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ORBITEX GROUP OF FUNDS
Orbitex Growth Fund
Orbitex Info-Tech & Communications Fund
Orbitex Strategic Natural Resources Fund
Orbitex Focus 30 Fund
Orbitex Health & Biotechnology Fund
Orbitex Cash Reserves Fund
STATEMENT OF ADDITIONAL INFORMATION
July 12, 1999
as supplemented
December 17, 1999
This Statement of Additional Information is not a Prospectus, but is an
incorporated part of the Prospectuses and should be read in conjunction with
the Prospectuses of the Orbitex Group of Funds (the "Trust") dated July 12,
1999. To obtain a free copy of the Prospectuses or an annual report, please
call the Trust at 1-888-ORBITEX.
TABLE OF CONTENTS
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ITEM PAGE
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General Information and History 2
Investment Restrictions 2
Description of Securities, Other Investment Policies and Risk Considerations 4
Management of the Trust
Principal Holders of Securities
Investment Management and Other Services
Administrator
Custodian
Transfer Agent Services
Distribution of Shares
Brokerage Allocation and Other Practices
Purchase and Redemption of Securities Being Offered
Shareholder Services
Determination of Net Asset Value
Taxes
Organization of the Trust
Performance Information About the Funds
Independent Accountants
Legal Matters
Financial Statements
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For more information on any Orbitex Fund, including charges and expenses, call
Orbitex at the number indicated above for a free prospectus. Read it carefully
before you invest or send money.
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GENERAL INFORMATION AND HISTORY
The Trust is an open-end management investment company, commonly known as
"mutual fund," and sells and redeems shares every day that it is open for
business. The Trust was organized as a Delaware business trust by a Declaration
of Trust dated December 13, 1996 and is registered with the Securities and
Exchange Commission (the "SEC") under the Investment Company Act of 1940 (the
"1940 Act").
The Trust currently consists of six portfolios: Orbitex Growth Fund ("Growth
Fund"), Orbitex Info-Tech & Communications Fund ("Info-Tech & Communications
Fund"), Orbitex Strategic Natural Resources Fund ("Strategic Natural Resources
Fund"), Orbitex Focus 30 Fund ("Focus 30 Fund"), Orbitex Health &
Biotechnology Fund ("Health & Biotechnology Fund") and Orbitex Cash Reserves
Fund ("Cash Reserves Fund") (individually a "Fund" and collectively the
"Funds"). Each Fund other than the Health & Biotechnology Fund is diversified,
and represents a separate series of beneficial interest in the Trust having
different investment objectives, investment programs, policies and restrictions.
Each Fund, except for the Focus 30 Fund offers two classes of shares: a
front-end load Class A, a contingent deferred sales charge Class B. The
Focus 30 Fund offers three classes of shares: Class A, Class B and a no-load
Class D.
Each Fund is managed by Orbitex Management, Inc. (the "Adviser"), which directs
the day-to-day operations and the investment of assets of each Fund. Harris
Investment Management, Inc. serves as the subadviser to the Orbitex Cash
Reserves Fund (the "Sub-Adviser"). American Data Services, Inc. ("ADS") is the
administrator for each of the Funds, and the accounting agent, transfer agent
and dividend disbursing agent for Focus 30 Fund, Health & Biotechnology
Fund, and the Cash Reserves Fund. State Street Bank and Trust Company ("State
Street") is the sub-administrator, accounting agent, transfer agent and dividend
disbursing agent for the Growth Fund, the Info-Tech & Communications Fund and
the Strategic Natural Resources Fund. State Street is the custodian for each of
the Funds. Funds Distributor, Inc. (the "Distributor") distributes the shares
of the Funds.
INVESTMENT RESTRICTIONS
The following policies and limitations supplement those set forth in the
Prospectuses. Unless otherwise noted, whenever a policy or limitation states a
maximum percentage of a Fund's assets that may be invested in any security or
other asset, or set forth a policy regarding quality standards, such standard or
percentage limitations will be determined immediately after and as a result of
the Fund's acquisition of such security or other asset. Accordingly, any
subsequent change in values, net assets or other circumstances will not be
considered when determining whether the investment complies with a Fund's
investment policies and limitations.
A Fund's fundamental investment policies and limitations may be changed only
with the consent of a "majority of the outstanding voting securities" of the
particular Fund. As used in this Statement of Additional Information, the term
"majority of the outstanding voting securities" means the lesser of (1) 67% of
the shares of a Fund present at a meeting where the holders of more than 50% of
the outstanding shares of a Fund are present in person or by proxy, or (2) more
than 50% of the outstanding shares of a Fund. Shares of each Fund will be voted
separately on matters affecting only that Fund, including approval of changes in
the fundamental investment policies of that Fund. Except for the fundamental
investment limitations listed below, the investment policies and limitations
described in this Statement of Additional Information are not fundamental and
may be changed without shareholder approval.
THE FOLLOWING ARE THE FUNDS' FUNDAMENTAL INVESTMENT LIMITATIONS. A FUND WILL
NOT:
(1) Purchase securities on margin, except a Fund may make margin deposits
in connection with permissible options and futures transactions subject to
(5) below and may obtain short-term credits as may be necessary for
clearance of transactions.
(2) Issue any class of securities senior to any other class of securities
except in compliance with the 1940 Act.
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(3) Borrow money for investment purposes in excess of 33-1/3% of the value
of its total assets, including any amount borrowed less its liabilities not
including any such borrowings. Any borrowings which come to exceed this
amount will be reduced in accordance with applicable law. Additionally,
each Fund may borrow up to 5% of its total assets (not including the amount
borrowed) for temporary or emergency purposes.
(4) Purchase or sell real estate, or invest in real estate limited
partnerships, except each Fund may, as appropriate and consistent with its
respective investment objective, policies and other investment
restrictions, buy securities of issuers that engage in real estate
operations and securities that are secured by interests in real estate
(including shares of real estate mortgage investment conduits, mortgage
pass-through securities, mortgage-backed securities and collateralized
mortgage obligations) and may hold and sell real estate acquired as a
result of ownership of such securities.
(5) Purchase or sell physical commodities or contracts thereon, except that
each Fund may enter into financial futures contracts and options thereon.
(6) Underwrite securities issued by other persons, except to the extent
that a Fund may be deemed to be an underwriter, within the meaning of the
Securities Act of 1933, in connection with the purchase of securities
directly from an issuer in accordance with each Fund's investment
objective, policies and restrictions.
(7) Make loans, except that each Fund in accordance with that Fund's
investment objective, policies and restrictions may: (i) invest in all or a
portion of an issue of publicly issued or privately placed bonds,
debentures, notes, other debt securities and loan participation interests
for investment purposes; (ii) purchase money market securities and enter
into repurchase agreements; and (iii) lend its portfolio securities in an
amount not exceeding one-third of the value of that Fund's total assets.
(8) Other than the Health & Biotechnology Fund, make an investment unless
75% of the value of that Fund's total assets is represented by cash, cash
items, U.S. Government securities, securities of other investment companies
and "other securities." For purposes of this restriction, the term "other
securities" means securities as to which the Fund invests no more than 5%
of the value of its total assets in any one issuer or purchases no more
than 10% of the outstanding voting securities of any one issuer. As a
matter of operating policy, each Fund will not consider repurchase
agreements to be subject to the above-stated 5% limitation if all of the
collateral underlying the repurchase agreements are U.S. Government
securities and such repurchase agreements are fully collateralized.
(9) Invest 25% or more of the value of its total assets in any one
industry, except that: (i) the Strategic Natural Resources Fund will invest
at least 25% of its total assets in securities of companies in natural
resource industries and industries supportive to natural resource
industries; (ii) the Info-Tech & Communications Fund will invest at least
25% of its total assets in the securities of companies in the
communications, information and related technology industries; and (iii)
the Health & Biotechnology Fund will invest at least 25% of its total
assets in the securities of companies in health, biotechnology and related
industries. This limitation (9) does not apply to securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or
repurchase agreements secured by U.S. Government securities.
THE FOLLOWING RESTRICTIONS ARE DESIGNATED AS NON-FUNDAMENTAL AND MAY BE CHANGED
BY THE BOARD OF TRUSTEES OF THE TRUST WITHOUT THE APPROVAL OF SHAREHOLDERS. A
FUND MAY NOT:
(1) Invest in portfolio companies for the purpose of acquiring or
exercising control of such companies.
(2) Invest in the securities of other investment companies except in
compliance with the 1940 Act.
(3) Invest in puts, calls, straddles, spreads or any combination thereof,
except to the extent permitted by the Prospectus and Statement of
Additional Information.
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(4) Purchase or otherwise acquire any security or invest in a repurchase
agreement if, as a result, more than 15% (or, in the case of the Cash
Reserves Fund, 10%) of the net assets of the Fund would be invested in
securities that are illiquid or not readily marketable, including
repurchase agreements maturing in more than seven days and non-negotiable
fixed time deposits with maturities over seven days. Each Fund may invest
without limitation in restricted securities provided such securities are
considered to be liquid. If, through a change in values, net assets or
other circumstances, a Fund were in a position where more than 15% of its
net assets was invested in illiquid securities, it would seek to take
appropriate steps to protect liquidity.
(5) Mortgage, pledge, or hypothecate in any other manner, or transfer as
security for indebtedness any security owned by a Fund, except as may be
necessary in connection with permissible borrowings and then only if such
mortgaging, pledging or hypothecating does not exceed 33 1/3% of such
Fund's total assets. Collateral arrangements with respect to margin, option
and other risk management and when-issued and forward commitment
transactions are not deemed to be pledges or other encumbrances for
purposes of this restriction.
With respect to investment restriction No. 4 above, the Adviser, as a matter of
policy, under normal circumstances, will limit the investment of the Info-Tech
and Communications Fund and the Health & Biotechnology Fund to a maximum of 5%
of the total assets (at the time of purchase) in private, early stage
communications or health and biotechnology companies, respectively.
DESCRIPTION OF SECURITIES, OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
The following pages contain more detailed information about the types of
instruments in which a Fund may invest, strategies the Adviser (or Sub-Adviser,
as the case may be) may employ in pursuit of a Fund's investment objective and
a summary of related risks. The Adviser (or Sub-Adviser, as the case may be)
may not buy all of these instruments or use all of these techniques unless it
believes that doing so will help a Fund achieve its investment objectives.
ADJUSTABLE RATE SECURITIES (ALL FUNDS). Adjustable rate securities (i.e.,
variable rate and floating rate instruments) are securities that have interest
rates that are adjusted periodically, according to a set formula. The maturity
of some adjustable rate securities may be shortened under certain special
conditions described more fully below.
Variable rate instruments are obligations that provide for the adjustment of
their interest rates on predetermined dates or whenever a specific interest rate
changes. A variable rate instrument whose principal amount is scheduled to be
paid in 397 days or less is considered to have a maturity equal to the period
remaining until the next readjustment of the interest rate. Many variable rate
instruments are subject to demand features which entitle the purchaser to resell
such securities to the issuer or another designated party, either (1) at any
time upon notice of usually 397 days or less, or (2) at specified intervals, not
exceeding 397 days, and upon 30 days notice. A variable rate instrument subject
to a demand feature is considered to have a maturity equal to the longer of the
period remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand, if final
maturity exceeds 397 days or the shorter of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand if final maturity is within 397 days.
Floating rate instruments have interest rate reset provisions similar to those
for variable rate instruments and may be subject to demand features like those
for variable rate instruments. The interest rate is adjusted, periodically
(e.g., daily, monthly, semi-annually), to the prevailing interest rate in the
marketplace. The interest rate on floating rate securities is ordinarily
determined by reference to the 90-day U.S. Treasury bill rate, the rate of
return on commercial paper or bank certificates of deposit or an index of
short-term interest rates. The maturity of a floating
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rate instrument is considered to be the period remaining until the principal
amount can be recovered through demand.
BELOW-INVESTMENT-GRADE DEBT SECURITIES (ALL FUNDS EXCEPT FOCUS 30 FUND AND
CASH RESERVES FUND). Each Fund may invest up to 35% of its net assets in debt
securities that are rated below "investment grade" by Standard and Poor's Rating
Group ("S&P") or Moody's Investors Services, Inc. ("Moody's") or, if unrated,
are deemed by the Adviser to be of comparable quality. Securities rated less
than Baa by Moody's or BBB by S&P are classified as below investment grade
securities and are commonly referred to as "junk bonds" or high yield, high risk
securities. Debt rated BB, B, CCC, CC and C and debt rated Ba, B, Caa, Ca, C is
regarded by S&P and Moody's, respectively, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. For S&P, BB indicates
the lowest degree of speculation and C the highest degree of speculation. For
Moody's, Ba indicates the lowest degree of speculation and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. Similarly, debt rated Ba or BB and below
is regarded by the relevant rating agency as speculative. Debt rated C by
Moody's or S&P is the lowest rated debt that is not in default as to principal
or interest, and such issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Such securities are
also generally considered to be subject to greater risk than securities with
higher ratings with regard to a deterioration of general economic conditions.
Excerpts from S&P's and Moody's descriptions of their bond ratings are contained
in the Appendix to this SAI.
Ratings of debt securities represent the rating agency's opinion regarding their
quality and are not a guarantee of quality. Rating agencies attempt to evaluate
the safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value. Also, since rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, the Adviser
and/or Sub-Advisers continuously monitor the issuers of high yield bonds in the
portfolios of the Funds to determine if the issuers will have sufficient cash
flows and profits to meet required principal and interest payments. The
achievement of a Fund's investment objective may be more dependent on the
Adviser's or Sub-Adviser's own credit analysis than might be the case for a fund
which invests in higher quality bonds. A Fund may retain a security whose rating
has been changed. The market values of lower quality debt securities tend to
reflect individual developments of the issuer to a greater extent than do higher
quality securities, which react primarily to fluctuations in the general level
of interest rates. In addition, lower quality debt securities tend to bemore
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have available to them more traditional methods of
financing. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower quality securities may
experience financial stress. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service debt obligations may also be adversely affected by specific
developments affecting the issuer, such as the issuer's inability to meet
specific projected business forecasts or the unavailability of additional
financing. Similarly, certain emerging market governments that issue lower
quality debt securities are among the largest debtors to commercial banks,
foreign governments and supranational organizations such as the World Bank and
may not be able or willing to make principal and/or interest repayments as they
come due. The risk of loss due to default by the issuer is significantly greater
for the holders of lower quality securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Lower quality debt securities frequently have call or buy-back features which
would permit an issuer to call or repurchase the security from a Fund. In
addition, a Fund may have difficulty disposing of lower quality securities
because they may have a thin trading market. There may be no established retail
secondary market for many of these securities, and each Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. The lack of a liquid secondary
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market also may have an adverse impact on market prices of such instruments and
may make it more difficult for a Fund to obtain accurate market quotations for
purposes of valuing the Fund's portfolios. A Fund may also acquire lower quality
debt securities during an initial underwriting or which are sold without
registration under applicable securities laws. Such securities involve special
considerations and risks.
In addition to the foregoing, factors that could have an adverse effect on the
market value of lower quality debt securities in which the Funds may invest,
include: (i) potential adverse publicity, (ii) heightened sensitivity to general
economic or political conditions and (iii) the likely adverse impact of a major
economic recession. A Fund may also incur additional expenses to the extent the
Fund is required to seek recovery upon a default in the payment of principal or
interest on its portfolio holdings, and the Fund may have limited legal recourse
in the event of a default. Debt securities issued by governments in emerging
markets can differ from debt obligations issued by private entities in that
remedies for defaults generally must be pursued in the courts of the defaulting
government, and legal recourse is therefore somewhat diminished. Political
conditions, in terms of a government's willingness to meet the terms of its debt
obligations, also are of considerable significance. There can be no assurance
that the holders of commercial bank debt may not contest payments to the holders
of debt securities issued by governments in emerging markets in the event of
default by the governments under commercial bank loan agreements. The Adviser
attempts to minimize the speculative risks associated with investments in lower
quality securities through credit analysis and by carefully monitoring current
trends in interest rates, political developments and other factors. Nonetheless,
investors should carefully review the investment objective and policies of the
Fund and consider their ability to assume the investment risks involved before
making an investment. Each Fund may also invest in unrated debt securities.
Unrated debt securities, while not necessarily of lower quality than rated
securities, may not have as broad a market. Because of the size and perceived
demand for an issue, among other factors, certain issuers may decide not to pay
the cost of obtaining a rating for their bonds. The Adviser will analyze the
creitworthiness of the issuer of an unrated security, as well as any financial
institution or other party responsible for payments on the security.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES (ALL FUNDS). Each Fund may
invest in certificates of deposit and bankers' acceptances which are considered
to be short-term money market instruments.
Certificates of deposit are receipts issued by a depository institution in
exchange for the deposit of funds. The issuer agrees to pay the amount deposited
plus interest to the bearer of the receipt on the date specified on the
certificate. The certificate usually can be traded in the secondary market prior
to maturity. Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
COMMERCIAL PAPER (ALL FUNDS). Each Fund may purchase commercial paper.
Commercial paper consists of short-term (usually from 1 to 270 days) unsecured
promissory notes issued by corporations in order to finance their current
operations.
DEALER (OVER-THE-COUNTER) OPTIONS (ALL FUNDS EXCEPT CASH RESERVES FUND). Each
Fund may engage in transactions involving dealer options. Certain risks are
specific to dealer options. While the Fund would look to a clearing corporation
to exercise exchange-traded options, if the Fund were to purchase a dealer
option, it would rely on the dealer from whom it purchased the option to perform
if the option were exercised. Failure by the dealer to do so would result in the
loss of the premium paid by the Fund as well as loss of the expected benefit of
the transaction.
Exchange-traded options generally have a continuous liquid market while dealer
options have none. Consequently, the Fund will generally be able to realize the
value of a dealer option it has purchased only by exercising it or reselling it
to the dealer who issued it. Similarly, when the Fund writes a dealer option, it
generally will be able to close out the option prior to its expiration only by
entering into a closing purchase transaction with the dealer to which the Fund
originally wrote the option. While the Fund will seek to enter into dealer
options only with dealers
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who will agree to and which are expected to be capable of entering into closing
transactions with the Fund, there can be no assurance that the Fund will be able
to liquidate a dealer option at a favorable price at any time prior to
expiration. Until the Fund, as a covered dealer call option writer, is able to
effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) or currencies used as cover until the option
expires or is exercised. In the event of insolvency of the contra party, the
Fund may be unable to liquidate a dealer option. With respect to options written
by the Fund, the inability to enter into a closing transaction may result in
material losses to the Fund. For example, since the Fund must maintain a secured
position with respect to any call option on a security it writes, the Fund may
not sell the assets which it has segregated to secure the position while it is
obligated under the option. This requirement may impair a Fund's ability to sell
portfolio securities or currencies at a time when such sale might be
advantageous.
The Staff of the SEC has taken the position that purchased dealer options and
the assets used to secure the written dealer options are illiquid securities. A
Fund may treat the cover used for written OTC options as liquid if the dealer
agrees that the Fund may repurchase the OTC option it has written for a maximum
price to be calculated by a predetermined formula. In such cases, the OTC option
would be considered illiquid only to the extent the maximum repurchase price
under the formula exceeds the intrinsic value of the option. Accordingly, the
Fund will treat dealer options as subject to the Fund's limitation on
unmarketable securities. If the SEC changes its position on the liquidity of
dealer options, the Fund will change its treatment of such instrument
accordingly.
EXPOSURE TO FOREIGN MARKETS (ALL FUNDS EXCEPT FOCUS 30 FUND AND CASH
RESERVES FUND). Foreign securities, foreign currencies, and securities issued
by U.S. entities with substantial foreign operations may involve significant
risks in addition to the risks inherent in U.S. investments. The value of
securities denominated in foreign currencies, and of dividends and interest paid
with respect to such securities will fluctuate based on the relative strength of
the U.S. dollar.
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There may be less publicly available information about foreign securities and
issuers than is available about domestic securities and issuers. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies. Securities of some foreign companies are less
liquid and their prices may be more volatile than securities of comparable
domestic companies. The Funds' interest and dividends from foreign issuers maybe
subject to non-U.S. withholding taxes, thereby reducing the Funds' net
investment income.
Currency exchange rates may fluctuate significantly over short periods and can
be subject to unpredictable change based on such factors as political
developments and currency controls by foreign governments. Because the Funds may
invest in securities denominated in foreign currencies, they may seek to hedge
foreign currency risks by engaging in foreign currency exchange transactions.
These may include buying or selling foreign currencies on a spot basis, entering
into foreign currency forward contracts, and buying and selling foreign currency
options, foreign currency futures, and options on foreign currency futures. Many
of these activities constitute "derivatives" transactions. See "Derivatives",
above.
Each Fund may invest in issuers domiciled in "emerging markets," those countries
determined by the Adviser to have developing or emerging economies and markets.
Emerging market investing involves risks in addition to those risks involved in
foreign investing. For example, many emerging market countries have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. In addition, economies in emerging markets generally are dependent
heavily upon international trade and, accordingly, have been and continue to be
affected adversely by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. The securities markets of emerging
countries are substantially smaller, less developed, less liquid and more
volatile than the securities markets of the United States and other more
developed countries. Brokerage commissions, custodial services and other costs
relating to investment in foreign markets generally are more expensive than in
the United States, particularly with respect to emerging markets. In addition,
some emerging market countries impose transfer taxes or fees on a capital market
transaction.
Foreign investments involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments,
and may be affected by actions of foreign governments adverse to the
interests of U.S. investors. Such actions may include the possibility of
expropriation or nationalization of assets, confiscatory taxation,
restrictions on U.S. investment or on the ability to repatriate assets or
convert currency into U.S. dollars, or other government intervention. There
is no assurance that the Adviser will be able to anticipate these potential
events or counter their effects. These risks are magnified for investments in
developing countries, which may have relatively unstable governments,
economies based on only a few industries, and securities markets that trade a
small number of securities.
Economies of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the United States. Foreign markets may offer
less protection to investors than U.S. markets. It is anticipated that in most
cases the best available market for foreign securities will be on an exchange or
in over-the-counter markets located outside the United States. Foreign stock
markets, while growing in volume and sophistication, are generally not as
developed as those in the United States, and securities of some foreign issuers
(particularly those located in developing countries) may be less liquid and more
volatile than securities of comparable U.S. issuers. Foreign security trading
practices, including those involving securities settlement where Fund assets may
be released prior to receipt of payment, may result in increased risk in the
event of a failed trade or the insolvency of a foreign broker-dealer, and may
involve substantial delays. In addition, the costs of foreign investing,
including withholding taxes, brokerage commissions and custodial costs, are
generally higher than for U.S. investors. In general, there is less overall
governmental supervision and regulation of securities exchanges, brokers, and
listed companies than in the United States. It may also be difficult to enforce
legal rights in foreign countries. Foreign issuers are generally not bound by
uniform accounting, auditing, and financial reporting requirements and standards
of practice comparable to those applicable to U.S. issuers.
Some foreign securities impose restrictions on transfer within the United States
or to U.S. persons. Although securities subject to such transfer restrictions
may be marketable abroad, they may be less liquid than foreign securities of the
same class that are not subject to such restrictions. American Depository
Receipts (ADRs), as well as other "hybrid" forms of ADRs, including European
Depository Receipts (EDRs) and Global Depository Receipts (GDRs), are
certificates evidencing ownership of shares of a foreign issuer. These
certificates 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 securities at all times and may charge fees for various services,
including forwarding dividends and interest and corporate actions. ADRs are
alternatives to directly purchasing the underlying foreign securities in their
national markets and currencies. However, ADRs continue to be subject to many of
the risks associated with investing directly in foreign securities. These risks
include foreign exchange risk as well as the political and economic risks of the
underlying issuer's country.
Investments in emerging markets can be subject to a number of types of taxes
that vary by country, change frequently, and are sometime defined by custom
rather than written regulation. Emerging countries can tax interest, dividends,
and capital gains through the application of a withholding tax. The local
custodian normally withholds the tax upon receipt of a payment and forwards such
tax payment to the foreign government on behalf of the Fund. Certain foreign
governments can also require a foreign investor to file an income tax return and
pay the local tax through estimated tax payments, or pay with the tax return.
Although not frequently used, some emerging markets have attempted to slow
conversion of their currency by imposing a repatriation tax. Generally, this tax
is applied to amounts which are converted from the foreign currency to the
investor's currency and withdrawn from the local bank account. Transfer taxes or
fees, such as stamp duties, security transfer taxes, and registration and script
fees, are generally imposed by emerging markets as a tax or fee on a capital
market transaction. Each emerging country may impose a tax or fee at a different
point in time as the foreign investor perfects his interest in the securities
acquired in the local market. A stamp duty is generally a tax on the official
recording of a capital market transaction. Payment of such duty is generally a
condition of the transfer of assets and failure to pay such duty can result in a
loss of title to such asset as well as loss of benefit from any corporate
actions. A stamp duty is generally determined based on a percentage of the value
of the transaction conducted and can be charged against the buyer (e.g., Cyprus,
India, Israel, Jordan, Malaysia, Pakistan, and the Philippines), against the
seller (e.g., Argentina, Australia, China, Egypt, Indonesia, Kenya, Portugal,
South Korea, Trinidad, Tobago, and Zimbabwe). Although such a fee does not
generally exceeded 100 basis points, certain emerging markets have assessed a
stamp duty as high as 750 basis points (e.g., Pakistan). A security transfer tax
is similar to a stamp duty and is generally applied to the purchase, sale or
exchange of securities which occur in a particular foreign market. These taxes
are based on the value of the trade and similar to stamp taxes, can be assessed
against the buyer, seller or both. Although the
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securities transfer tax may be assessed in lieu of a stamp duty, such tax can be
assessed in addition to a stamp duty in certain foreign markets (e.g.,
Switzerland, South Korea, Indonesia). Upon purchasing a security in an emerging
market, such security must often be submitted to a registration process in order
to record the purchaser as a legal owner of such security interest. Often
foreign countries will charge a registration or script fee to record the change
in ownership and, where physical securities are issued, issue a new security
certificate. In addition to assessing this fee upon the acquisition of a
security, some markets also assess registration charges upon the registration of
local shares to foreign shares.
FEDERAL TAX TREATMENT OF OPTIONS, FUTURES CONTRACTS AND FORWARD FOREIGN EXCHANGE
CONTRACTS. Each Fund may enter into certain option, futures, and forward foreign
exchange contracts, including options and futures on currencies, which are
Section 1256 contracts and may result in the Fund entering into straddles.
Open Section 1256 contracts at fiscal year end will be considered to have been
closed at the end of the Fund's fiscal year and any gains or losses will be
recognized for tax purposes at that time. Such gains or losses from the normal
closing or settlement of such transactions will be characterized as 60%
long-term capital gain or loss and 40% short-term capital gain or loss
regardless of the holding period of the instrument. The Fund will be required to
distribute net gains on such transactions to shareholders even though it may not
have closed the transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts, including options and
futures on currencies, which offset a security or currency position may be
considered straddles for tax purposes, in which case a loss on any position in a
straddle will be subject to deferral to the extent of unrealized gain in an
offsetting position. The holding period of the securities or currencies
comprising the straddle may be deemed not to begin until the straddle is
terminated. The holding period of the security offsetting an "in-the-money
qualified covered call" option will not include the period of time the option is
outstanding.
Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options, may be long-term capital loss, if the
security covering the option was held for more than twelve months prior to the
writing of the option.
In order for each Fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, and gains from the sale of securities
or currencies.
FOREIGN CURRENCY TRANSACTIONS (ALL FUNDS EXCEPT FOCUS 30 FUND AND CASH
RESERVES FUND). A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are
principally traded in the interbank market conducted directly between currency
traders (usually large, commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions are charged at
any stage for trades.
Each Fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign currency exposure of its
portfolio. The Fund's use of such contracts would include, but not be limited
to, the following: First, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, it may desire to "lock
in" the U.S. dollar price of the security. By entering into a forward contract
for the purchase or sale, for a fixed amount of dollars of the amount of foreign
currency involved in the underlying security transactions, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date the security is purchased or sold and the date on
which payment is made or received.
Second, when the Adviser believes that one currency may experience a substantial
movement against another currency, including the U.S. dollar, or it wishes to
alter the Fund's exposure to the currencies of the countries in its investment
universe, it may enter into a forward contract to sell or buy foreign currency
in exchange for the U.S. dollar or another foreign currency. Alternatively,
where appropriate, a Fund may manage all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies. In
such a case, the Fund may enter into a forward contract where the
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amount of the foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging technique may be
more efficient and economical than entering into separate forward contracts for
each currency held in the Fund. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of short-term currency market movement is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Under normal circumstances, consideration of the prospect for currency parities
will be incorporated into the longer term investment decisions made with regard
to overall diversification strategies. However, each of the Adviser and
Sub-Advisers believe that it is important to have the flexibility to enter into
such forward contracts when it determines that the best interests of a Fund will
be served.
Each Fund may enter into forward contacts for any other purpose consistent with
the Fund's investment objective and program. However, the Fund will not enter
into a forward contract, or maintain exposure to any such contract(s), if the
amount of foreign currency required to be delivered thereunder would exceed the
Fund's holdings of liquid securities and currency available for cover of the
forward contract(s). In determining the amount to be delivered under a contract,
the Fund may net offsetting positions.
At the maturity of a forward contract, the Fund may sell the portfolio security
and make delivery of the foreign currency, or it may retain the security and
either extend the maturity of the forward contract (by "rolling" that contract
forward) or may initiate a new forward contract.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent of the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
Each Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, each Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its foreign currency
denominated securities and will not do so unless deemed appropriate by the
Adviser or a Sub-Adviser. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although each Fund values its assets daily in terms of U.S. dollars, it does not
intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
FOREIGN FUTURES AND OPTIONS (ALL FUNDS EXCEPT FOCUS 30 FUND AND CASH
RESERVES FUND). Participation in foreign futures and foreign options
transactions involves the execution and clearing of trades on or subject to the
rules of a foreign board of trade. Neither the National Futures Association nor
any domestic exchange regulates activities of any foreign boards of trade,
including the execution, delivery and clearing of transactions, or has the power
to compel enforcement of the rules of a foreign board of trade or any applicable
foreign law. This is true even if the exchange is formally linked to a domestic
market so that a position taken on the market may be liquidated by a transaction
on another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures or foreign options transaction
occurs. For these reasons, customers
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who trade foreign futures or foreign options contracts may not be afforded
certain of the protective measures provided by the Commodity Exchange Act, the
CFTC's regulations and the rules of the National Futures Association and any
domestic exchange, including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received from
a Fund for foreign futures or foreign options transactions may not be provided
the same protections as funds received in respect of transactions on United
States futures exchanges. In addition, the price of any foreign futures or
foreign options contract and, therefore, the potential profit and loss thereon
may be affected by any variance in the foreign exchange rate between the time
the Fund's order is placed and the time it is liquidated, offset or exercised.
FUTURES CONTRACTS (ALL FUNDS EXCEPT CASH RESERVES FUND). Transactions in
Futures. Each Fund may enter into futures contracts, including stock index,
interest rate and currency futures ("futures or futures contracts").
Stock index futures contracts may be used to provide a hedge for a portion of
the Fund's portfolio, as a cash management tool, or as an efficient way for the
Adviser to implement either an increase or decrease in portfolio market exposure
in response to changing market conditions. A Fund may, purchase or sell futures
contracts with respect to any stock index. Nevertheless, to hedge the Fund's
portfolio successfully, the Fund must sell futures contacts with respect to
indices or sub-indices whose movements will have a significant correlation with
movements in the prices of the Fund's portfolio securities.
Interest rate or currency futures contracts may be used to manage a Fund's
exposure to changes in prevailing levels of interest rates or currency exchange
rates in order to establish more definitely the effective return on securities
or currencies held or intended to be acquired by the Fund. In this regard, the
Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
A Fund will enter into futures contracts which are traded on national or foreign
futures exchanges, and are standardized as to maturity date and underlying
financial instrument. Futures exchanges and trading in the United States are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"). Futures are traded in London at the London International
Financial Futures Exchange in Paris at the MATIF and in Tokyo at the Tokyo Stock
Exchange. Although techniques other than the sale and purchase of futures
contracts could be used for the above-referenced purposes, futures contracts
offer an effective and relatively low cost means of implementing the Fund's
objectives in these areas.
Although the Funds have no current intention of engaging in futures or options
transactions other than those described above, they reserve the right to do so.
Such futures and options trading might involve risks which differ from those
involved in the futures and options described in this Statement of Additional
Information.
HEDGING RISK. A decision of whether, when, and how to hedge involves skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or market or interest rate trends. There
are several risks in connection with the use by a Fund of futures contracts as a
hedging device. One risk arises because of the possible imperfect correlation
between movements in the prices of the futures contracts and movements in the
prices of the underlying instruments which are the subject of the hedge. The
Adviser or Sub-Adviser will, however, attempt to reduce this risk by entering
into futures contracts whose movements, in its judgment, will have a significant
correlation with movements in the prices of the Fund's underlying instruments
sought to be hedged.
Successful use of futures contracts by the Fund for hedging purposes is also
subject to the Adviser's or Sub-Adviser's ability to correctly predict movements
in the direction of the market. It is possible that, when the Fund has sold
futures to hedge its portfolio against a decline in the market, the index,
indices, or instruments underlying futures might advance and the value of the
underlying instruments held in the Fund's portfolio might decline. If this were
to occur, the Fund would lose money on the futures and also would experience a
decline in value in its underlying instruments. However, while this might occur
to a certain degree, the Adviser and each Sub-Adviser believe that over time the
value of the Fund's portfolio will tend to move in the same direction as the
market indices used to hedge the portfolio. It is also possible that if a Fund
were to hedge against the possibility of a decline in the
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market (adversely affecting the underlying instruments held in its portfolio)
and prices instead increased, the Fund would lose part or all of the benefit of
increased value of those underlying instruments that it has hedged, because it
would have offsetting losses in its futures positions. In addition, in such
situations, if the Fund had insufficient cash, it might have to sell underlying
instruments to meet daily variation margin requirements. Such sales of
underlying instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). The Fund might have to sell
underlying instruments at a time when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect correlation, or
no correlation at all, between price movements in the futures contracts and the
portion of the portfolio being hedged, the price movements of futures contracts
might not correlate perfectly with price movements in the underlying instruments
due to certain market distortions. First, all participants in the futures market
are subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors might close futures contracts
through offsetting transactions, which could distort the normal relationship
between the underlying instruments and futures markets. Second, the margin
requirements in the futures market are less onerous than margin requirements in
the securities markets, and as a result the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price distortions.
Due to the possibility of price distortion in the futures market and also
because of the imperfect correlation between price movements in the underlying
instruments and movements in the prices of futures contracts, even a correct
forecast of general market trends by the Adviser or Sub-Adviser might not result
in a successful hedging transaction over a very short time period.
ILLIQUID OR RESTRICTED SECURITIES (ALL FUNDS). Restricted securities may be sold
only in privately negotiated transactions or in a public offering with respect
to which a registration statement is in effect under the Securities Act of 1933
(the "1933 Act"). Where registration is required, a Fund may be obligated to pay
all or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Board of Trustees of the Trust. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Fund should be
in a position where more than 15% (or, in the case of the Cash Reserves Fund,
10%) of the value of its net assets are invested in illiquid assets, including
restricted securities, the Fund will take appropriate steps to protect
liquidity.
Notwithstanding the above, each Fund may purchase securities which, while
privately placed, are eligible for purchase and sale under Rule 144A under the
1933 Act. This rule permits certain qualified institutional buyers to trade in
privately placed securities even though such securities are not registered under
the 1933 Act. The Adviser or Sub-Adviser under the supervision of the Board of
Trustees of the Trust, will consider whether securities purchased under Rule
144A are illiquid and thus subject to the Fund's restriction of investing no
more than 15% of its net assets in illiquid securities. A determination of
whether a Rule 144A security is liquid or not is a question of fact. In making
this determination, the Adviser or Sub-Adviser will consider the trading markets
for the specific security taking into account the unregistered nature of a Rule
144A security. In addition, the Adviser or Sub-Adviser could consider (1) the
frequency of trades and quotes, (2) the number of dealers and potential
purchases, (3) any dealer undertakings to make a market, and (4) the nature of
the security and of marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer). The
liquidity of Rule 144A securities would be monitored, and if as a result of
changed conditions it is determined that a Rule 144A security is no longer
liquid, the Fund's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the Fund does not
invest more than 15% of its net assets in illiquid securities. Investing in Rule
144A securities could have the effect of increasing the amount of the Fund's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS (ALL FUNDS). Direct debt instruments are
interests in amounts owed by a corporate, governmental, or other borrower to
lenders or lending syndicates (loans and loan participations), to suppliers of
goods or services (trade claims or other receivables), or to other parties.
Direct debt instruments are subject to each Fund's policies regarding the
quality of debt securities.
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Purchasers of loans and other forms of direct indebtedness depend primarily upon
the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating
service. If a Fund does not receive scheduled interest or principal payments on
such indebtedness, the Fund's share price and yield could be adversely affected.
Loans that are fully secured offer a Fund more protections than an unsecured
loan in the event of non-payment of scheduled interest or principal. However,
there is no assurance that the liquidations of collateral from a secured loan
would satisfy the borrower's obligation, or that the collateral could be
liquidated. Indebtedness of borrowers whose creditworthiness is poor involves
substantially greater risks and may be highly speculative. Borrowers that are in
bankruptcy or restructuring may never pay off their indebtedness, or may pay
only a small fraction of the amount owed. Direct indebtedness of developing
countries also involves a risk that the governmental entities responsible for
the repayment of the debt may be unable, or unwilling, to pay interest and repay
principal when due.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to a Fund. For
example, if a loan is foreclosed, the Fund could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, the Fund could be held liable as a colender.
Direct debt instruments may also involve a risk of insolvency of the lending
bank or other intermediary. Direct debt instruments that are not in the form of
securities may offer less legal protection to a Fund in the event of fraud or
misrepresentation. In the absence of definitive regulatory guidance, each Fund
relies on the Adviser's research in an attempt to avoid situations where fraud
or misrepresentation could adversely affect the Fund.
A loan is often administered by a bank or other financial institution that acts
as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, a Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower. If
assets held by the agent for the benefit of a Fund were determined to be subject
to the claims of the agent's general creditors, the Fund might incur certain
costs and delays in realizing payment on the loan or loan participation and
could suffer a loss of principal or interest.
Direct indebtedness purchased by a Fund may include letters of credit, revolving
credit facilities, or other standby financing commitments obligating the Fund to
pay additional cash on demand. These commitments may have the effect of
requiring the Fund to increase its investment in a borrower at a time when it
would not otherwise have done so, even if the borrower's condition makes it
unlikely that the amount will ever be repaid. A Fund will set aside appropriate
liquid assets in a custodial account to cover its potential obligations under
standby financing commitments.
Each Fund limits the amount of total assets that it will invest in any one
issuer or, except for the Strategic Natural Resources Fund and the Info-Tech &
Communications Fund, in issuers within the same industry (see each Fund's
investment limitations). For purposes of these limitations, a Fund generally
will treat the borrower as the "issuer" of indebtedness held by the Fund. In the
case of loan participations where a bank or other lending institution serves as
financial intermediary between a Fund and the borrower, if the participation
does not shift to the Fund the direct debtor-creditor relationship with the
borrower, SEC interpretations require the Fund, in appropriate circumstances, to
treat both the lending bank or other lending institution and the borrower as
"issuers" for these purposes. Treating a financial intermediary as an issuer of
indebtedness may restrict a Fund's ability to invest in indebtedness related to
a single financial intermediary, or a group of intermediaries engaged in the
same industry, even if the underlying borrowers represent many different
companies and industries.
MATURITY OF DEBT SECURITIES. The maturity of debt securities may be considered
long (10 years or more), intermediate (3 to 10 years), or short-term (less than
3 years). In general, the principal values of longer-term securities fluctuate
more widely in response to changes in interest rates than those of shorter-term
securities, providing greater opportunity for capital gain or risk of capital
loss. A decline in interest rates usually produces an increase in the value of
debt securities, while an increase in interest rates generally reduces their
value.
MORTGAGE PASS-THROUGH SECURITIES (ALL FUNDS EXCEPT FOCUS 30 FUND AND CASH
RESERVES FUND). Interests in pools of mortgage pass-through securities differ
from other forms of debt securities (which normally provide periodic payments of
interest in fixed amounts and the payment of principal in a lump sum at maturity
or on specified call dates). Instead, mortgage pass-through securities provide
monthly payments consisting of both
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interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on the underlying
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Unscheduled payments of principal may be made if the underlying
mortgage loans are repaid or refinanced or the underlying properties are
foreclosed, thereby shortening the securities' weighted average life. Some
mortgage pass-through securities (such as securities guaranteed by GNMA) are
described as "modified pass-through securities." These securities entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, on the scheduled payment dates regardless of whether the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is
GNMA. GNMA is authorized to guarantee, with the full faith and credit of the
U.S. Treasury, the timely payment of principal and interest on securities issued
by lending institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of mortgage loans.
These mortgage loans are either insured by the Federal Housing Administration or
guaranteed by the Veterans Administration. A "pool" or group of such mortgage
loans is assembled and after being approved by GNMA, is offered to investors
through securities dealers.
Government-related guarantors of mortgage pass-through securities (i.e., not
backed by the full faith and credit of the U.S. Treasury) include FNMA and
FHLMC. FNMA is a Government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any Government agency) residential mortgages from a list of
approved sellers/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Mortgage pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA but are not
backed by the full faith and credit of the U.S. Treasury.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a U.S.
Government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the U.S. Treasury.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may,
in addition, be the originators and/or servicers of the underlying mortgage
loans as well as the guarantors of the mortgage pass-through securities. The
Funds do not purchase interests in pools created by such non-governmental
issuers.
Resets. The interest rates paid on the Adjustable Rate Mortgage Securities
("ARMs") in which a Fund may invest generally are readjusted or reset at
intervals of one year or less to an increment over some predetermined interest
rate index. There are two main categories of indices: those based on U.S.
Treasury securities and those derived from a calculated measure, such as a cost
of funds index or a moving average of mortgage rates. Commonly utilized indices
include the one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the National Median Cost of Funds, the
one-month or three-month London Interbank Offered Rate (LIBOR), the prime rate
of a specific bank, or commercial paper rates. Some indices, such as the
one-year constant maturity Treasury Note rate, closely mirror changes in market
interest rate levels. Others tend to lag changes in market rate levels and tend
to be somewhat less volatile.
Caps and Floors. The underlying mortgages which collateralize the ARMs in which
a Fund invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down:
(1) per reset or adjustment interval and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.
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The value of mortgage securities in which a Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. Additionally, even though
the interest rates on the underlying residential mortgages are adjustable,
amortization and prepayments may occur, thereby causing the effective maturities
of the mortgage securities in which the Fund invests to be shorter than the
maturities stated in the underlying mortgages.
OPTIONS (ALL FUNDS EXCEPT CASH RESERVES FUND). Writing Covered Call Options.
Each Fund may write (sell) American or European style "covered" call options and
purchase options to close out options previously written by the Fund. In writing
covered call options, the Fund expects to generate additional premium income
which should serve to enhance the Fund's total return and reduce the effect of
any price decline of the security or currency involved in the option. Covered
call options will generally be written on securities or currencies which, in the
Adviser's opinion, are not expected to have any major price increases or moves
in the near future but which, over the long term, are deemed to be attractive
investments for the Fund.
A call option gives the holder (buyer) the "right to purchase" a security or
currency at a specified price (the exercise price) at expiration of the option
(European style) or at any time until a certain date (the expiration date)
(American style). So long as the obligation of the writer of a call option
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to deliver the underlying security or
currency against payment of the exercise price. This obligation terminates upon
the expiration of the call option, or such earlier time at which the writer
effects a closing purchase transaction by repurchasing an option identical to
that previously sold. To secure his obligation to deliver the underlying
security or currency in the case of a call option, a writer is required to
deposit in escrow the underlying security or currency or other assets in
accordance with the rules of a clearing corporation.
Each Fund will write only covered call options. This means that the Fund will
own the security or currency subject to the option or an option to purchase the
same underlying security or currency, having an exercise price equal to or less
than the exercise price of the "covered" option, or will establish and maintain
with its custodian for the term of the option, an account consisting of cash,
U.S. government securities or other liquid securities having a value equal to
the fluctuating market value of the securities or currencies on which the Fund
holds a covered call position.
Portfolio securities or currencies on which call options may be written will be
purchased solely on the basis of investment considerations consistent with the
Fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Funds will not
do), but capable of enhancing the Fund's total return. When writing a covered
call option, a Fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities or currencies, since it may be assigned an
exercise notice at any time prior to the expiration of its obligation as a
writer. If a call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security or currency during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security or currency. The Fund does not
consider a security or currency covered by a call to be "pledged" as that term
is used in the Fund's policy which limits the pledging or mortgaging of its
assets.
The premium received is the market value of an option. The premium the Fund will
receive from writing a call option will reflect, among other things, the current
market price of the underlying security or currency, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security or currency, and the length of the option period. Once the
decision to write a call option has been made, the Adviser, in determining
whether a particular call option should be written on a particular security or
currency, will consider the reasonableness of the anticipated premium and the
likelihood that a liquid secondary market will exist for those options. The
premium received by the Fund for writing covered call options will be recorded
as a liability of the Fund. This liability will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Fund is computed (close of the New
York Stock Exchange), or, in the absence of such sale, the latest asked price.
The option will be terminated upon expiration of the option, the
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purchase of an identical option in a closing transaction, or delivery of the
underlying security or currency upon the exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to sell
a particular security or currency from its portfolio on which it has written a
call option, or purchased a put option, it will seek to effect a closing
transaction prior to, or concurrently with, the sale of the security or
currency. There is, of course, no assurance that the Fund will be able to effect
such closing transactions at favorable prices. If the Fund cannot enter into
such a transaction, it may be required to hold a security or currency that it
might otherwise have sold. When the Fund writes a covered call option, it runs
the risk of not being able to participate in the appreciation of the underlying
securities or currencies above the exercise price, as well as the risk of being
required to hold on to securities or currencies that are depreciating in value.
This could result in higher transaction costs. The Fund will pay transaction
costs in connection with the writing of options to close out previously written
options. Such transaction costs are normally higher than those applicable to
purchases and sales of portfolio securities.
Call options written by a Fund will normally have expiration dates of less than
nine months from the date written. The exercise price of the options may be
below, equal to, or above the current market values of the underlying securities
or currencies at the time the options are written. From time to time, a Fund may
purchase an underlying security or currency for delivery in accordance with an
exercise notice of a call option assigned to it, rather than delivering such
security or currency from its portfolio. In such cases, additional costs may be
incurred.
A Fund will realize a profit or loss from a closing purchase transaction if the
cost of the transaction is less or more than the premium received from the
writing of the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying security
or currency, any loss resulting from the repurchase of a call option is likely
to be offset in whole or in part by appreciation of the underlying security or
currency owned by the Fund.
OPTIONS ON FUTURES CONTRACTS (ALL FUNDS EXCEPT CASH RESERVES FUND). Each Fund
may purchase and sell options on the same types of futures in which it may
invest.
Options on futures are similar to options on underlying instruments except that
options on futures give the purchaser the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put), rather than to purchase or
sell the futures contract, at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds (in the case of a call) or is less than
(in the case of a put) the exercise price of the option on the futures contract.
Purchasers of options who fail to exercise their options prior to the exercise
date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on stock index
futures, each Fund may write or purchase call and put options on stock indices.
Such options would be used in a manner similar to the use of options on futures
contracts.
PURCHASING CALL OPTIONS (ALL FUNDS EXCEPT CASH RESERVES FUND). Each Fund may
purchase American or European style call options. As the holder of a call
option, the Fund has the right to purchase the underlying security or currency
at the exercise price at any time during the option period (American style) or
at the expiration of the option (European style). The Fund may enter into
closing sale transactions with respect to such options, exercise them or permit
them to expire. The Fund may purchase call options for the purpose of increasing
its current return or avoiding tax consequences which could reduce its current
return. The Fund may also purchase call options in order to acquire the
underlying securities or currencies. Examples of such uses of call options are
provided below.
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Call options may be purchased by the Fund for the purpose of acquiring the
underlying securities or currencies for its portfolio. Utilized in this fashion,
the purchase of call options enables the Fund to acquire the securities or
currencies at the exercise price of the call option plus the premium paid. At
times the net cost of acquiring securities or currencies in this manner may be
less than the cost of acquiring the securities or currencies directly. This
technique may also be useful to the Fund in purchasing a large block of
securities or currencies that would be more difficult to acquire by direct
market purchases. So long as it holds such a call option rather than the
underlying security or currency itself, the Fund is partially protected from any
unexpected decline in the market price of the underlying security or currency
and in such event could allow the call option to expire, incurring a loss only
to the extent of the premium paid for the option.
PURCHASING PUT OPTIONS (ALL FUNDS EXCEPT CASH RESERVES FUND). Each Fund may
purchase American or European style put options. As the holder of a put option,
the Fund has the right to sell the underlying security or currency at the
exercise price at any time during the option period (American style) or at the
expiration of the option (European style). The Fund may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Fund may purchase put options for defensive purposes in order to
protect against an anticipated decline in the value of its securities or
currencies. An example of such use of put options is provided below.
Each Fund may purchase a put option on an underlying security or currency (a
"protective put") owned by the Fund as a defensive technique in order to protect
against an anticipated decline in the value of the security or currency. Such
hedge protection is provided only during the life of the put option when the
Fund, as the holder of the put option, is able to sell the underlying security
or currency at the put exercise price regardless of any decline in the
underlying security's market price or currency's exchange value. For example, a
put option may be purchased in order to protect unrealized appreciation of a
security or currency where the Adviser deems it desirable to continue to hold
the security or currency because of tax considerations. The premium paid for the
put option and any transaction costs would reduce any capital gain otherwise
available for distribution when the security or currency is eventually sold.
Each Fund may also purchase put options at a time when the Fund does not own the
underlying security or currency. By purchasing put options on a security or
currency it does not own, the Fund seeks to benefit from a decline in the market
price of the underlying security or currency. If the put option is not sold when
it has remaining value, and if the market price of the underlying security or
currency remains equal to or greater than the exercise price during the life of
the put option, the Fund will lose its entire investment in the put option. In
order for the purchase of a put option to be profitable, the market price of the
underlying security or currency must decline sufficiently below the exercise
price to cover the premium and transaction costs, unless the put option is sold
in a closing sale transaction.
REGULATORY LIMITATIONS. A Fund will engage in futures contracts and options
thereon only for bona fide hedging, yield enhancement, and risk management
purposes, in each case in accordance with rules and regulations of the CFTC.
A Fund may not purchase or sell futures contracts or related options if, with
respect to positions which do not qualify as bona fide hedging under applicable
CFTC rules, the sum of the amounts of initial margin deposits and premiums paid
on those portions would exceed 5% of the net asset value of the Fund after
taking into account unrealized profits and unrealized losses on any such
contracts it has entered into; provided, however, that in the case of an option
that is in-the money at the time of purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. For purposes of this policy options
on futures contracts and foreign currency options traded on a commodities
exchange will be considered "related options." This policy may be modified by
the Board of Trustees without a shareholder vote and does not limit the
percentage of the Fund's assets at risk to 5%.
A Fund's use of futures contracts may result in leverage. Therefore, to the
extent necessary, in instances involving the purchase of futures contracts or
the writing of call or put options thereon by the Fund, an amount of cash, U.S.
Government securities or other appropriate liquid securities, equal to the
market value of the futures contracts and options thereon (less any related
margin deposits), will be identified in an account with the Fund's custodian to
cover (such as owning an offsetting position) the position, or alternative cover
will be employed. Assets used as cover or held in an identified account cannot
be sold while the position in the corresponding option or future is
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open, unless they are replaced with similar assets. As a result, the commitment
of a large portion of a Fund's assets to cover or identified accounts could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, each Fund would comply with such new
restrictions.
OTHER INVESTMENT COMPANIES. Each Fund may invest up to 10% of its total assets
in other investment companies, but only up to 5% of its assets in any one other
investment company. In addition, a Fund may not purchase more than 3% of the
securities of any one investment company. As a shareholder in an investment
company, that Fund would bear its ratable share of that investment company's
expenses, including its advisory and administration fees. At the same time, the
Fund would continue to pay its own management fees and other expenses.
MASTER/FEEDER STRUCTURE. Notwithstanding these limitations, each Fund
reserves the right to convert to a "master/feeder" structure at a future
date. Under such a structure, one or more "feeder" funds, such as the Funds,
invest all of their assets in a "master" fund, which, in turn, invests
directly in a portfolio of securities. If required by applicable law, the
Funds will seek shareholder approval before converting to a master/feeder
structure. If the requisite regulatory authorities determine that such
approval is not required, shareholders will be deemed, by purchasing shares,
to have consented to such a conversion and no further shareholder approval
will be sought. Such a conversion is expressly permitted under the investment
objective and fundamental policies of each Fund.
REPURCHASE AGREEMENTS (ALL FUNDS). The Funds may invest in repurchase
agreements. A repurchase agreement is an instrument under which the investor
(such as the Fund) acquires ownership of a security (known as the "underlying
security") and the seller (i.e., a bank or primary dealer) agrees, at the time
of the sale, to repurchase the underlying security at a mutually agreed upon
time and price, thereby determining the yield during the term of the agreement.
This results in a fixed rate of return insulated from market fluctuations during
such period, unless the seller defaults on its repurchase obligations. A Fund
will only enter into repurchase agreements where (i) the underlying securities
are of the type (excluding maturity limitations) which the Fund's investment
guidelines would allow it to purchase directly, (ii) the market value of the
underlying security, including interest accrued, will be at all times at least
equal to the value of the repurchase agreement, and (iii) payment for the
underlying security is made only upon physical delivery or evidence of
book-entry transfer to the account of the Fund's custodian. Repurchase
agreements usually are for short periods, often under one week, and will not be
entered into by a Fund for a duration of more than seven days if, as a result,
more than 15% (or, in the case of the Cash Reserves Fund, 10%) of the net asset
value of the Fund would be invested in such agreements or other securities which
are not readily marketable.
The Funds will assure that the amount of collateral with respect to any
repurchase agreement is adequate. As with a true extension of credit, however,
there is risk of delay in recovery or the possibility of inadequacy of the
collateral should the seller of the repurchase agreement fail financially. In
addition, a Fund could incur costs in connection with the disposition of the
collateral if the seller were to default. The Funds will enter into repurchase
agreements only with sellers deemed to be creditworthy by, or pursuant to
guidelines established by, the Board of Trustees of the Trust and only when the
economic benefit to the Funds is believed to justify the attendant risks. The
Funds have adopted standards for the sellers with whom they will enter into
repurchase agreements. The Board of Trustees of the Trust believe these
standards are designed to reasonably assure that such sellers present no serious
risk of becoming involved in bankruptcy proceedings within the time frame
contemplated by the repurchase agreement. The Funds may enter into repurchase
agreements only with well-established securities dealers or with member banks of
the Federal Reserve System.
SHORT SALES (ALL FUNDS EXCEPT CASH RESERVES FUND). The Funds may sell securities
short as part of their overall portfolio management strategies involving the use
of derivative instruments and to offset potential declines in long positions in
similar securities. A short sale is a transaction in which a Fund sells a
security it does not own or have the right to acquire (or that it owns but does
not wish to deliver) in anticipation that the market price of that security will
decline.
When a Fund makes a short sale, the broker-dealer through which the short sale
is made must borrow the security sold short and deliver it to the party
purchasing the security. The Fund is required to make a margin deposit in
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connection with such short sales; the Fund may have to pay a fee to borrow
particular securities and will often be obligated to pay over any dividends and
accrued interest on borrowed securities.
If the price of the security sold short increases between the time of the short
sale and the time the Fund covers its short position, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a capital gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. The successful use of short selling may be adversely affected
by imperfect correlation between movements in the price of the security sold
short and the securities being hedged.
To the extent a Fund sells securities short, it will provide collateral to the
broker-dealer and (except in the case of short sales "against the box") will
maintain additional asset coverage in the form of cash, U.S. Government
securities or other liquid securities with its custodian in a segregated account
in an amount at least equal to the difference between the current market value
of the securities sold short and any amounts required to be deposited as
collateral with the selling broker (not including the proceeds of the short
sale). The Funds do not intend to enter into short sales (other than short sales
"against the box") if immediately after such sales the aggregate of the value of
all collateral plus the amount in such segregated account exceeds 10% of the
value of the Fund's net assets. This percentage may be varied by action of the
Board of Trustees. A short sale is "against the box" to the extent the Fund
contemporaneously owns, or has the right to obtain at no added cost, securities
identical to those sold short.
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. Volatility and Leverage. The
prices of futures contracts are volatile and are influenced, among other things,
by actual and anticipated changes in the market and interest rates, which in
turn are affected by fiscal and monetary policies and national and international
political and economic events.
Most United States futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a subsequent 10%
decrease in the value of the futures contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount of margin deposited to maintain the futures contract. However, a Fund
would presumably have sustained comparable losses if, instead of the futures
contract, it had invested in the underlying financial instrument and sold it
after the decline. Furthermore, in the case of a futures contract purchase, in
order to be certain that the Fund has sufficient assets to satisfy its
obligations under a futures contract, the Fund earmarks to the futures contract
money market instruments or other liquid securities equal in value to the
current value of the underlying instrument less the margin deposit.
Liquidity. A Fund may elect to close some or all of its futures positions at any
time prior to their expiration. The Fund would do so to reduce exposure
represented by long futures positions or short futures positions. The Fund may
close its positions by taking opposite positions which would operate to
terminate the Fund's position in the futures contracts. Final determinations of
variation margin would then be made, additional cash would be required to be
paid by or released to the Fund, and the Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of trade where
the contracts were initially traded. Although each Fund intends to purchase or
sell futures contracts only on exchanges or boards of trade where there appears
to be an active market, there is no assurance that a liquid market on an
exchange or board of trade will exist for any particular contract at any
particular time. The reasons for the absence of a liquid secondary market on an
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exchange are substantially the same as those discussed under "Special Risks of
Transactions in Options on Futures Contracts." In the event that a liquid market
does not exist, it might not be possible to close out a futures contract, and in
the event of adverse price movements, the Fund would continue to be required to
make daily cash payments of variation margin. However, in the event futures
contracts have been used to hedge the underlying instruments, the Fund would
continue to hold the underlying instruments subject to the hedge until the
futures contracts could be terminated. In such circumstances, an increase in the
price of underlying instruments, if any, might partially or completely offset
losses on the futures contract. However, as described below, there is no
guarantee that the price of the underlying instruments will, in fact, correlate
with the price movements in the futures contract and thus provide an offset to
losses on a futures contract.
SPECIAL RISKS OF TRANSACTIONS IN OPTIONS ON FUTURES CONTRACTS. The risks
described under "Special Risks of Transactions on Futures Contracts" are
substantially the same as the risks of using options on futures. In addition,
where a Fund seeks to close out an option position by writing or buying an
offsetting option covering the same underlying instrument, index or contract and
having the same exercise price and expiration date, its ability to establish and
close out positions on such options will be subject to the maintenance of a
liquid secondary market. Reasons for the absence of a liquid secondary market on
an exchange include the following: (i) there may be insufficient trading
interest in certain options; (ii) restrictions may be imposed by an exchange on
opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options, or underlying instruments; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges could,
for economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in the class or series
of options) would cease to exist, although outstanding options on the exchange
that had been issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms. There
is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of any
of the clearing corporations inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
SWAP AGREEMENTS (ALL FUNDS EXCEPT FOCUS 30 FUND AND CASH RESERVES FUND).
Each of the Funds may enter into interest rate, index and currency exchange rate
swap agreements in attempts to obtain a particular desired return at a lower
cost to the Fund than if the Fund has invested directly in an instrument that
yielded that desired return. Swap agreements are two-party contracts entered
into primarily by institutional investors for periods ranging from a few weeks
to more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of returns) earned or realized
on particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. The
"notional amount" of the swap agreement is only a fictive basis on which to
calculate the obligations the parties to a swap agreement have agreed to
exchange. A Fund's obligations (or rights) under a swap agreement will generally
be equal only to the amount to be paid or received under the agreement based on
the relative values of the positions held by each party to the agreement (the
"net amount"). A Fund's obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash, U.S. Government securities, or other
liquid securities, to avoid leveraging of the Fund's portfolio. A Fund will not
enter into a swap agreement with any single party if the net amount owed or to
be received under existing contracts with that party would exceed 5% of the
Fund's assets.
Whether a Fund's use of swap agreements enhance the Fund's total return will
depend on the Adviser's ability correctly to predict whether certain types of
investments are likely to produce greater returns than other investments.
Because they are two-party contracts and may have terms of greater than seven
days, swap agreements may be considered to be illiquid. Moreover, a Fund bears
the risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterparty. The
Adviser will cause a Fund to enter into swap agreements only with counterparties
that would be eligible for consideration as repurchase agreement counterparties
under the Funds' repurchase agreement guidelines. The swap market is a
relatively new market and is largely unregulated. It is possible that
developments in the swaps market, including potential
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government regulation, could adversely affect a Fund's ability to terminate
existing swap agreements or to realize amounts to be received under such
agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations of the CFTC. To
qualify for this exemption, a swap agreement must be entered into by "eligible
participants," which include the following, provided the participants' total
assets exceed established levels: a bank or trust company, savings association
or credit union, insurance company, investment company subject to regulation
under the 1940 Act, commodity pool, corporation, partnership, proprietorship,
organization, trust or other entity, employee benefit plan, governmental entity,
broker-dealer, futures commission merchant, natural person, or regulated foreign
person. To be eligible, natural persons and most other entities must have total
assets exceeding $10 million; commodity pools and employees benefit plans must
have assets exceeding $5 million. In addition, an eligible swap transaction must
meet three conditions. First, the swap agreement may not be part of a fungible
class of agreements that are standardized as to their material economic terms.
Second, the creditworthiness of parties with actual or potential obligations
under the swap agreement must be a material consideration in entering into or
determining the terms of the swap agreement, including pricing, cost or credit
enhancement terms. Third, swap agreements may not be entered into and traded on
or through a multilateral transaction execution facility.
TRADING IN FUTURES CONTRACTS (ALL FUNDS EXCEPT CASH RESERVES FUND). A futures
contract provides for the future sale by one party and purchase by another party
of a specified amount of a specific financial instrument (e.g., units of a stock
index) for a specified price, date, time and place designated at the time the
contract is made. Brokerage fees are incurred when a futures contract is bought
or sold and margin deposits must be maintained. Entering into a contract to buy
is commonly referred to as buying or purchasing a contract or holding a long
position. Entering into a contract to sell is commonly referred to as selling a
contract or holding a short position.
Unlike when a Fund purchases or sells a security, no price would be paid or
received by the Fund upon the purchase or sale of a futures contract. Upon
entering into a futures contract, and to maintain the Fund's open positions in
futures contracts, the Fund would be required to deposit with its custodian or
futures broker in a segregated account in the name of the futures broker an
amount of cash, U.S. government securities, suitable money market instruments,
or other liquid securities, known as "initial margin." The margin required for a
particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased and
sold on margins that may range upward from less than 5% of the value of the
contract being traded.
If the price of an open futures contract changes (by increase in underlying
instrument or index in the case of a sale or by decrease in the case of a
purchase) so that the loss on the futures contract reaches a point at which the
margin on deposit does not satisfy margin requirements, the broker will require
an increase in the margin. However, if the value of a position increases because
of favorable price changes in the futures contract so that the margin deposit
exceeds the required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the futures
broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." Each Fund expects to
earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual future
delivery of and payment for the underlying instruments, in practice most futures
contracts are usually closed out before the delivery date. Closing out an open
futures contract purchase or sale is effected by entering into an offsetting
futures contract sale or purchase, respectively, for the same aggregate amount
of the identical underlying instrument or index and the same delivery date. If
the offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction costs
must also be included in these calculations. There can be no assurance, however,
that the Fund will be able to enter into an offsetting transaction with respect
to a particular futures contract at a particular time. If the Fund is not able
to enter into an offsetting transaction, the Fund will continue to be required
to maintain the margin deposits on the futures contract.
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For example, one contract in the Financial Times Stock Exchange 100 Index future
is a contract to buy 25 pounds sterling multiplied by the level of the UK
Financial Times 100 Share Index on a given future date. Settlement of a stock
index futures contract may or may not be in the underlying instrument or index.
If not in the underlying instrument or index, then settlement will be made in
cash, equivalent over time to the difference between the contract price and the
actual price of the underlying asset at the time the stock index futures
contract expires.
WARRANTS (ALL FUNDS EXCEPT CASH RESERVES FUND). Each Fund may invest in
warrants. Warrants are pure speculation 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 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 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 SECURITIES (ALL FUNDS). Each Fund may, from time to time, purchase
securities on a "when-issued" or delayed delivery basis. The price for such
securities, which may be expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment for the when-issued
securities take place at a later date. Normally, the settlement date occurs
within one month of the purchase, but may take up to three months. During the
period between purchases and settlement, no payment is made by a Fund to the
issuer and no interest accrues to a Fund. At the time a Fund makes the
commitment to purchase a security on a when-issued basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. Each Fund will maintain, in a segregated account with the custodian, cash
or appropriate liquid securities equal in value to commitments for when-issued
securities.
WRITING COVERED PUT OPTIONS (ALL FUNDS EXCEPT CASH RESERVES FUND). Each Fund may
write American or European style covered put options and purchase options to
close out options previously written by the Fund. A put option gives the
purchaser of the option the right to sell and the writer (seller) has the
obligation to buy, the underlying security or currency at the exercise price
during the option period (American style) or at the expiration of the option
(European style). So long as the obligation of the writer continues, he may be
assigned an exercise notice by the broker-dealer through whom such option was
sold, requiring him to make payment of the exercise price against delivery of
the underlying security or currency. The operation of put options in other
respects, including their related risks and rewards, is substantially identical
to that of call options.
A Fund would write put options only on a covered basis, which means that the
Fund would maintain in a segregated account cash, U.S. government securities or
other liquid appropriate securities in an amount not less than the exercise
price or the Fund will own an option to sell the underlying security or currency
subject to the option having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. (The rules of a clearing corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price.) The Fund
would generally write covered put options in circumstances where the Adviser
wishes to purchase the underlying security or currency for the Fund's portfolio
at a price lower than the current market price of the security or currency. In
such event the Fund would write a put option at an exercise price which, reduced
by the premium received on the option, reflects the lower price it is willing to
pay. Since the Fund would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this technique could be
used to enhance current return during periods of market uncertainty. The risk in
such a transaction would be that the market price of the underlying security or
currency would decline below the exercise price less the premiums received. Such
a decline could be substantial and result in a significant loss to the Fund. In
addition, the Fund, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies.
UNITED STATES GOVERNMENT OBLIGATIONS (ALL FUNDS). These consist of various types
of marketable securities issued by the United States Treasury, i.e., bills,
notes and bonds. Such securities are direct obligations of the United States
Government and differ mainly in the length of their maturity. Treasury bills,
the most frequently issued marketable government security, have a maturity of up
to one year and are issued on a discount basis.
22
<PAGE>
UNITED STATES GOVERNMENT AGENCY SECURITIES (ALL FUNDS). These consist of debt
securities issued by agencies and instrumentalities of the United States
Government, including the various types of instruments currently outstanding or
which may be offered in the future. Agencies include, among others, the Federal
Housing Administration, Government National Mortgage Association ("GNMA"),
Farmer's Home Administration, Export-Import Bank of the United States, Maritime
Administration, and General Services Administration. Instrumentalities include,
for example, each of the Federal Home Loan Banks, the National Bank for
Cooperatives, the Federal Home Loan Mortgage Corporation ("FHLMC"), the Farm
Credit Banks, the Federal National Mortgage Association ("FNMA"), and the United
States Postal Service. These securities are either: (i) backed by the full faith
and credit of the United States Government (e.g., United States Treasury Bills);
(ii) guaranteed by the United States Treasury (e.g., GNMA mortgage-backed
securities); (iii) supported by the issuing agency's or instrumentality's right
to borrow from the United States Treasury (e.g., FNMA Discount Notes); or (iv)
supported only by the issuing agency's or instrumentality's own credit (e.g.,
Tennessee Valley Association).
SPECIAL CONSIDERATIONS AFFECTING CANADA
Canada is a confederation of 10 provinces with a parliamentary system of
government. The area, the world's second largest nation by landmass, is
inhabited by 30.2 million people, most of whom are decedents of France, the
United Kingdom and indigenous peoples. The country has a work force of over 15
million people in various industries such as trade, manufacturing, mining,
finance, construction and government. As an affluent, high-tech industrial
society, Canada today closely resembles the US in its market-oriented economic
system, pattern of production, and high living standards. Since World War II,
the impressive growth of the manufacturing, mining, and service sectors has
transformed the nation from a largely rural economy into one primarily
industrial and urban. While the country has many institutions which closely
parallel the United States, such as a transparent stock market and similar
accounting practices, it differs from the United States in that it has an
extensive social welfare system, much more akin to European welfare states.
Canada is endowed with extensive energy resources, and is a large producer and
net exporter of natural gas, coal, hydropower and uranium. Within this sector,
Canada is a major supplier of electric power and natural gas to the United
States. In addition, Canada's other particularly strong commodities are forest
products, mining, metals, and agricultural products such as grains. Accordingly,
the Canadian stock market is strongly represented by such basic materials
stocks, and movements in the supply and demand of industrial materials,
agriculture, and energy, both domestically and internationally, can have a
strong effect on market performance.
The United States is Canada's biggest trading partner, representing over 80% of
total trade in 1997. Automobiles and auto parts accounted for the largest
export items followed by energy, mining and forest products. Canada is the
largest energy supplier to the United States, while the United States is
Canada's largest foreign investor. The United States investment has been largely
focused on financial, energy, metals, and mining industries. The expanding
economic and financial integration of the United States and Canada will likely
make the Canadian economy and securities markets increasingly sensitive to U.S.
economic and market events.
For United States investors in Canadian markets, currency has become an
important determinant of investment return. Since Canada let its dollar float in
1970, its value has been in a steady decline against its United States
counterpart. While the decline has enabled Canada to stay competitive with its
more efficient southern neighbor, which buys four-fifths of its exports, United
States investors have seen their investment returns eroded by the impact of the
currency conversion.
MANAGEMENT OF THE TRUST
Trustees and Officers
Because Orbitex Group of Funds is a Delaware business trust, there are Trustees
appointed to run the Trust. These Trustees are responsible for overseeing the
general operations of the Adviser and the general operations of the Trust. These
responsibilities include approving the arrangements with companies that provide
necessary services to the Funds, ensuring the Funds' compliance with applicable
securities laws and that dividends and capital gains are
23
<PAGE>
distributed to shareholders. The Trustees have appointed officers to provide
many of the functions necessary for day-to-day operations.
Trustees and officers of the Trust, together with information as to their
principal business occupations during the last five years, are shown below. Each
Trustee who is considered an "interested person" of the Trust (as defined in
Section 2(a)(19) of the 1940 Act) is indicated by an asterisk next to his name.
<TABLE>
<CAPTION>
POSITION WITH THE TRUST AND PRINCIPAL
NAME, AGE AND BUSINESS ADDRESS AGE OCCUPATION WITHIN THE PAST FIVE YEARS
- ------------------------------ --- -------------------------------------
<S> <C> <C>
Ronald S. Altbach 51 Trustee of the Trust.
1540 West Park Avenue Chairman, Paul Sebastian, Inc.(1994 - present)
Ocean, New Jersey (perfume distributor);
07712 President, Olcott Corporation (1992- 1994)
(perfume distributor).
*Thomas T. Bachmann 52 Trustee of the Trust. Co-
410 Park Avenue Chairman of the Board of
New York, NY 10022 Trustees of Orbitex Management
(1996 - present) (investment management); Chairman,
Orbitex Management, Ltd. (1986 to present)
(investment management).
*Otto J. Felber 66 Trustee of the Trust.
130 Adelaide Street President, Felcom Capital, Corp. (1985 - present)
West, (investment management)
Suite 3205 President and Vice Chairman,
Toronto, Ontario, Altamira Management, Ltd.
M5H3P5 (1987 - 1997) (investment management).
*James L. Nelson 50 Chairman of Trust, President, Assistant
410 Park Avenue Treasurer and Assistant
New York, New York Secretary of the Trust.
10022 Director and Chief Executive Officer,
Orbitex Management, Inc.
(1995 - present) (investment management); Chief
Executive Officer and President,
Orbitex, Inc. (1995 - present)
(business development);
President, AVIC Group International
(1993 - 1995) (communications);
President, Eaglescliff
Corporation (1986 - present) (consulting).
24
<PAGE>
*Richard E. Stierwalt 44 Trustee of the Trust.
410 Park Avenue President, Chief Executive
New York, New York Officer, President and
10022 Director, Orbitex
Management, Inc. (1998 - present);
Consultant, Bisys Management, Inc. (1996-1998)
(mutual fund distributor);
Chairman of the Board and
Chief Executive Officer,
Concord Financial Group
(1987 - 1996) (administrator
and distributor of mutual funds).
Stephen H. Hamrick 47 Trustee of the Trust.
Carey Financial Corp. Chairman, Carey Financial
50 Rockfeller Plaza Corporation (1995 - present)
New York, New York (broker-dealer); Chief
10020 Executive Officer, Wall
Street Investors Services (1994 - 1995) (retail
brokerage firm); Senior Vice
President, PaineWebber, Inc.
(1988 - 1994) (investment services).
John D. Morgan 69 Trustee of the Trust.
32 Edgehill Road Chairman and Director, CIBC
Westmount, Quebec, Trust Company (1997 -
Canada H3Y1E9 present) (trust management);
(Vice President, Midland Walwyn
(1990 - 1997) (investment banking).
M. Fyzul Khan 28 Secretary of the Trust.
410 Park Avenue Legal Counsel, Orbitex
New York, New York Management, Inc. (1998 to
10022 present) (investment adviser);
Attorney, CIBC Oppenheimer
(August 1997 March 1998) (hedge fund);
Law student, Widener
University School of Law (September 1994 - June 1997)
Kimberly Ratz 38 Treasurer of the Trust.
410 Park Avenue Chief Financial Officer,
New York, New York America's Mortgage Source
10022 (1996-1997)(mortgage banking); Finance
Management, Chase Manhattan
Mortgage (1988 - 1998) (mortgage banking).
</TABLE>
Each Trustee of the Trust who is not an interested person of the Trust or
Adviser receives a fee of $1,250 for each regular and special meeting of the
Board that the Trustee attends. The Trust also reimburses each such Trustee for
travel and other expenses incurred in attending meetings of the Board.
COMPENSATION TABLE*
25
<PAGE>
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION FROM
RETIREMENT BENEFITS ESTIMATED ANNUAL REGISTRANT AND FUND
AGGREGATE COMPENSATION ACCRUED AS PART OF BENEFITS UPON COMPLEX PAID
NAME OF PERSON FROM FUND FUND EXPENSES RETIREMENT TO TRUSTEES
<S> <C> <C> <C> <C>
Ronald S. Altbach $5,000 N/A N/A $5,000
Thomas T. Bachmann $0 N/A N/A $0
Otto J. Felber $0 N/A N/A $0
Stephen H. Hamrick $3,750 N/A N/A $3,750
John D. Morgan $5,413 N/A N/A $5,413
James L. Nelson $0 N/A N/A $0
Richard E. Stierwalt $0 N/A N/A $0
</TABLE>
- --------------------------
* The compensation table covers the period May 1, 1998 through April 30, 1999.
As of April 30, 1999, Trustees and officers of the Trust, as a group, owned less
than 1% of each of the Funds.
PRINCIPAL HOLDERS OF SECURITIES
As of March 31, 1999, the following shareholders were beneficial owners of 5% or
more of the outstanding shares of the Funds listed because they possessed voting
or investment power with respect to such shares:
ORBITEX GROWTH FUND - CLASS A % HELD
Cresta Ltd. 31.55%
P.O. Box N9932
Maritime House, Frederick Street
Nassua, Bahamas
Sharon Miller & Richard Mosse 12.30%
Attorney Trustees
Lauren E. Mosse Trust
142 E. 71st Street Apt. 3D
New York, NY 10021-5133
26
<PAGE>
Sharon Miller & Richard Mosse 12.30%
Attorney Trustees
Danielle T. Mossee Trust
142 E. 71st Street Apt. 3D
New York, NY 10021-5133
Sharon Miller & Richard Mosse 12.30%
Attorney Trustees
Julia B. Mosse Trust
142 E. 71st Street Apt. 3D
New York, NY 10021-5133
Donaldson Lufkin Jenrette 7.05%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
ORBITEX GROWTH FUND - CLASS B
Thomas F. Fitzpatrick 85.00%
Linda Fitzpatrick
1610 Barkalow Road
Wall, NJ 07719-3843
CIBC Oppenheimer Corporation 13.32%
FBO 376-10055-15
P.O. Box 3484
Church Street Station
New York, NY 10008-3484
ORBITEX INFO-TECH & COMMUNICATIONS FUND - CLASS A
PaineWebber for the benefit of 11.14%
Melrich Associates
A Partnership
C/O RTA Associates
2000 S. Winston Road Building #4
Rochester, NY 14618-3922
ORBITEX INFO-TECH & COMMUNICATIONS FUND - CLASS B
27
<PAGE>
PaineWebber for the benefit of 6.76%
Paul W. Kinney and
E. Yukiko Kinney
391 Plantation Drive
Titusville, FL 32780-2558
ORBITEX STRATEGIC NATURAL RESOURCES FUND -
CLASS A
Sidney Kimmel 26.93%
C/O Jones Apparel Group
1411 Broadway Floor 21
New York, NY 10018-3403
Daniel A. McAloon 7.95%
Clare M. McAloon Ten Comm
66 Union Hill Road
Madison, NJ 07940-2300
ORBITEX STRATEGIC NATURAL RESOURCES FUND -
CLASS B
Guarantee & Trust 5.77%
FBO Judith Borden IRA
PO BOX 8963
Wilmington, DE 19899-8963
First Clearing Corporation 6.92%
WFS AS CUSTODIAN
William L. Harper IRA
209 Church Street
Hackettstown, NJ 07840-2207
28
<PAGE>
First Clearing Corporation 11.44%
Earl D. Stires
34 Route 31 S
Pennington, NJ 08822-2504
First Clearing Corporation 8.69%
Edit Zeloof
581 Sergeantsville Road
Flemington, NJ 08822-2703
First Clearing Corporation 20.16%
Dr. George S. Naifeh IRA
WFS AS Custodian
265 Long Branch East
Prescott, AZ 86303-5327
First Clearing Corporation 5.78%
Charles I. Adler DDS PC
DEF BEN PEN PL
3353 82nd Street
Jackson Heights, NY 11372-1447
First Clearing Corporation 8.82%
Norma Mass
765 Woodland Avenue
Oradell, NJ 07649-1431
29
<PAGE>
First Clearing Corporation 5.33%
Myron G. Dumoff & Judith Lomson
1381 Plymouth Road
Bridgewater, NJ 08807-1461
First Clearing Corporation 5.22%
Dorothy Waltz IRA
WFS AS Custodian
2486 Glasgo Road
Norwich, CT 06360-9117
A shareholder owning of record or beneficially more than 25% of a Fund's
outstanding shares may be considered a controlling person. That shareholder's
vote could have more significant effect on matters presented at a shareholder's
meeting than votes of other shareholders.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT ADVISER. Orbitex Management, Inc., located at 410 Park Avenue, New
York, NY 10022, serves as the Adviser of each Fund pursuant to Investment
Advisory Agreements that have been approved by the Board, including a majority
of the independent Trustees. The initial term of each Investment Advisory
Agreement is two years. However, the Investment Advisory Agreements may
continue in effect from year to year if approved at least annually by a vote
of a majority of the Board (including a majority of the Trustees who are not
parties to the Investment Advisory Agreements or interested persons of any
such parties) cast in person at a meeting called for the purpose of voting on
such renewal, or by the vote of a majority of the outstanding shares of the
particular Fund. The Advisory Agreement for the Growth, Info-Tech &
Communications and Strategic Natural Resources Funds was last renewed by the
Board of Trustees on March 9, 1999. The Advisory Agreement for the Focus
30, Health & Biotechnology, and Cash Reserves Funds was initially approved by
the Board of Trustees on June 29, 1999. The Portfolio managers are
supervised by John W. Davidson, CFA, Executive Vice President and Chief
Investment Officer of the Advisor.
The directors and the principal executive officers of the Adviser are: Otto
J. Felber, Chairman; Thomas T. Bachmann, Co-Chairman; Richard E. Stierwalt,
Director, CEO and President; James L. Nelson, Director; M. Fyzul Khan,
Secretary and Legal Counsel; and Kimberly Ratz, Treasurer and Chief Financial
Officer. The Adviser is a subsidiary of Orbitex, Inc., a business
development firm.
In addition to the duties set forth in the Prospectus under the section entitled
"Management," the Adviser, in furtherance of such duties and responsibilities,
is authorized in its discretion to engage in the following activities or to
cause or permit Sub-Advisers to engage in the following activities on behalf of
the Trust: (i) develop a continuing program for the management of the assets of
each Fund; (ii) buy, sell, exchange, convert, lend, or otherwise trade in
portfolio securities and other assets; (iii) place orders and negotiate the
commissions for the execution of transactions in securities with or through
broker-dealers, underwriters, or issuers; (iv) prepare and supervise the
30
<PAGE>
preparation of shareholder reports and other shareholder communications; and (v)
obtain and evaluate business and financial information in connection with the
exercise of its duties.
Subject to policies established by the Board of Trustees of the Trust, which has
overall responsibility for the business and affairs of each Fund, the Adviser
manages the operations of the Funds. In addition to providing advisory services,
the Adviser furnishes the Funds with office space and certain facilities and
personnel required for conducting the business of the Funds.
For the advisory services provided and expenses assumed by it, the Adviser has
agreed to a fee from each Fund, computed daily and payable monthly at an
annual rate of 0.75% for the Growth Fund, 1.25% for the Info-Tech &
Communications Fund, 1.25% for the Strategic Natural Resources Fund, 0.75% for
the Focus 30 Fund, 1.25% for the Health & Biotechnology Fund and 0.15%
for the Cash Reserves Fund.
The following table shows the amount of advisory fees paid by each Fund to the
Adviser and the amount of the advisory fees waived by the Adviser for the past
two fiscal years.
<TABLE>
<CAPTION>
Advisory Fees Advisory Fees Waived
Fund paid by Fund by the Adviser
---- ------------- --------------------
<S> <C> <C>
Growth Fund
April 30, 1998* 0 $ 2,423
April 30, 1999 0 $ 8,089
Info-Tech & Communications Fund
April 30, 1998* 0 $ 5,113
April 30, 1999 0 $ 211,268
Strategic Natural Resources Fund
April 30, 1998** 0 $ 25,989
April 30, 1999 0 $ 46,098
</TABLE>
* Fiscal period October 22, 1997 through April 30, 1998
** Fiscal period October 23, 1997 through April 30, 1998
The Adviser has voluntarily agreed to waive or limit its fees and pay certain
operating expenses to the extent necessary to limit total fund operating of each
Fund with respect to each class of shares as follows:
<TABLE>
<CAPTION>
Fund Class A Class B Class D
- ---- ------- ------- -------
<S> <C> <C> <C>
Growth Fund 2.00% 2.60% N/A
Info-Tech & Communications Fund 2.00% 2.60% N/A
Strategic Natural Resources Fund 2.00% 2.60% N/A
Focus 30 Fund 1.15% 1.75% 0.75%
Health & Biotechnology Fund 2.00% 2.60% N/A
31
<PAGE>
Institutional Institutional
Class Service Class
Cash Reserves Fund 0.25% 0.50%
</TABLE>
The Adviser may discontinue such fee waivers and/or expense reimbursements at
any time, in its sole discretion.
The following table shows the amount of fee waivers and/or reimbursements by the
Adviser for the last three fiscal years. As of July 7, 1999, the Focus 30
Fund, Health & Biotechnology Fund and the Cash Reserves Fund had not commenced
operations.
<TABLE>
<CAPTION>
Amount of Reimbursed
Fund Expenses by the Adviser
---- -----------------------
<S> <C>
Growth Fund - Class A
April 30, 1998* $ 80,890
April 30, 1999 $203,594
Growth Fund - Class B
April 30, 1999** $ 2,208
Info-Tech & Communications Fund - Class A
April 30, 1998* $ 74,137
April 30, 1999 $ 11,543
Info-Tech & Communications Fund - Class B
April 30, 1999** $ 3,928
Strategic Natural Resources Fund - Class A
April 30, 1998*** $ 55,295
April 30, 1999 $159,491
Strategic Natural Resources Fund - Class B
April 30, 1999**** $ 2,832
</TABLE>
* Fiscal period October 22, 1997 through April 30, 1998.
** Fiscal period September 16, 1998 through April 30, 1999.
*** Fiscal period October 23, 1998 through April 30, 1998.
**** Fiscal period September 21, 1998 through April 30, 1999.
INVESTMENT SUB-ADVISER
Harris Investment Management, Inc. (Harris Management) is the investment
sub-adviser. The sub-adviser's address is 190 S. LaSalle St., Chicago,
Illinois 60690. Harris Management was organized and exists under the laws of
the State of Delaware and registered pursuant to the Investment Advisers Act
of 1940. Harris Management is a wholly-owned subsidiary of Harris Bankcorp,
Inc. Harris Bankcorp is a wholly-owned subsidiary of Bankmont Financial
Corp, which in turn is a wholly-owned subsidiary of Bank of Montreal, a
publicly-traded Canadian banking institution. Harris Management serves as a
portfolio management agent for the Harris Insight-R- Funds. As of March 31,
1999, Harris Investment Management, Inc managed approximately $13.4 billion
of discretionary assets.
ADMINISTRATOR
32
<PAGE>
The Administrator for the Funds is American Data Services, Inc. (the
"Administrator"), which has its principal office at The Hauppauge Corporate
Center, 150 Motor Parkway, Hauppauge, New York 11788, and is primarily in the
business of providing administrative, fund accounting and stock transfer
services to retail and institutional mutual funds through its offices in New
York, Denver and Los Angeles.
Pursuant to an Administrative Service Agreement with the Funds, the
Administrator provides all administrative services necessary for the Fund,
subject to the supervision of the Board of Directors. The Administrator will
provide persons to serve as officers of the Fund. Such officers may be
directors, officers or employees of the Administrator or its affiliates.
The Administration Agreement was initially approved by the Board of Trustees at
a meeting on June 29, 1999. The Agreement shall remain in effect for two
years from the date of its initial approval, and subject to annual approval of
the Board of Trustees for one-year periods thereafter. The Administrative
Service Agreement is terminable by the Board of Trustees or the Administrator on
sixty days' written notice and may be assigned provided the non-assigning party
provides prior written consent. The Agreement provides that in the absence of
willful misfeasance, bad faith or gross negligence on the part of the
Administrator or reckless disregard of its obligations thereunder, the
Administrator shall not be liable for any action or failure to act in accordance
with its duties thereunder.
Under the Administrative Service Agreement, the Administrator provides all
administrative services, including, without limitation: (i) providing services
of persons competent to perform such administrative and clerical functions as
are necessary to provide effective administration of the Funds; (ii) overseeing
the performance of administrative and professional services to the Funds by
others, including the Funds' Custodian; (iii) preparing, but not paying for, the
periodic updating of the Funds' Registration Statement, Prospectus and Statement
of Additional Information in conjunction with Fund counsel, including the
printing of such documents for the purpose of filings with the Securities and
Exchange Commission and state securities administrators, preparing the Funds'
tax returns, and preparing reports to the Funds' shareholders and the Securities
and Exchange Commission; (iv) preparing in conjunction with Fund counsel, but
not paying for, all filings under the securities or "Blue Sky" laws of such
states
33
<PAGE>
or countries as are designated by the Distributor, which may be required to
register or qualify, or continue the registration or qualification, of the Funds
and/or its shares under such laws; (v) preparing notices and agendas for
meetings of the Board of Trustees and minutes of such meetings in all matters
required by the 1940 Act to be acted upon by the Board; and (vi) monitoring
daily and periodic compliance with respect to all requirements and restrictions
of the Investment Company Act, the Internal Revenue Code and the Prospectus.
The Administrator, pursuant to the Fund Accounting Service Agreement,
provides the Funds with all accounting services, including, without limitation:
(i) daily computation of net asset value; (ii) maintenance of security ledgers
and books and records as required by the Investment Company Act; (iii)
production of the Funds's listing of portfolio securities and general ledger
reports; (iv) reconciliation of accounting records; (v) calculation of yield and
total return for the Funds; (vi) maintaining certain books and records described
in Rule 31a-1 under the 1940 Act, and reconciling account information and
balances among the Funds's Custodian and Adviser; and (vii) monitoring and
evaluating daily income and expense accruals, and sales and redemptions of
shares of the Funds.
For the services rendered to the Funds by the Administrator, the Funds pay the
Administrator a fee, computed daily and payable monthly at annual rate of 0.10%
on assets up to $100 million; 0.08% on assets from $100 million to $250
million; 0.05% on assets from $250 million to $500 million; and 0.03% on assets
greater than $500 million, or a minimum fee of $40,000 per Fund per year
of each Fund's average daily net assets. The Cash Reserve Fund pays the
Administrator a fee equal to 0.02% based upon prior months' average net
assets. The Funds also pay the Administrator for any out-of-pocket expenses.
In return for providing the Funds with all accounting related services, the
Funds pays the Administrator a monthly fee based on the Funds's average net
assets, plus any out-of-pocket expenses for such services.
34
<PAGE>
SUB-ADMINISTRATOR
State Street is the sub-administrator of the Growth Fund, the Info-Tech &
Communications Fund and the Strategic Natural Resources Fund. State Street is a
Massachusetts trust company with a principal office at 225 Franklin Street,
Boston, Massachusetts 02111. State Street serves as administrator for other
mutual funds.
Pursuant to a Sub-Administration Agreement for the benefit of the trust,
State Street provides all administrative services reasonably necessary for
the Growth Fund, the Info-Tech & Communications Fund and the Strategic
Natural Resources Fund, other than those provided by the Adviser and/or ADS,
subject to the supervision of the Administrator.
Under the Sub-Administration Agreement for the benefit of the trust, State
Street, assists the Administrator with certain of its responsibilities under
the administration agreement, including providing, without limitation: (i)
services of personnel competent to perform such administrative and clerical
functions as are necessary to provide effective administration of the Growth
Fund, the Info-Tech & Communications Fund and the Strategic Natural Resources
Fund; (ii) maintaining the books and records of the Growth Fund, the
Info-Tech & Communications Fund and the Strategic Natural Resources Fund
(other than financial and accounting books and records and records maintained
by the Trust's custodian or transfer agent); (iii) overseeing the insurance
relationships of the Growth Fund, the Info-Tech & Communications Fund and the
Strategic Natural Resources Fund; (iv) preparing or assisting in the
preparation of all required tax returns, proxy statements and reports to
shareholders of the Growth Fund, the Info-Tech & Communications Fund and the
Strategic Natural Resources Fund, and the Board of Trustees and reports to
and filings with the SEC and any other governmental agency; (v) preparing or
assisting in the preparation of such notices and reports as may be necessary
to offer and sell shares of the Growth Fund, the Info-Tech & Communications
Fund and the Strategic Natural Resources Fund under applicable state
securities laws; (vi) preparing or assisting in the preparation of, and
coordinating the distribution of all materials for meetings of the Board of
Trustees of the Trust; (vii) monitoring daily and periodic compliance of the
Growth Fund, the Info-Tech & Communications Fund and the Strategic Natural
Resources Fund with respect to all requirements and restrictions of the 1940
Act, the Internal Revenue Code and the Prospectus; (viii) monitoring the
calculation of all income and expense accruals, sales and redemptions of
capital shares outstanding with respect to the Growth Fund, the Info-Tech &
Communications Fund and the Strategic Natural Resources Fund by the Trust's
custodian; (ix) evaluating expenses, projecting future expenses, and
processing payments of expenses; and (x) monitoring and evaluating
performance of accounting and related services provided to the Growth Fund,
the Info-Tech & Communications Fund and the Strategic Natural Resources Fund,
by the Trust's custodian.
The Sub-Administration Agreement is terminable at any time by the parties
thereto on sixty days' written notice. If the Trust terminates the Agreement
within three years of its effective date, the Fund must reimburse State
Street for any fees waived by State Street.
For the period September 16, 1997 through April 30, 1998, fees of State
Street accrued were: $43,750 for the Growth Fund, $43,750 for the Info-Tech &
Communications Fund and $43,750 for the Strategic Natural Resources Fund.
For fiscal year ended April 30, 1999, fees of State Street accrued were:
$62,711 for the Growth Fund, $62,711 for the Info-Tech & Communications
Fund and $62,858 for the Strategic Natural Resources Fund.
35
<PAGE>
CUSTODIAN
State Street serves as the custodian of the Trust's assets pursuant to a
Custodian Contract by and between State Street and the Trust. State Street's
responsibilities include safeguarding and controlling the Trust's cash and
securities, handling the receipt and delivery of securities, and collecting
interest and dividends on the Trust's investments. Pursuant to the Custodian
Contract, State Street also provides certain accounting and pricing services to
the Trust, including calculating the daily net asset value per share for [each
Fund]; maintaining original entry documents and books of record and general
ledgers; posting cash receipts and disbursements; reconciling bank account
balances monthly; recording purchases and sales based upon communications from
the Adviser and Sub-Advisers; and preparing monthly and annual summaries to
assist in the preparation of financial statements of, and regulatory reports
for, the Trust. The Trust may employ foreign sub-custodians that are approved by
the Board of Trustees to hold foreign assets.
TRANSFER AGENT SERVICES
ADS provides transfer agent and dividend disbursing services to the Focus
30 Fund, Health & Biotechnology Fund, and the Cash Reserves Fund.
State Street provides transfer agent and dividend disbursing services to the
Growth Fund, the Info-Tech & Communications Fund and the Strategic Natural
Resources Fund.
DISTRIBUTION OF SHARES
Funds Distributor, Inc. (the "Distributor" or "FDI") serves as the distributor
of the shares of each class of each Fund pursuant to a Distribution Agreement
between the Distributor and the Trust. The Distributor's principal business
address is 60 State Street, Boston, Massachusetts 02108.
Under the terms of the Class A and Class B Distribution Plans and Agreements
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Rule 12b-1
Plans"), the Distributor receives front-end or contingent deferred sales
commissions or sales loads on Class A and Class B Shares and fees for providing
services to the Class A and Class B Shares of each Fund, other than the Cash
Reserves Fund, under the Distribution Agreements. In addition, pursuant to the
Rule 12b-1 Plans, each of the Funds are
36
<PAGE>
authorized to use a portion of their assets attributable to the Class A and
Class B Shares to finance certain activities relating to the distribution of
their shares to investors.
The Plan adopted for Class A Shares, allows each Fund, other than the Cash
Reserves Fund, to pay the Distributor quarterly at a rate equal to an
annualized rate of 0.40% of the average daily net assets attributable to the
Class A Shares of that Fund. The Plan adopted for Class B Shares allows each
Fund, other than the Cash Reserves Fund, to pay the Distributor quarterly at
a rate equal to 0.75% of the average daily net assets attributable to the
Class B Shares of that Fund during that quarter. The Class B Plan also allows
each Fund to pay the Distributor for certain shareholder services provided to
Class B shareholders or other service providers that have entered into
agreements with the Distributor to provide these services. For these
services, each Fund pays a shareholder service fee equal to 0.25% of average
net assets attributable to Class B Shares of the Fund on an annualized basis.
A Fund may pay fees to the Distributor at a lesser rate, as agreed upon by
the Board of Trustees of the Trust and the Distributor. The Rule 12b-1 Plans
authorize payments to the Distributor as compensation for providing account
maintenance services to investors in the Class A and Class B Shares of the
Fund, including arranging for certain securities dealers or brokers,
administrators and others ("Recipients") to provide these services and paying
compensation for these services. Each Fund will bear its own costs of
distribution with respect to its Shares.
The services to be provided by Recipients may include, but are not limited to,
the following: assistance in the offering and sale of the Class A and Class B
Shares of the Funds and in other aspects of the marketing of the shares to
clients or prospective clients of the respective recipients; answering routine
inquiries concerning a Fund; assisting in the establishment and maintenance of
accounts or sub-accounts in a Fund and in processing purchase and redemption
transactions; making a Fund's investment plans and shareholder services
available; and providing such other information and services to investors in
shares of a Fund as the Distributor or the Trust, on behalf of a Fund, may
reasonably request. The distribution services shall also include any advertising
and marketing services provided by or arranged by the Distributor with respect
to the Funds.
The Distributor is required to provide a written report, at least quarterly to
the Board of Trustees of the Trust, specifying in reasonable detail the
amounts expended pursuant to the Rule 12b-1 Plans and the purposes for which
such expenditures were made. Further, the Distributor will inform the Board of
any Rule 12b-1 fees to be paid by the Distributor to Recipients.
The initial term of the Rule 12b-1 Plans is one year and this will continue in
effect from year to year thereafter, provided such continuance is specifically
approved at least annually by a majority of the Board of Trustees of the Trust
and a majority of the Trustees who are not "interested persons" of the Trust and
do not have a direct or indirect financial interest in the Rule 12b-1 Plans
("Rule 12b-1 Trustees") by votes cast in person at a meeting called for the
purpose of voting on the Rule 12b-1 Plans. The Rule 12b-1 Plans and Agreements
may be terminated at any time by the Trust or any Fund by vote of a majority of
the Rule 12b-1 Trustees or by vote of a majority of the outstanding voting Class
A or B Shares of the Trust or the affected Fund. The Rule 12b-1 Plans will
terminate automatically in the event of their assignment (as defined in the 1940
Act).
The Rule 12b-1 Plans may not be amended to increase materially the amount of the
Distributor's compensation to be paid by a Fund, unless such amendment is
approved by the vote of a majority of the outstanding voting securities of the
Fund (as defined in the 1940 Act). All material amendments must be approved by a
majority of the Board of Trustees of the Trust and a majority of the Rule 12b- 1
Trustees by votes cast in person at a meeting called for the purpose of voting
on a Rule 12b-1 Plan. During the term of the Rule 12b-1 Plans, the selection and
nomination of non-interested Trustees of the Trust will be committed to the
discretion of current non-interested Trustees. The Distributor will preserve
copies of the Rule 12b-1 Plans, any related agreements, and all reports, for a
period of not less than six years from the date of such document and for at
least the first two years in an easily accessible place.
Any agreement related to a Rule 12b-1 Plan will be in writing and provide that:
(a) it may be terminated by the Trust or a Fund at any time upon sixty days'
written notice, without the payment of any penalty, by vote of a majority of the
respective Rule 12b-1 Trustees, or by vote of a majority of the outstanding
voting securities of the Trust or the affected Fund; (b) it will automatically
terminate in the event of its assignment (as defined in the 1940 Act); and (c)
it will continue in effect for a period of more than one year from the date of
its execution or adoption only so long as such continuance is specifically
approved at least annually
37
<PAGE>
by a majority of the Board and a majority of the Rule 12b-1 Trustees by votes
cast in person at a meeting called for the purpose of voting on such agreement.
The following table shows the distribution fees paid for Class A shares of the
Funds for the fiscal years ended April 30, 1998 and April 30, 1999. As of July
12, 1999, the Focus 30 Fund, Health & Biotechnology Fund and the Cash
Reserves Fund had not commenced operations.
Class A Distribution Fees
<TABLE>
<CAPTION>
Paid to Investment
Fund Professionals Retained by FDI
---- ------------------ ---------------
<S> <C> <C>
Growth Fund
April 30, 1998* $ 549.20 $ 487.28
April 30, 1999 $ 2,656.81 $ 1,595.25
Info-Tech & Communications Fund
April 30, 1998* $ 809.40 $ 620.63
April 30, 1999 $33.787.95 $20,190.48
Strategic Natural Resources Fund
April 30, 1998** $ 3,625.67 $ 3,149.26
April 30, 1999 $ 8,942.34 $ 5,429.90
</TABLE>
* Fiscal period October 22, 1997 through April 30, 1998.
** Fiscal period October 23, 1997 through April 30, 1998.
The following table shows the distribution fees paid and retained by the
Distributor for Class B shares of the Funds for the fiscal years ended April 30,
1998 and April 30, 1999. As of July 12, 1999, the Focus 30 Fund, the
Health & Biotechnology Fund and the Cash Reserves Fund had not commenced
operations.
Class B Distribution and Services Fees
<TABLE>
<CAPTION>
Distribution Fees Paid
to Investment Distribution Fees Shareholder Service
Fund Professionals retained by FDI Fees Retained by FDI
---- ---------------------- ----------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Growth Fund
April 30, 1999* $0 $ 111.13 $ 20.27 $0
Info-Tech & Communications Fund
April 30, 1999* $0 $26,078.91 $1,940.14 $0
38
<PAGE>
Strategic Natural Resources Fund
April 30, 1999** $0 $ 475.52 $ 158.50 $0
</TABLE>
* Fiscal period September 16, 1998 through April 30, 1999.
** Fiscal period September 21, 1998 through April 30, 1999.
The following table shows the sales charge revenues collected, and retained by
FDI for the past two fiscal years.
<TABLE>
<CAPTION>
Sales Charge CDSC Revenue
Revenue
Amount Amount Amount Amount
Paid Retained Paid Retained
Fund to FDI by FDI to FDI by FDI
---- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Growth Fund - Class A
April 30, 1998* $ 5,000 $0 $ 0 $0
April 30, 1999 $ 27,000 $0 $ 0 $0
Growth Fund - Class B
April 30, 1999** $ 2,472.10 $0 $ 228.91 $0
Info-Tech & Communications Fund -
Class A
April 30, 1998* $ 48,000 $0 $ 0 $0
April 30, 1999 $ 1,872,000 $0 $ 0 $0
Info-Tech & Communications Fund -
Class B
April 30, 1999** $ 589,551 $0 $3,770.57 $0
Strategic Natural Resources Fund -
Class A
April 30, 1998*** $ 39,000 $0 $ 0 $0
April 30, 1999 $ 113,000 $0 $ 0 $0
Strategic Natural Resources Fund -
Class B
April 30, 1999**** $ 13,768.29 $0 $ 975.50 $0
</TABLE>
39
<PAGE>
* Fiscal period October 22, 1997 through April 30, 1998.
** Fiscal period September 16, 1998 through April 30, 1999.
*** Fiscal period October 23, 1997 through April 30, 1998.
*** Fiscal period September 21, 1998 through April 30, 1999.
The following table shows amounts paid by each Fund under its Class A 12b-1
Plans during the fiscal year ended April 30, 1999. As of July 12, 1999, the
Focus 30 Fund, the Health & Biotechnology Fund and the Cash Reserves Fund
had not commenced operations.
<TABLE>
<CAPTION>
Compensation to Compensation to
Fund Underwriters Dealers
---- ------------ -------
<S> <C> <C>
Growth Fund $ 1,595 $ 2,657
Info-Tech & $20,190 $33,788
Communications Fund
Strategic Natural $ 5,430 $ 8,942
Resources Fund
</TABLE>
The following table shows amounts paid by each Fund under its Class B 12b-1
Plans during the fiscal year ended April 30, 1999. As of July 12, 1999, the
Focus 30 Fund, the Health & Biotechnology Fund and the Cash Reserves Fund
had not commenced operations.
40
<PAGE>
<TABLE>
<CAPTION>
Interest
Carrying or
other
Compensation to Financing
Fund Sales Personnel Charges
---- --------------- -------
<S> <C> <C>
Growth Fund $ 20 $ 111
Info-Tech & $1,940 $26,079
Communications Fund
Strategic Natural $ 13 $ 475
Resources Fund
</TABLE>
BROKERAGE ALLOCATION AND OTHER PRACTICES
Subject to the general supervision of the Board of Trustees of the Trust, the
Adviser is responsible for making decisions with respect to the purchase and
sale of portfolio securities on behalf of the Funds. The Adviser is also
responsible for the implementation of those decisions, including the
selection of broker-dealers to effect portfolio transactions, the negotiation
of commissions, and the allocation of principal business and portfolio
brokerage.
In purchasing and selling each Fund's portfolio securities, it is the
Adviser's policy to obtain quality execution at the most favorable prices
through responsible broker-dealers and, in the case of agency transactions,
at competitive commission rates where such rates are negotiable. However,
under certain conditions, a Fund may pay higher brokerage commissions in
return for brokerage and research services. In selecting broker-dealers to
execute a Fund's portfolio transactions, consideration is given to such
factors as the price of the security, the rate of the commission, the size
and difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing brokers and
dealers, their expertise in particular markets and the brokerage and research
services they provide to the Adviser or the Funds. It is not the policy of
the Adviser to seek the lowest available commission rate where it is believed
that a broker or dealer charging a higher commission rate would offer greater
reliability or provide better price or execution.
Transactions on stock exchanges involve the payment of brokerage commissions. In
transactions on stock exchanges in the United States, these commissions are
negotiated. Traditionally, commission rates have generally not been negotiated
on stock markets outside the United States. In recent years, however, an
increasing number of overseas stock markets have adopted a system of negotiated
rates, although a number of markets continue to be subject to an established
schedule of minimum commission rates. It is expected that equity securities will
ordinarily be purchased in the primary markets, whether over-the-counter or
listed, and that listed securities may be purchased in the over-the-counter
market if such market is deemed the primary market. In the case of securities
traded on the over-the-counter markets, there is generally no stated commission,
but the price usually includes an undisclosed commission or markup. In
underwritten offerings, the price includes a disclosed, fixed commission or
discount.
For fixed income securities, it is expected that purchases and sales will
ordinarily be transacted with the issuer, the issuer's underwriter, or with a
primary market maker acting as principal on a net basis, with no brokerage
commission being paid by the Fund. However, the price of the securities
generally includes compensation which is not disclosed separately. Transactions
placed through dealers who are serving as primary market makers reflect the
spread between the bid and asked prices.
41
<PAGE>
With respect to equity and fixed income securities, the Adviser may effect
principal transactions on behalf of the Funds with a broker or dealer
whofurnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts or other allowances or
otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings. The prices the Funds pay to
underwriters of newly-issued securities usually include a concession paid by
the issuer to the underwriter. The Adviser may receive research services in
connection with brokerage transactions, including designations in fixed price
offerings.
The Adviser and Sub-Adviser receive a wide range of research services from
brokers and dealers covering investment opportunities throughout the world,
including information on the economies, industries, groups of securities,
individual companies, statistics, political developments, technical market
action, pricing and appraisal services, and performance analyses of all the
countries in which a Fund's portfolio is likely to be invested. The Adviser or
Sub-Adviser cannot readily determine the extent to which commissions charged by
brokers reflect the value of their research services, but brokers occasionally
suggest a level of business they would like to receive in return for the
brokerage and research services they provide. To the extent that research
services of value are provided by brokers, the Adviser [or Sub-Adviser] may be
relieved of expenses which it might otherwise bear. In some cases, research
services are generated by third parties but are provided to the Adviser and
Sub-Adviser by or through brokers.
Certain broker-dealers which provide quality execution services also furnish
research services to the Adviser and Sub-Adviser. The Adviser and Sub-Adviser
have adopted brokerage allocation policies embodying the concepts of Section
28(e) of the Securities Exchange Act of 1934, which permits an investment
adviser to cause its clients to pay a broker which furnishes brokerage or
research services a higher commission than that which might be charged by
another broker which does not furnish brokerage or research services, or which
furnishes brokerage or research services deemed to be of lesser value, if such
commission is deemed reasonable in relation to the brokerage and research
services provided by the broker, viewed in terms of either that particular
transaction or the overall responsibilities of the adviser with respect to the
accounts as to which it exercises investment discretion. Accordingly, the
Adviser or Sub-Adviser may assess the reasonableness of commissions in light of
the total brokerage and research services provided by each particular broker.
The Adviser or Sub-Adviser may also consider sales of the Funds' Shares as a
factor in the selection of broker-dealers.
Portfolio securities will not be purchased from or sold to the Adviser or
Sub-Adviser, or the Distributor, or any affiliated person of any of them acting
as principal, except to the extent permitted by rule or order of the SEC.
For the fiscal period October 16, 1997 through April 30, 1998, the Funds paid
brokerage commissions as follows: $9,293 for the Growth Fund, $1,801 for the
Info-Tech & Communications Fund and $81,999 for the Strategic Natural
Resources Fund.
For the fiscal year ended April 30, 1999, the Funds paid brokerage
commissions as follows: $21,022 for the Growth Fund, $102,306 for the
Info-Tech & Communications Fund and $137,895 for the Strategic Natural
Resources Fund.
PURCHASE AND REDEMPTION OF SECURITIES BEING OFFERED
WAIVERS OF INITIAL SALES CHARGE FOR CLASS A SHARES. The initial sales charge
Class A
42
<PAGE>
Shares of the Funds is waived on the following types of purchases: (1) purchases
by investors who have invested $1 million or more in one Fund alone or in any
combination of Funds;(2) purchases by the officers, directors/trustees, and
employees of the Trust, the Advisor or the Distributor; the immediate family
members of any such person; any trust or individual retirement account or self-
employed retirement plan for the benefit of any such person or family members;
or the estate of any such person or family members; (3) purchases by Selling
Group Members, for their own accounts, or for retirement plans for their
employees or sold to registered representatives or full time employees (and
their immediate families) that certify to the Distributor at the time of
purchase that such purchase is for their own account (or for the benefit of
their immediate families); (4)purchases by a charitable organization (as defined
in Section 501(c)(3) of the Internal Revenue Code) investing $100,000 or more;
(5) purchases by a charitable remainder trust or life income pool established
for the benefit of a charitable organization (as defined in Section 501(c)(3) of
the Internal Revenue Code); (6)purchases with trust assets; (7) purchases in
accounts as to which a Selling Group Member charges an account management fee;
(8) purchases by any state, county, or city, or any governmental
instrumentality, department, authority or agency; (9) purchases with redemption
proceeds from another mutual fund (which is not a series of the Trust) on which
the investor has paid a front-end sales charge only; (10) purchases of Class A
Shares by clients of certain securities dealers offering programs in which the
client pays a separate fee to an advisor providing financial management or
consulting services, including WRAP fee programs; (11) purchases of Class A
Shares by certain fee paid investment advisers purchasing on behalf of their
clients; (12) purchases of Class A Shares made through certain fee-waived
programs sponsored by third parties; (13) Class A Shares issued in plans of
reorganization such as mergers, asset acquisitions and exchange offers to which
a Fund is a party; and, (14) purchases made through a broker-dealer or financial
intermediary which maintains a net asset value purchase program that enables the
Funds to realize certain economies of scale.
In addition, purchases may be made at net asset value by the following:
Investment Advisors or Financial Planners who place trades for their own
accounts or the accounts of their clients and who charge a management,
consulting or other fee for their services; and clients of such investment
advisors or financial planners who place trades for their own accounts if the
accounts are linked to the master account of such investment advisor or
financial planner on the books and records of the broker or agent.
Retirement and deferred compensation plans and trusts used to fund those
plans, including, but not limited to, those defined in section 401(a),
403(b), or 457 of the Internal Revenue Code and "rabbi trusts".
The securities dealers offering WRAP fees or similar programs may charge a
separate fee for purchases and redemptions of Class A Shares. Neither the Fund,
the Advisor, nor the Distributor receives any part of the fees charged clients
of such securities dealers or financial advisors. To qualify for the purchase of
such Class A Shares, Fund Employees and other persons listed in section (2) must
provide the Transfer Agent with a letter stating that the purchase is for their
own investment purposes only and that the shares will not be resold except to
the Funds.
LETTER OF INTENT. In submitting a Letter of Intent to purchase Class A Shares of
the Funds at a reduced sales charge, the investor agrees to the terms of the
Prospectus, the Applications used to buy such shares, and the language in this
Statement of Additional Information as to Letters of Intent, as they may be
amended from time to time by the Trust. Such amendments will apply automatically
to existing Letters of Intent.
A Letter of Intent ("Letter") is the investor's statement of intention to
purchase Class A Shares of one or more of the Funds during the 13-month period
from the investor's first purchase pursuant to the Letter (the "Letter of Intent
period"), which may, at the investor's request, include purchases made up to 90
days prior to the date of the Letter. The investor states the intention to make
the aggregate amount of purchases (excluding any reinvestment of dividends or
distributions or purchases made at net asset value without sales charge), which
together with the investor's holdings of such funds (calculated at their
respective public offering prices calculated on the date of the Letter) will
equal or exceed the amount specified in the Letter to obtain the reduced sales
charge rate (as set forth in "How To Purchase Shares" in the Prospectus)
applicable to purchases of shares in that amount (the "intended amount"). Each
purchase under the Letter will be made at the public offering price applicable
to a single lump-sum purchase of shares in the intended amount, as described in
the Prospectus.
In submitting a Letter, the investor makes no commitment to purchase Class A
Shares, but if the investor's purchases of Class A Shares within the Letter of
Intent period, when added to the value (at offering price) of the investor's
holdings of such Fund shares on the last day of that period, do not equal or
exceed the intended amount, the investor agrees to pay the additional amount of
sales charge applicable to such purchases, as set forth in "Terms of Escrow,"
below, as those terms may be amended from time to time.
43
<PAGE>
The investor agrees that shares equal in value to 5% of the intended amount will
be held in escrow by the Trust's transfer agent subject to the Terms of Escrow.
If the total eligible purchases made during the Letter of Intent period do not
equal or exceed the intended amount, the commissions previously paid to the
dealer of record for the account and the amount of sales charge retained by the
Distributor will be adjusted to the rates applicable to actual total purchases.
If total eligible purchases during the Letter of Intent period exceed the
intended amount and exceed the amount needed to qualify for the next sales
charge rate reduction set forth in the applicable prospectus, the sales charges
paid will be adjusted to the lower rate, but only if and when the dealer returns
to the Distributor the excess of the amount of commissions allowed or paid to
the dealer over the amount of commissions that apply to the actual amount of
purchases. The excess commissions returned to the Distributor will be used to
purchase additional shares for the investor's account at the net asset value per
share in effect on the date of such purchase, promptly after the Distributor's
receipt thereof.
In determining the total amount of purchases made under a Letter, Class A Shares
redeemed by the investor prior to the termination of the Letter of Intent period
will be deducted. It is the responsibility of the dealer of record and/or the
investor to refer to the Letter in placing any purchase orders for the investor
during the Letter of Intent period. All of such purchases must be made through
the Distributor.
Terms of Escrow
1. Out of the initial purchase (or subsequent purchases if necessary) made
pursuant to a Letter, Class A Shares of the Fund equal in value to 5% of the
intended amount specified in the Letter shall be held in escrow by the Fund's
transfer agent. For example, if the intended amount specified under the Letter
is $50,000, the escrow shall be shares valued in the amount of $2,500 (computed
at the public offering price adjusted for a $50,000 purchase). Any dividends and
capital gains distributions on the escrowed shares will be credited to the
investor's account.
2. If the total minimum investment specified under the Letter is completed
within the thirteen-month Letter of Intent period, the escrowed shares will be
promptly released to the investor.
3. If, at the end of the thirteen-month Letter of Intent period the total
purchases pursuant to the Letter are less than the intended amount specified in
the Letter, the investor must remit to the Distributor an amount equal to the
difference between the dollar amount of sales charges actually paid and the
amount of sales charges which would have been paid if the total amount purchased
had been made at a single time. Such sales charge adjustment will apply to any
shares redeemed prior to the completion of the Letter. If such difference in
sales charges is not paid within twenty days after a request from the
Distributor or the dealer, the Distributor will, within sixty days of the
expiration of the Letter, redeem the number of escrowed shares necessary to
realize such difference in sales charges. Full and fractional shares remaining
after such redemption will be released from escrow. If a request is received to
redeem escrowed shares prior to the payment of such additional sales charge, the
sales charge will be withheld from the redemption proceeds.
4. By signing the Letter, the investor irrevocably constitutes and appoints the
transfer agent of the Trust as attorney-in-fact to surrender for redemption any
or all escrowed shares.
5. Shares held in escrow hereunder will automatically be exchanged for shares of
another Fund to which an exchange is requested, and the escrow will be
transferred to that other Fund.
In-Kind. Each Fund intends to pay all redemptions of its shares in cash.
However, each Fund may make full or partial payment of any redemption request by
the payment to shareholders of portfolio securities of the applicable Fund
(i.e., by redemption-in-kind), at the value of such securities used in
determining the redemption price. The Funds, nevertheless, pursuant to Rule
18f-1 under the 1940 Act, have filed a notification of election under which each
Fund is committed to pay in cash to any shareholder of record, all such
shareholder's requests for redemption made during any 90-day period, up to the
lesser of $250,000 or
44
<PAGE>
1% of the applicable Fund's net asset value at the beginning of such period. The
securities to be paid in-kind to any shareholders will be readily marketable
securities selected in such manner as the Board of Trustees of the Trust deems
fair and equitable. If shareholders were to receive redemptions-in-kind, they
would incur brokerage costs should they wish to liquidate the portfolio
securities received in such payment of their redemption request. The Trust does
not anticipate making redemptions-in-kind.
The right to redeem shares or to receive payment with respect to any redemption
of shares of the Funds may only be suspended (1) for any period during which
trading on the New York Stock Exchange ("NYSE") is restricted or such Exchange
is closed, other than customary weekend and holiday closings, (2) for any period
during which an emergency exists as a result of which disposal of securities or
determination of the net asset value of the Fund is not reasonably practicable,
or (3) for such other periods as the SEC may by order permit for protection of
shareholders of the Funds.
CLASS D SHARES OF THE FOCUS 30 FUND. Class D Shares of the Focus 30 Fund are
available for purchase by the following persons: (1) shareholders who were
shareholders of the ASM Index 30 Fund at the time of the reorganization of
the ASM Fund into the Focus 30 Fund and certain related accounts of those
shareholders, (2) employees, and certain related accounts of employees, of
Orbitex Financial Services Group, Inc. ("OFSG") and its affiliates; and (3)
certain institutional investors including broker-dealers or financial
intermediaries that maintain net asset value purchase programs that enable
the Fund to realize certain economies of scale.
"Related accounts" include: the shareholder, one of the shareholder's
immediate family members, a trust or individual retirement account or
self-employed retirement plan for the benefit of the shareholder or the
shareholder's immediate family members, and the estate of the shareholder or
the shareholder's immediate family.
SHAREHOLDER SERVICES
Systematic Withdrawal Program. A shareholder owning or purchasing shares of any
Fund having a total value of $10,000 or more may participate in a systematic
withdrawal program providing regular monthly or quarterly payments. An
application form containing details of the Systematic Withdrawal Program is
available upon request from the Funds' transfer agent. The Program is voluntary
and may be terminated at any time by the shareholders.
Income dividends and capital gain distributions on shares of the Funds held in a
Systematic Withdrawal Program are automatically reinvested in additional shares
of the relevant Fund at net asset value. A Systematic Withdrawal Program is not
an annuity and does not and cannot protect against loss in declining markets.
Amounts paid to a shareholder from the Systematic Withdrawal Program represents
the proceeds from redemptions of Fund shares, and the value of the shareholder's
investment in a Fund will be reduced to the extent that the payments exceed any
increase in the aggregate value of the shareholder's shares (including shares
purchased through reinvestment of dividends and distributions). If a shareholder
receives payments that are greater than the appreciation in value of his or her
shares, plus the income earned on the shares, the shareholder may eventually
withdraw his or her entire account balance. This will occur more rapidly in a
declining market. For tax purposes, depending upon the shareholder's cost basis
and date of purchase, each withdrawal will result in a capital gain or loss. See
"Dividends, Distributions and Taxes" in this SAI and in the Funds' Prospectus.
The Funds offer certain shareholder services, which are designed to facilitate
investment in their shares. Each of the options is described in the Funds'
Prospectus. All of these special services may be terminated by either the Funds
or the shareholder without any prior written notice.
Systematic Exchange Program. The Systematic Exchange Program allows you to make
regular, systematic exchanges from one Orbitex Fund account into another Orbitex
Fund account. By setting up the program, you authorize the Fund and its agents
to redeem a set dollar amount or number of shares from the first account and
purchase shares of a second Fund. An exchange transaction is a sale and a
purchase of shares for federal income tax purposes and may result in a capital
gain or loss.
To participate in the Systematic Exchange Program, you must have an initial
account balance of $10,000 in the first account and at least $1,000 in the
second account. Exchanges may be made on any day or days of your choice. If the
amount remaining in the first account is less than the exchange amount you
requested, then the remaining amount will be exchanged. At such time as the
first account has a zero balance, your participation in the program will be
terminated. You may also terminate the program by calling or writing the Fund.
Once participation in the program has been terminated for any reason, to
reinstate the program you must do so in writing; simply investing additional
funds will not reinstate the program.
DETERMINATION OF NET ASSET VALUE
45
<PAGE>
The net asset value per share of a Fund will be determined for each class of
shares. The net asset value per share of a given class of shares of a Fund is
determined by calculating the total value of the Fund's assets attributable to
such class of shares, deducting its total liabilities attributable to such class
of shares in conformance with the provisions of the plan adopted by the Fund in
accordance with Rule 18f-3 under the 1940 Act., and dividing the result by the
number of shares of such class outstanding. The net asset value of shares of
each class of each Fund, other than the Cash Reserves Fund, is normally
calculated as of the close of trading on the NYSE on every day the NYSE is open
for trading. The NYSE is open Monday through Friday except on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value of the Cash Reserves Fund is normally
calculated at 3:00 p.m. Eastern time on each day that the Federal Reserve Bank
of New York is open. The Federal Reserve Bank of New York is open Monday through
Friday except on the following holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.
The net asset value per share of the different classes of shares is expected to
be substantially the same; from time to time, however, the per share net asset
value of the different classes of shares may differ.
For each Fund, other than the Cash Reserves Fund, short-term debt instruments
with a remaining maturity of more than 60 days, intermediate and long-term
bonds, convertible bonds, and other debt securities are generally valued on the
basis of dealer supplied quotations or by pricing system selected by the Adviser
and approved by the Board of Trustees of the Trust. Where such prices are not
available, valuations will be obtained from brokers who are market makers for
such securities. However, in circumstances where the Adviser or a Sub-Adviser
deems it appropriate to do so, the mean of the bid and asked prices for over-
the-counter securities or the last available sale price for exchange-traded debt
securities may be used. Where no last sale price for exchange traded debt
securities is available, the mean of the bid and asked prices may be used.
Short-Term debt securities with a remaining maturity of 60 days or less are
amortized to maturity, provided such valuations represent par value.
Other securities and assets for which market quotations are not readily
available or for which valuation cannot be provided, as described above, are
valued as determined in good faith in accordance with procedures approved by the
Board of Trustees of the Trust.
Trading in securities on Far Eastern securities exchanges and over-the-counter
markets is normally completed well before the close of business on each business
day in New York (i.e., a day on which the NYSE is open). In addition, Far
Eastern securities trading generally or in a particular country or countries may
not take place on all business days in New York. Furthermore, trading takes
place in Japanese markets on certain Saturdays in various foreign markets on
days which are not business days in New York and on which a Fund's net asset
value is not calculated. Each Fund calculates net asset value per share, and
therefore effects sales, redemptions and repurchases of its shares, as of the
close of regular trading on the NYSE once on each day on which the NYSE is open.
Such calculation may not take place contemporaneously with the determination of
the prices of the majority of the portfolio securities used in such calculation.
If events materially affecting the value of such securities occur between the
time when their price is determined and the time when the Fund's net asset value
is calculated, such securities will be valued at fair value as determined in
good faith in accordance with procedures approved by the Board of Trustees of
the Trust.
The securities in the Cash Reserve Fund's portfolio are valued at their
amortized cost which does not take into account unrealized gains or losses on
securities. This method involves initially valuing a security at its cost and
thereafter assuming a constant amortization to maturity of any premium paid or
accreting discount. The amortized cost method minimizes changes in the market
value of the Fund's portfolio securities and is intended to help maintain a
stable price of $1.00 per share; there can be no assurance, however, that the
net asset value of the Cash Reserves Fund will remain at $1.00.
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TAXES
Each Fund intends to qualify as a "regulated investment company" ("RIC") under
Subchapter M of the Internal Revenue Code. In general, to qualify as a RIC: (a)
at least 90% of the gross income of a Fund for the taxable year must be derived
from dividends, interest, payments with respect to loans of securities, gains
from the sale or other disposition of securities, or other income derived with
respect to its business of investing in securities; (b) a Fund must distribute
to its shareholders 90% of its ordinary income and net short-term capital gains;
and (c) a Fund must diversity its assets so that, at the close of each quarter
of its taxable year, (i) at least 50% of the fair market value of its total
(gross) assets is comprised of cash, cash items, U.S. Government securities,
securities of other regulated investment companies and other securities limited
in respect of any one issuer to no more than 5% of the fair market value of the
Fund's total assets and 10% of the outstanding voting securities of such issuer
and (ii) no more than 25% of the fair market value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies) or of two or
more issuers controlled by the Fund and engaged in the same, similar, or related
trades or businesses.
In addition, each Fund must declare and distribute dividends equal to at least
98% of its ordinary income (as of the twelve months ended December 31) and at
least 98% of its net capital gain (as of the twelve months ended October 31), in
order to avoid a federal excise tax. Each Fund intends to make the required
distributions, but they cannot guarantee that they will do so. Dividends
attributable to a Fund's ordinary income and net capital gain are taxable as
such to shareholders in the year in which they are received except dividends
declared in October, November and December to the shareholders of record on a
specified date in such a month and paid in January of the following year are
taxable in the previous year.
A corporate shareholder may be entitled to take a deduction for income dividends
received by it that are attributable to dividends received from a domestic
corporation, provided that both the corporate shareholder retains its shares in
the applicable Fund for more than 45 days and the Fund retains its shares in the
issuer from whom it received the income dividends for more than 45 days. A
distribution of net capital gain reflects a Fund's excess of net long-term gains
over its net short-term losses. Each Fund must designate distributions of net
capital gain and must notify shareholders of this designation within sixty days
after the close of the Trust's taxable year. A corporate shareholder of a Fund
cannot use a dividends-received deduction for distributions of net capital gain.
Foreign currency gains and losses, including the portion of gain or loss on the
sale of debt securities attributable to foreign exchange rate fluctuations are
taxable as ordinary income. If the net effect of these transactions is a gain,
the dividend paid by the Fund will be increased; if the result is a loss, the
income dividend paid by the Fund will be decreased. Adjustments to reflect these
gains and losses will be made at the end of each Fund's taxable year.
At the time of purchase, each Fund's net asset value may reflect undistributed
income or net capital gains. A subsequent distribution to shareholders of such
amounts, although constituting a return of their investment, would be taxable
either as dividends or capital gain distributions. For federal income tax
purposes, each Fund is permitted to carry forward its net realized capital
losses, if any, for eight years, and realize net capital gains up to the amount
of such losses without being required to pay taxes on, or distribute such gains.
Income received by each Fund from sources within various foreign countries may
be subject to foreign income taxes withheld at the source. Under the Internal
Revenue Code, if more than 50% of the value of a Fund's total assets at the
close of its taxable year comprise securities issued by foreign corporations,
the Fund may file an election with the Internal Revenue Service to "pass
through" to the Fund's shareholders the amount of any foreign income taxes paid
by the Fund. Pursuant to this election, shareholders will be required to: (i)
include in gross income, even though not actually received, their respective pro
rata share of
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foreign taxes paid by the Fund; (ii) treat their pro rata share of foreign taxes
as paid by them; and (iii) either deduct their pro rata share of foreign taxes
in computing their taxable income, or use it as a foreign tax credit against
U.S. income taxes (but not both). No deduction for foreign taxes may be claimed
by a shareholder who does not itemize deductions.
The Strategic Natural Resources Fund intends to meet the requirements of the
Internal Revenue Code to "pass through" to its shareholders foreign income taxes
paid, but there can be no assurance that it will be able to do so. Shareholders
ofthe Strategic Natural Resources Fund will be notified within 60 days after the
close of each taxable year of a Fund, if that Fund will "pass through" foreign
taxes paid for that year, and, if so, the amount of each shareholder's pro rata
share (by country) of (i) the foreign taxes paid, and (ii) the Fund's gross
income from foreign sources. Of course, shareholders who are not liable for
federal income taxes, such as retirement plans qualified under Section 401 of
the Internal Revenue Code, will not be affected by any such "pass through" of
foreign tax credits.
If, in any taxable year, a Fund should not qualify as a RIC under the Internal
Revenue Code: (1) that Fund would be taxed at normal corporate rates on the
entire amount of its taxable income without deduction for dividends paid or
other distributions to its shareholders, and (2) that Fund's distributions to
the extent made out of that Fund's current or accumulated earnings and profits
would be taxable to its shareholders (other than shareholders in tax deferred
accounts) as ordinary dividends (regardless of whether they would otherwise have
been considered capital gain dividends), and may qualify for the deduction for
dividends received by corporations.
PASSIVE FOREIGN INVESTMENT COMPANIES. Each Fund may invest in the stock of
foreign companies that may be treated as "passive foreign investment companies"
("PFICs") under the Internal Revenue Code. Certain other foreign corporations,
not operated as investment companies, may also satisfy the PFIC definition. A
portion of the income and gains that a Fund derives may be subject to a
non-deductible federal income tax unless the Fund makes a mark-to-market
election. Because it is not always possible to identify a foreign issuer as a
PFIC in advance of making the investment, the Fund's will elect to do
mark-to-market and identified PFIC to avoid the PFIC tax.
If a Fund purchases shares in certain foreign passive investment entities
described in the Internal Revenue Code as passive foreign investment companies
("PFIC"), the Fund will be subject to U.S. federal income tax on a portion of
any "excess distribution" (the Fund's ratable share of distributions in any year
that exceeds 125% of the average annual distribution received by the Fund in the
three preceding years or the Fund's holding period, if shorter, and any gain
from the disposition of such shares) even if such income is distributed as a
taxable dividend by the Fund to its shareholders. Additional charges in the
nature of interest may be imposed on the Fund in respect of deferred taxes
arising from such "excess distributions." If the Fund were to invest in a PFIC
and elect to treat the PFIC as a "qualified electing fund" under the Internal
Revenue Code (and if the PFIC were to comply with certain reporting
requirements), in lieu of the foregoing requirements the Fund would be required
to include in income each year its pro rata share of the PFIC's ordinary
earnings and net realized capital gains, whether or not such amounts were
actually distributed to the Fund.
Pursuant to legislation enacted on August 5, 1997 any taxpayer holding shares of
"marketable" PFICs may make an election to mark that stock to market at the
close of the taxpayer's taxable year. A Fund making an irrevocable election will
mark its PFICs to market at taxable year-end for income tax purposes and at
October 31 for purposes of the excise tax minimum distribution requirements of
Code Section 4982. This provision is effective for taxable years of U.S.
persons beginning after December 31, 1997.
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ORGANIZATION OF THE TRUST
As a Delaware business trust entity, the Trust need not hold regular annual
shareholder meetings and, in the normal course, does not expect to hold such
meetings. The Trust, however, must hold shareholder meetings for such purposes
as, for example: (1) approving certain agreements as required by the 1940 Act;
(2) changing fundamental investment objectives, policies, and restrictions of
the Funds; and (3) filling vacancies on the Board of Trustees of the Trust in
the event that less than a majority of the Trustees were elected by
shareholders. The Trust expects that there will be no meetings of shareholders
for the purpose of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders. At
such time, the Trustees then in office will call a shareholders meeting for the
election of Trustees. In addition, holders of record of not less than two-thirds
of the outstanding shares of the Trust may remove a Trustee from office by a
vote cast in person or by proxy at a shareholder meeting called for that purpose
at the request of holders of 10% or more of the outstanding shares of the Trust.
The Funds have the obligation to assist in such shareholder communications.
Except as set forth above, Trustees will continue in office and may appoint
successor Trustees.
Costs incurred by the Growth Fund, Info-Tech & Communications Fund and
Strategic Natural Resources Fund in connection with their organization,
estimated at $15,000 for, will be amortized on a straight line basis over a
five year period beginning at the commencement of operations of each Funds.
In the event that any of the initial shares of the Funds are redeemed during
the amortization period, the redemption proceeds will be reduced by any
unamortized organization expenses in the same proportion as the number of
initial shares outstanding at the time of such redemption.
PERFORMANCE INFORMATION ABOUT THE FUNDS
Total Return Calculations
Each Fund may provide average annual total return information calculated
according to a formula prescribed by the SEC. Average annual total return will
be calculated separately for Class A, Class B and Class D Shares. According to
that formula, average annual total return figures represent the average annual
compounded rate of return for the stated period. Average annual total return
quotations reflect the percentage change between the beginning value of a static
account in the Fund and the ending value of that account measured by then
current net asset value of that Fund assuming that all dividends and capital
gains distributions during the stated period were reinvested in shares of the
Fund when paid. Total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment that would equate the
initial amount invested to the ending redeemable value of such investment,
according to the following formula:
1/n
T=(ERV/P) -1
Where:
T = average annual total return.
P = a hypothetical initial payment of $1,000.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1,5, or 10 year periods at the
end of the1, 5, or 10 year periods (or fractional portion).
Each Fund, from time to time, also may advertise its cumulative total return
figures. Cumulative total return is the compound rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of a Fund's shares and
assume that all
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dividends and capital gains distributions during the period were
reinvested in shares of that Fund. Cumulative total return is calculated by
finding the compound rates of a hypothetical investment over such period,
according to the following formula (cumulative total return is then expressed as
a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value; ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.
Yield Calculations.
In addition to providing cumulative total return information, the Cash Reserves
Fund may also illustrate its performance by providing information concerning its
yield and effective yield. Yield and effective yield will be calculated
separately for each class of shares of the Fund.
The Cash Reserve Fund's yield is computed by (a) determining the net change in
the value of a hypothetical pre-existing account in the Fund having a balance of
one share at the beginning of a seven calendar day period for which yield is to
be quoted; (b) dividing the net change by the value of the account at the
beginning of the period to obtain the base period return; and (c) annualizing
the results (I.E., multiplying the base period return by 365/7).
In addition, the Cash Reserves Fund may calculate a compound effective
annualized yuield by determing the net change in the valueof a hypothetical
pre-existing account in the Fund having a balance of one share at the beginning
of a seven calendar day period for which yield is to be quoted according to the
following formula:
365/7
Effective Yield = [(Base Period return + 1) -- 1
The net change in the value of the account reflects the value of additional
shares, but does not include realized gains and losses or unrealized
appreciation and depreciation.
[Yield fluctuations may reflect changes in the Fund's net income, and portfolio
changes resulting from net purchases or net redemptions of the Fund's shares may
affect its yield. Accordingly, the Fund's yield may vary from day to day, and
the yield stated for a particular past period is not necessarily representative
of the Fund's future yield. The Fund's yield is not guaranteed, and its
principal is not insured.]
From time to time, in reports and promotional literature, each Fund's
performance may be compared to: (1) other groups of mutual funds tracked by: (A)
Lipper Analytical Services, a widely-used independent research firm which ranks
mutual funds by overall performance, investment objectives, and asset size; (B)
Forbes Magazine's Annual Mutual Funds Survey and Mutual Fund Honor Roll; or (C)
other financial or business publications, such as Business Week, Money Magazine,
and Barron's, which provide similar information; (2) the Consumer Price Index
(measure for inflation), which may be used to assess the real rate of return
from an investment in each Fund; (3) other Government statistics such as GNP,
and net import and export figures derived from Governmental publications, e.g.,
The Survey of Current Business, which may be used to illustrate investment
attributes of each Fund or the general economic, business, investment, or
financial environment in which each Fund operates; (4) Alexander Steele's Mutual
Fund Expert, a tracking service which ranks various mutual funds according to
their performance; and (5) Morningstar, Inc. which ranks mutual funds on the
basis of historical risk and total return. Morningstar's rankings are calculated
using the mutual fund's average annual returns for a certain period and a risk
factor
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that reflects the mutual fund's performance relative to three-month Treasury
bill monthly returns. Morningstar's rankings range from five star (highest) to
one star (lowest) and represent Morningstar's assessment of the historical risk
level and total return of a mutual fund as a weighted average for 3, 5, and
10-year periods. In each category, Morningstar limits its five star rankings to
10% of the funds it follows and its four star rankings to 22.5% of the funds it
follows. Rankings are not absolute or necessarily predictive of future
performance.
In addition, the performance of the Funds may be compared to indices of broad
groups of similar but unmanaged securities or other benchmarks considered to be
representative of a Fund's holdings.
The performance of the indices that may be used as benchmarks for each Fund's
performance, unlike the returns of the Funds, do not include the effect of
paying brokerage costs (for equity securities) and other transaction costs that
investors normally incur when investing directly in the securities in those
indices.
The Trust may also illustrate a particular Fund's investment returns or returns
in general by graphs and charts, that compare, at various points in time, the
return from an investment in the particular Fund (or returns in general) on a
tax-deferred basis (assuming reinvestment of capital gains and dividends and
assuming one or more tax rates) with the same return on a taxable basis.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP whose address is 160 Federal Street, Boston,
Massachusetts 02110 serves as the Trust's Independent Accountants providing
services including (1) audit of annual financial statements, (2) assistance
and consultation in connection with SEC filings and (3) review of the annual
federal income tax returns filed on behalf of the Funds.
LEGAL MATTERS
Legal advice regarding certain matters relating to the federal securities laws
applicable to the Trust and the offer and sale of its shares has been provided
by Rogers & Wells LLP, 200 Park Avenue, New York, New York 10166, which serves
as Counsel to the Trust.
The Trust has agreed that the word "Orbitex" in its name is derived from the
name of the Adviser; that such name is the property of the Adviser for
copyrights and/or other purposes; and that therefore, such name may freely be
used by the Adviser for other investment companies, entities or products. The
Trust has further agreed that in the event that for any reason, the Adviser
ceases to be its investment adviser, the Trust will, unless the Adviser
otherwise consents, promptly take all steps necessary to change its name to one
which does not include "Orbitex."
FINANCIAL STATEMENTS
Following are (1) the Schedules of Investments for the Orbitex Group of Funds as
of April 30, 1999, (2) the Statements of Assets and Liabilities as of April 30,
1999, (3) the Statements of Operations as of April 30, 1999, (4) the Statements
of Changes in Net Assets as of April 30, 1999, (5) the Financial Highlights as
of April 30, 1999 and (6) the Notes to the Financial Statements.
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APPENDIX A
- RATED INVESTMENTS -
CORPORATE BONDS
Excerpts from MOODY'S INVESTORS SERVICES, INC. ("MOODY'S") description
of its bond ratings:
"Aaa":
Bonds that 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 that 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 that 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 that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appears
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 that 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 that are rated "B" generally lack characteristics of
desirable investments. 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 that are rated "Caa" are of poor standing. These
issues may be in default or present elements of danger may exist
with respect to principal or interest.
Moody's applies numerical modifiers (1, 2 and 3) with respect to bonds
rated "Aa" through "B". The modifier 1 indicates that the bond being rated ranks
in the higher end of its generic rating category; the
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modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
bond ranks in the lower end of its generic rating category.
Excerpts from STANDARD & POOR'S CORPORATION ("S&P") description of its
bond ratings:
"AAA":
Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
"AA":
Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from "AAA" issues by a small
degree.
"A":
Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
"BBB":
Bonds rated "BBB" are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they
normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds
in this category than for bonds in higher rated categories.
"BB", "B" AND "CCC":
Bonds rated "BB" and "B" are regarded, on balance, as
predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligations. "BB" represents a lower degree of speculation than
"B" and "CCC" the highest degree of speculation. While such bonds
will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
To provide more detailed indications of credit quality, the "AA" or "A"
ratings may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
COMMERCIAL PAPER
The rating "PRIME-1" is the highest commercial paper rating assigned by
MOODY'S. These issues (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.
Issues rated "PRIME-2" (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics of "Prime-1" rated issues, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Commercial paper ratings of S&P are current assessments of the
likelihood of timely payment of debt having original maturities of no more than
365 days. Commercial paper rated "A-1" by S&P indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
"A-1+." Commercial paper rated "A-2" by S&P indicates that capacity for timely
payment is strong. However, the relative degree of safety is not as high as for
issues designated "A-1."
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