
100% - One Health Plan of Colorado,
Inc.
100% - One Health Plan of Georgia,
Inc.
100% - One Health Plan of North
Carolina, Inc.
100% - One Health Plan of
Washington, Inc.
100% - One Health Plan of Ohio, Inc.
100% - One Health Plan of
Tennessee, Inc.
100% - One Health Plan of Oregon,
Inc.
100% - One Health Plan of Florida,
Inc.
100% - One Health Plan of Indiana,
Inc.
100% - One Health Plan of
Massachusetts, Inc.
100% - One Orchard Equities, Inc.
100% - Great-West Benefit Services, Inc.
13% - Private Healthcare Systems,
Inc.
100% - Benefits Communication
Corporation 100% - BenefitsCorp
Equities, Inc.
100% - Greenwood Property Corporation
95% - Maxim Series Fund, Inc.*
100% - GWL Properties Inc.
100% - Great-West Realty
Investments, Inc.
50% - Westkin Properties Ltd.
100% - Confed Admin Services, Inc.
92%** - Orchard Series Fund
</TABLE>
* 5% New England Life Insurance Company
** 8% New England Life Insurance Company
<PAGE>
which he or she is involved by virtue of his or her service as a trustee, an
officer, or both. Additionally, amounts paid or incurred in settlement of such
matters are covered by this indemnification. Indemnification will not be
provided in certain circumstances, however. These include instances of willful
misfeasance, bad faith, gross negligence, and reckless disregard of the duties
involved in the conduct of the particular office involved.
Item 28. Business and Other Connections of Investment Adviser.
Registrant's investment adviser, GW Capital Management, LLC ("GW Capital
Management"), is a wholly-owned subsidiary of Great-West Life & Annuity
Insurance Company ("GWL&A"), which is a wholly-owned subsidiary of The
Great-West Life Assurance Company. GW Capital Management provides investment
advisory services to various unregistered separate accounts of GWL&A and to
Great-West Variable Annuity Account A and the Maxim Series Fund, Inc., which are
registered investment companies. The directors and officers of GW Capital
Management have held, during the past two fiscal years, the following positions
of a substantial nature.
Name Position(s)
- ---- -----------
John T. Hughes Director, Chairman of the Board and President,
GW Capital Management; Senior Vice President and Chief
Investment Officer (U.S. Operations), Great-West; Senior
Vice President, Chief Investment Officer, GWL&A;
Chairman of the Board, GWL Properties Inc.
Wayne Hoffmann Director, GW Capital Management; Vice President,
Investments, Great-West and GWL&A.
Mark S. Hollen Director, GW Capital Management; Vice President,
Financial Services, Great-West and GWL&A; Chief
Operating Officer, Financial Administrative Services
Corporation.
James M. Desmond Vice President, GW Capital Management; Assistant Vice
President, Investments, Great-West and GWL&A.
David G. McLeod Treasurer, GW Capital Management; Assistant Vice
President, Investment Administration, Great-West,
GWL&A and Financial Administrative Services
Corporation.
Beverly A. Byrne Secretary, GW Capital Management; Assistant Counsel,
Great-West; Assistant Counsel and Assistant
Secretary, GWL&A; Assistant Counsel and Secretary,
Financial Administrative Services Corporation;
Secretary, One Orchard Equities, Inc., Confed Admin
Services, Inc., BenefitsCorp Equities, Inc.,
Great-West Variable Annuity Account A, and Maxim
Series Fund, Inc.; Assistant Secretary, Benefits
Communication Corporation, One Corporation and
Great-West Benefit Services, Inc.
Item 29. Principal Underwriter.
(a) Not applicable.
(b) The principal business address of the directors
and officers of One Orchard Equities, Inc. named
below is 8515 East Orchard Road, Englewood,
Colorado 80111.
Positions and Offices Positions and Officers
Name with Underwriter with Registrant
- ------ --------------------- --------------------
Steve Miller Director and President None
Stan Kenyon Director None
Alan D. MacLennan Director None
Glen R. Derback Treasurer Treasurer
Beverly A. Byrne Secretary Secretary
(c) Not applicable.
Item 30.Location of Accounts and Records.
All accounts, books, and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules promulgated thereunder
are maintained in the physical possession of: Orchard Series Fund, 8515 East
Orchard Road, Englewood, Colorado 80111; GW Capital Management, LLC, 8515 East
Orchard Road, Englewood, Colorado 80111; or Financial Administrative Services
Corporation, 8515 East Orchard Road, Englewood, Colorado 80111.
<PAGE>
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
(d) Registrant undertakes to comply with Section 16(c) of the Investment
Company Act of 1940 as it relates to the assistance to be rendered
to shareholders with respect to the calling of a meeting to replace
a trustee.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 4 to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized in the City of Englewood in the State of
Colorado on the day of , 1998.
ORCHARD SERIES FUND
/s/ D.L. Wooden
D.L. Wooden
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 4 to the Registration Statement has been signed by the following
persons in the capacities and on the date indicated.
Signature Title Date
/s/ D.L. Wooden President 4/1/98
D.L. Wooden and Trustee
/s/ D.G. McLeod Treasurer 4/1/98
D.G. McLeod
/s/ R.P. Koeppe* Trustee 4/1/98
R.P. Koeppe
/s/ R. Jennings* Trustee 4/1/98
R. Jennings
<PAGE>
Signature Title Date
/s/ J.D. Motz Trustee 4/1/98
J.D. Motz
/s/ S.Zisman Trustee 4/1/98
S. Zisman
*By: /s/ Beverly A. Byrne
B.A. Byrne
Attorney-in-fact pursuant to Powers of Attorney filed under
Post-Effective Amendment No. 1 to the Registration Statement
<PAGE>
EXHIBIT INDEX
Exhibit Description
24 Powers of Attorney*
27 Financial Data Schedule+
99.24(b)(1) Declaration of Trust**
99.24(b)(2) Bylaws**
99.24(b)(5) Form of Investment Advisory Agreement+
99.24(b)(6) Form of Principal Underwriting Agreement**
99.24(b)(8) Form of Custodian Agreement**
99.24(b)(9) Form of Transfer Agency Agreement**
99.24(b)(10) Opinion of R.B. Lurie**
99.24(b)(11) Consent of Deloitte & Touche LLP#
99.24(b)(13) Form of Subscription Agreement.**
* Filed with Post-Effective Amendment No. 1.
+ Filed with Post-Effective Amendment. No. 3.
++ Filed with this Post-Effective Amendment No. 2.
** Filed with Pre-Effective Amendment No. 2.
# To be filed by amendment.
