As filed with the Securities and Exchange Commission on February 23, 1999
Securities Act Registration No. 333-45509
Investment Company Act Registration No. 811-8535
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 4 [X]
Post-Effective Amendment No. __
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 4
LIGHT REVOLUTION FUND, INC.
(Exact Name of Registrant as Specified in Charter)
704 Court A
Tacoma, Washington 98402
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, including Area Code:
(888) 463-3957
Henry Hewitt
Light Index Investment Company
704 Court A
Tacoma, Washington 98402
(Name and Address of Agent for Service)
Copies to:
Scott A. Moehrke
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202
Approximate date of commencement of proposed sale
to the public: As soon as practicable after this
Registration Statement becomes effective.
The Registrant hereby amends this Registration
Statement on such date or dates as may be necessary to
delay its effective date until the Registrant shall
file a further amendment which specifically states that
this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE
SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION
OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
Prospectus
Subject to Completion
February ___, 1999
Light Revolution Fund, Inc.
LIGHT REVOLUTION FUND
704 Court A
Tacoma, Washington 98402
1-888-463-3957
The investment objective of the Light
Revolution Fund (the "Fund") is capital
appreciation. The Fund invests primarily in
common stocks of large capitalization companies in
the technology sector engaged in the processing or
delivery of information. Light Index Investment
Company (the "Adviser") is the investment adviser
to the Fund. The Fund is a long-term investment,
intended to complement your other investments.
This Prospectus contains important
information you should consider before you invest
in the Fund, including information about risks.
Please read it carefully and keep it for future
reference.
____________________
Neither the Securities and Exchange
Commission (the "SEC") nor any state securities
commission has approved or disapproved of the
securities offered by this Prospectus, nor has the
SEC or any state securities commission passed upon
the adequacy of this Prospectus. Any
representation to the contrary is a criminal
offense.
<PAGE>
TABLE OF CONTENTS
Page No.
HIGHLIGHTS 1
FEES AND EXPENSES OF THE FUND 2
INVESTMENT OBJECTIVE 3
HOW THE FUND INVESTS AND RELATED RISKS 3
FUND MANAGEMENT 4
HOW TO PURCHASE SHARES 5
HOW TO REDEEM SHARES 7
VALUATION OF FUND SHARES 9
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN 9
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX TREATMENT 9
YEAR 2000 ISSUE 10
ADDITIONAL INFORMATION 11
_____________________________
In deciding whether to invest in the Fund, you
should rely only on information in this Prospectus or
the Statement of Additional Information (the "SAI").
The Fund has not authorized others to provide
additional information. The Fund does not authorize
the use of this Prospectus in any state or jurisdiction
in which such offering may not legally be made.
<PAGE>
HIGHLIGHTS
What is the goal of the Fund?
The Fund's goal is capital appreciation. This
goal is sometimes referred to as the Fund's investment
objective. The Fund cannot guarantee that it will
achieve its goal. For more information, see
"Investment Objective" and "How the Fund Invests and
Related Risks."
What will the Fund invest in?
The Fund invests primarily in common stocks. The
Fund may also invest in other types of securities in
pursuing its investment objective. In trying to
achieve the Fund's goal, the Adviser will use an
investment methodology based on the investment
methodology it uses to manage the Light Index. The
Light Index is a stock index which was developed and is
published by the Adviser. The companies which the
Adviser considers for inclusion in the Light Index are
publicly-traded, large capitalization companies engaged
in the processing or delivery of information, which the
Adviser expects will lead the "Light Revolution." The
Adviser created the term "Light Revolution" to describe
the transition of the world's economy from one based on
the ability to perform physical work with machines at
high speed to one based on the ability to process and
deliver information at the speed of light. The Fund
will normally invest at least a majority of its assets
in the common stocks of large capitalization companies.
For more information, see "How the Fund Invests and
Related Risks."
What are the main risks of investing in the Fund?
The main risks of investing in the Fund are:
Stock Market Risk: Stock funds like the Fund
are subject to stock market risks and significant
fluctuations in value. If the stock market declines in
value, the Fund is likely to decline in value.
Increases or decreases in the value of stocks are
generally greater than for bonds or other debt
investments.
Stock Selection Risk: The stocks selected by the
Adviser for inclusion in the Fund's portfolio may
decline in value or not increase in value when the
stock market in general is rising. The Adviser has
not previously acted as an investment adviser to a
mutual fund.
Liquidity Risk: The Adviser may not be able to
sell stocks at an optimal time or price.
You should be aware that you may lose money by
investing in the Fund. Because of the Fund's focus on
value investing, it may not be a complete investment
program for the equity portion of your portfolio.
Is the Fund an appropriate investment for me?
The Fund is suitable for long-term investors only.
The Fund is not a short-term investment vehicle. An
investment in the Fund may be appropriate if:
your goal is capital appreciation;
you want to allocate some portion of your long-
term investments to value investing;
you do not require current income from this
investment; and
you are willing to accept short-term to
intermediate-term fluctuations in investment value.
Because the Fund has been in operation for less than a
full calendar year, it has no annual return history.
<PAGE>
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that
you may pay if you buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your
investment)
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) None
Maximum deferred sales charge (load) imposed on
redemptions (as a percentage of amount redeemed) None
Redemption Fee (as a percentage of amount redeemed) (1) 1.00%
Annual Fund Operating Expenses (expenses that are
deducted from Fund assets)(2)
Management Fees(3) 1.00%
Distribution and Service (12b-1) Fees(4) 0.25%
Other Expenses(3) 0.86%
Total Annual Fund Operating Expenses(3) 2.11%
____________
(1)A redemption fee of 1% of the current market value
of the shares redeemed may be imposed on
redemptions of shares made within 12 months of
purchase. Redemption fees are paid directly into
Fund assets to help cover the costs that short-term
trading generates. A fee of $12.00 is charged for
each wire redemption. See "How to Redeem Shares -
In General."
(2)Fund operating expenses are deducted from Fund
assets before computing the daily share price or
making distributions. As a result, they will not
appear on your account statement, but instead
reduce the amount of total return you receive.
(3)"Other Expenses" have been estimated for the
current fiscal year because the Fund does not
expect to begin operations until March 31, 1999.
Until March 31, 2000, the Adviser has agreed to
waive its management fee and/or reimburse the
Fund's other expenses to the extent necessary to
ensure that the Fund's total annual operating
expenses which include management and
administration fees, but which exclude interest,
taxes, brokerage commissions and other costs
incurred in connection with the purchase and sale
of portfolio securities, and extraordinary items,
do not exceed 2.00% of its average net assets.
After such date, the total annual operating expense
limitations may be terminated or revised at any
time. "Other expenses" are presented before any
such waivers or reimbursements. If such waivers
and reimbursements are included in the calculation
of "other expenses" (i.e., if actual "other
expenses" are shown), other expenses and total
annual operating expenses for the Fund are expected
to be 0.75% and 2.00%, respectively. Any waiver or
reimbursement is subject to later adjustment to
allow the Adviser to recoup amounts waived or
reimbursed, including initial organization costs of
the Fund, to the extent actual fees and expenses
for a period are less than the expense limitation
cap, provided, however, that the Adviser shall only
be entitled to recoup such amounts for a period of
three years from the date such amount was waived or
reimbursed. For additional information, see "Fund
Management."
(4)Because Rule 12b-1 fees are paid out of the Fund's
assets on an on-going basis, over time these fees
will increase the cost of your investment and could
cost long-term investors of the Fund more than
other types of sales charges. For more
information, see "Distribution and Shareholder
Servicing Plan."
Example
The following Example is intended to help you
compare the cost of investing in the Fund with the cost
of investing in other mutual funds. The Example
assumes that you invest $10,000 in the Fund for the
time periods indicated and then redeem all of your
shares at the end of those periods. The Example also
assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower,
based on these assumptions your costs would be as
follows:
1 Year 3 Years
$213 $658
<PAGE>
INVESTMENT OBJECTIVE
The Fund's investment objective is capital
appreciation.
HOW THE FUND INVESTS AND RELATED RISKS
The Fund seeks to achieve its investment objective
by investing primarily in companies with large market
capitalizations in the technology sector engaged in the
processing or delivery of information. A large
capitalization company would typically have a market
capitalization of at least $1 billion.
The investment methodology used by the Fund to
achieve its investment objective is based on the
investment methodology developed by the Adviser in
creating and maintaining the Light Index. The Light
Index is a stock index composed of publicly-traded,
large capitalization companies engaged in the
processing or delivery of information selected from a
group of companies which the Adviser expects to lead
the transition of the world's economy from the
Industrial Age to the Information Age. The Industrial
Age was an era characterized by a rapid increase in
productivity brought about by the ability to perform
physical work with machines. Through the use of the
steam engine and other machines, natural resources and
industrial commodities such as coal, iron ore, lumber
and oil were brought to market at speeds never before
possible. The early years of that era came to be known
as the "Industrial Revolution." The Information Age is
an era characterized by a rapid increase in
productivity brought about by the ability to quickly
process and deliver information. Through the
development and use of the integrated circuit and
related technologies, information is processed and
delivered to end users at the speed of light when
translated into "information commodities" such as
electrons, radio waves, microwaves, and infrared and
visible light. The Adviser has characterized this era
as the "Light Revolution."
The Adviser considers companies for inclusion in
the Light Index from the group of companies which it
expects to lead the "Light Revolution." The Adviser
includes a particular company from this group in the
Light Index based upon its review of that company's
attributes, such as:
Strong sales growth;
Substantial spending on research and
development;
Increasing operating margins;
Decreasing number of days sales are
outstanding; and
Growing market share.
The securities the Adviser selects for the Fund
typically possess some but not all of the above
attributes. Because of the Fund's focus on value
investing, it may not be a complete investment program
for the equity portion of your portfolio.
The Fund will invest primarily in common stocks.
Common stocks generally increase or decrease in value
based on the earnings of a company and on general
industry and market conditions. Because the Fund
invests a significant amount of its assets in common
stocks, it is likely to have greater fluctuations in
share price than a fund that invests a significant
portion of its assets in fixed-income securities.
Stock funds like the Fund are subject to stock market
risks and significant fluctuations in value. If the
stock market declines in value, the Fund is likely to
decline in value and such declines may not correspond
to the changes in value of the stock market overall.
For example, the Fund's decline in value may be greater
than of the market as a whole. Changes in the value of
stocks have generally been greater than for bonds or
other fixed-income investments. The Fund's portfolio
itself is subject to the risk that the Adviser may
select stocks that decline in value or not increase in
value when the stock market in general is rising. The
technology sector may be subject to greater volatility
than the stock market in general and may not correspond
to positive stock market movements in general. In
addition, the Adviser may not or may not be able to
sell stocks at an optimal time or price. The Adviser
has not previously acted as an investment adviser to a
mutual fund. Although not part of its principal
investment strategy, the Fund may occasionally invest a
limited portion of its assets in futures
<PAGE>
contracts,
options, options on futures, foreign securities and
illiquid securities. See the Fund's SAI for additional
information.
Although the Adviser intends to use an investment
methodology in managing the Fund based on the
investment methodology it uses in managing the Light
Index, the Fund is not an "index fund." The Adviser
may not identically replicate the composition or
performance of the Light Index in managing the Fund.
The Fund has no minimum holding period for its
investments and will sell securities whenever the
Adviser believes it is consistent with the Fund's
investment objective. The Fund typically sells a
security when the Adviser believes it has achieved its
target price, shows deteriorating economic
fundamentals, falls short of the Adviser's expectations
or is no longer a leading firm in its segment of the
market. The Fund will attempt to maximize investment
returns. Potential tax consequences to Fund
shareholders will be a secondary consideration when it
sells securities. Investors may realize taxable
capital gains as a result of frequent trading of the
Fund's assets and the Fund incurs transaction costs in
connection with buying and selling securities. Tax and
transaction costs lower the Fund's effective return for
investors.
The Fund intends to remain fully invested. The
Fund will not invest in cash reserves as part of a
temporary defensive strategy, such as lowering its
investment in common stocks, to protect against
potential stock market declines.
FUND MANAGEMENT
Adviser
The Fund has entered into an Investment Advisory
Agreement with the Adviser under which the Adviser
manages the Fund's investments and business affairs,
subject to the supervision of the Fund's Board of
Directors. The Adviser, 704 Court A, Tacoma,
Washington 98402, is a Washington corporation and was
organized in 1997. The Adviser is controlled by Henry
Hewitt. Under the Investment Advisory Agreement, the
Fund pays the Adviser an annual management fee of 1.00%
of the Fund's average daily net assets. The advisory
fee is accrued daily and paid monthly. Until March 31,
2000, the Adviser has agreed to waive its management
fee and/or reimburse the Fund's other expenses to the
extent necessary to ensure that the Fund's total annual
operating expenses do not exceed 2.00% of its average
daily net assets. After such time, the Adviser may
voluntarily waive all or a portion of its management
fee and/or reimburse all or a portion of Fund operating
expenses. The Adviser will waive fees and/or reimburse
expenses on a monthly basis and the Adviser will pay
the Fund by reducing its fee. Any waivers or
reimbursements will have the effect of lowering the
overall expense ratio for the Fund and increasing its
overall return to investors at the time any such
amounts were waived and/or reimbursed. Any such waiver
or reimbursement is subject to later adjustment during
the term of the Investment Advisory Agreement to allow
the Adviser to recoup amounts waived or reimbursed,
including initial organization costs of the Fund,
provided, however, that the Adviser shall only be
entitled to recoup such amounts for a period of three
years from the date such amount was waived or
reimbursed.
Under the Investment Advisory Agreement, not only
is the Adviser responsible for management of the Fund's
assets, but also for portfolio transactions and
brokerage. The Adviser has no prior experience
advising mutual funds.
Portfolio Managers. The Fund will be managed by
the following individual:
Henry Hewitt. President, Chief Executive Officer,
Director and majority shareholder of the Adviser, Mr.
Hewitt graduated from the University of Washington in
1975 and from Oxford University in 1978. He has been a
registered investment adviser since 1993 and has
published a monthly newsletter called The Light
Revolution(TM) Herald since September 1993. The Light
Revolution(TM) Herald examines current technological and
financial developments surrounding the companies which
are included in the Light Index. Mr. Hewitt is
primarily responsible for the day-to-day management of
the Fund.
<PAGE>
Custodian
Firstar Bank Milwaukee, N.A. ("Firstar Bank"),
Third Floor, 615 East Michigan Street, Milwaukee,
Wisconsin 53202 acts as custodian of the Fund's
assets.
Transfer Agent and Administrator
Firstar Mutual Fund Services, LLC ("Firstar"),
Third Floor, 615 East Michigan Street, Milwaukee,
Wisconsin 53202 acts as transfer agent for the Fund
(the "Transfer Agent") and as the Fund's administrator.
Distributor
First Data Distributors, Inc., 4400 Computer
Drive, Westborough, Massachusetts 01581-5108, a
registered broker-dealer and member of the National
Association of Securities Dealers, Inc., acts as
distributor of the Fund's shares (the "Distributor").
HOW TO PURCHASE SHARES
Shares of the Fund may be purchased at net asset
value (as described below) through any dealer which has
entered into a sales agreement with the Distributor, in
its capacity as principal underwriter of shares of the
Fund, or through the Distributor directly. The
Transfer Agent may also accept purchase applications.
Payment for Fund shares should be made by check or
money order in U.S. dollars drawn on a U.S. bank,
savings and loan or credit union. The minimum initial
investment in the Fund is $10,000. Subsequent
investments of at least $100 may be made by mail or by
wire. For investors using the Automatic Investment
Plan, as described below, there is no minimum
investment but subsequent investments must be at least
$100. These minimums may be changed or waived by the
Fund at any time. Shareholders will be given at least
30 days' notice of any increase in the minimum dollar
amount of subsequent investments.
In order to relieve you of responsibility for the
safekeeping and delivery of stock certificates, the
Fund does not issue certificates.
Net Asset Value
Shares of the Fund are sold on a continual basis
at the net asset value per share next computed
following receipt of an order in proper form (as
described below under "Initial Investment" and
"Subsequent Investments") by a dealer, the Distributor
or the Transfer Agent, as the case may be. Net asset
value per share is calculated once daily as of the
close of trading (currently 4:00 p.m., Eastern Standard
Time) on each day the New York Stock Exchange (the
"NYSE") is open. See "Valuation of Fund Shares."
Initial Investment - Minimum $10,000
You may purchase Fund shares by completing the
enclosed shareholder application and mailing it and a
check or money order payable to "Light Revolution Fund,
Inc." to your securities dealer, the Distributor or the
Transfer Agent, as the case may be. The minimum
initial investment is $10,000. If mailing to the
Distributor or Transfer Agent, please send to the
following address: Firstar Mutual Fund Services, LLC,
P.O. Box 701, Milwaukee, Wisconsin 53201-0701. In
addition, overnight mail should be sent to the
following address: Light Revolution Fund, Inc.,
Firstar Mutual Fund Services, LLC, Third Floor, 615
East Michigan Street, Milwaukee, Wisconsin 53202. The
Fund does not consider the U.S. Postal Service or other
independent delivery services to be its agents.
Therefore, deposit in the mail or with such services,
or receipt at the Transfer Agent's post office box, of
purchase applications does not constitute receipt by
the Transfer Agent or the Fund. Do not send letters by
overnight courier to the post office box.
If the securities dealer you have chosen to
purchase Fund shares through has not entered into a
sales agreement with the Distributor, such dealer may,
nevertheless, offer to place your order for the
purchase of Fund shares. Purchases made through such
dealers will be effected at the net asset value next
determined after receipt by the Fund of the dealer's
order to purchase shares. Such dealers may also charge
a transaction fee, as determined by the dealer. That
<PAGE>
fee may be avoided if shares are purchased through a
dealer who has entered into a sales agreement with the
Distributor or through the Transfer Agent.
If your check does not clear, you will be charged
a $25 service fee. You will also be responsible for
any losses suffered by the Fund as a result. Neither
cash nor third-party checks will be accepted. All
applications to purchase Fund shares are subject to
acceptance by the Fund and are not binding until so
accepted. The Fund reserves the right to decline or
accept a purchase order application in whole or in
part.
Wire Purchases
You may also purchase Fund shares by wire. The
following instructions should be followed when wiring
funds to the Transfer Agent for the purchase of Fund
shares:
Wire to: Firstar Bank Milwaukee, N.A.
ABA Number: 075000022
Credit: Firstar Mutual Fund Services, LLC
Account: 112-952-137
Further Credit: Light Revolution Fund, Inc.
(shareholder account number)
(shareholder name/account registration)
Please call 1-888-463-3957 prior to wiring any
funds to notify the Transfer Agent that the wire is
coming and to verify the proper wire instructions so
that the wire is properly applied when received. The
Fund is not responsible for the consequences of delays
resulting from the banking or Federal Reserve wire
system.
Telephone Purchases
The telephone purchase option allows investors to
make subsequent investments directly from a bank
checking or savings account. To establish the
telephone purchase option on your account, complete the
appropriate section in the shareholder application.
Only bank accounts held at domestic financial
institutions that are Automated Clearing House ("ACH")
members may be used for telephone transactions. This
option will become effective approximately 15 business
days after the application form is received by the
Transfer Agent. Purchases must be in amounts of $100
or more and may not be used for initial purchases of
the Fund's shares. To have Fund shares purchased at
the offering price determined at the close of regular
trading on a given date, the Transfer Agent must
receive both your purchase order and payment by
electronic funds transfer through the ACH system prior
to the close of regular trading on such date.
Subsequent investments may be made by calling 1-888-463-
3957.
Purchasing Shares Through Financial Intermediaries
If you purchase shares through a financial
intermediary (such as a broker-dealer), certain
features of the Fund relating to such transactions may
not be available or may be modified. In addition,
certain operational policies of the Fund, including
those related to settlement and dividend accrual, may
vary from those applicable to direct shareholders of
the Fund and may vary among intermediaries. You should
consult your financial intermediary for more
information regarding these matters. Certain financial
intermediaries may charge you transaction fees for
their services. You will not be charged such fees
directly by the Fund if you purchase your Fund shares
directly from the Fund without the intervention of a
financial intermediary. The Fund may, however,
compensate financial intermediaries for assistance
under the Fund's Distribution and Shareholder Service
Plan (i.e., Rule 12b-1 plan) or otherwise.
Automatic Investment Plan - No Minimum
The Automatic Investment Plan ("AIP") allows you
to make regular, systematic investments in the Fund
from your bank checking, money market, savings or NOW
account. There is no minimum initial investment for
investors using the AIP. Subsequent investments using
the AIP must be at least $100, but no more than
$50,000. To establish the AIP, complete the
appropriate section in the shareholder application.
You should consider your financial ability to
<PAGE>
continue
in the AIP until the minimum initial investment amount
is met because the Fund has the right to close an
investor's account for failure to reach the minimum
initial investment. For additional information on the
AIP, please see the SAI.
Individual Retirement Accounts
You may invest in the Fund by establishing a tax-
sheltered individual retirement account ("IRA"). The
Fund offers the Traditional IRA, Roth IRA and Education
IRA. For additional information on IRA options, please
see the SAI.
Subsequent Investments - Minimum $100
Additions to your account may be made by mail or
by wire. Any subsequent investment must be for at
least $100. When making an additional purchase by
mail, enclose a check payable to "Light Revolution
Fund, Inc." and the Additional Investment Form provided
on the lower portion of your account statement. To
make an additional purchase by wire, please call 1-888-
463-3957 for complete wiring instructions.
HOW TO REDEEM SHARES
In General
Investors may request redemption of part or all of
their Fund shares at any time at the next determined
net asset value. See "Valuation of Fund Shares." You
may be charged a redemption fee of 1.00% of the value
of the shares redeemed on redemptions made within 12
months of the date of purchase. Solely for purposes of
measuring this 12 month period, a purchase is deemed to
be made on the first day of the month in which you make
the purchase. The imposition of the redemption fee may
be waived by the Fund. The redemption fee does not
apply to dividend and capital gain distributions. No
redemption request will become effective until a
redemption request is received in proper form (as
described below) by the Transfer Agent. An investor
should contact the Transfer Agent for further
information concerning redemption of Fund shares. The
Fund normally will mail your redemption proceeds the
next business day and, in any event, no later than
seven days after receipt of a redemption request in
good order. However, when a purchase has been made by
check, the Fund may hold payment on redemption proceeds
until it is reasonably satisfied that the check has
cleared, which may take up to 12 days. Redemptions may
be made by written request, telephone or wire. You may
also redeem Fund shares using the Fund's exchange
privilege, as discussed in the SAI.
Redemptions may also be made through brokers or
dealers. Such redemptions will be effected at the net
asset value next determined after receipt by the Fund
of the broker or dealer's instruction to redeem shares.
Some brokers or dealers may charge a fee in connection
with such redemptions.
Investors who have an Individual Retirement
Account must indicate on their redemption requests
whether or not federal income tax should be withheld.
Redemption requests failing to make an election will be
subject to withholding.
Your account may be terminated by the Fund on not
less than 30 days' notice if, at the time of any
redemption of shares in your account, the value of the
remaining shares in the account falls below $1,000.
Upon any such termination, a check for the proceeds of
redemption will be sent to you within seven days of the
redemption.
Written Redemption
For most redemption requests, an investor need
only furnish a written, unconditional request to redeem
his or her shares at net asset value to the Transfer
Agent: Firstar Mutual Fund Services, LLC, P.O. Box
701, Milwaukee, Wisconsin 53201-0701. Overnight mail
should be sent to Light Revolution Fund, Inc., Firstar
Mutual Fund Services, LLC, Third Floor, 615 East
Michigan Street, Milwaukee, Wisconsin 53202. Requests
for redemption must (i) be signed exactly as the shares
are registered, including the signature of each owner,
and (ii) specify the number of shares or dollar amount
to be redeemed. Redemption proceeds made by written
redemption request may also be wired to a commercial
bank that you have authorized on your account
application. The Transfer Agent will charge a $12
service fee for wire transactions. Additional
documentation may be requested from corporations,
executors, administrators,
<PAGE>
trustees, guardians, agents
or attorneys-in-fact. The Fund does not consider the
U.S. Postal Service or other independent delivery
services to be its agents. Therefore, deposit in the
mail or with such services, or receipt at the Transfer
Agent's post office box of redemption requests does not
constitute receipt by the Transfer Agent or the Fund.
Do not send letters by overnight courier to the post
office box. Any written redemption requests received
within 15 days after an address change must be
accompanied by a signature guarantee.
Telephone Redemption
Shares of the Fund may also be redeemed by calling
the Transfer Agent at 1-888-463-3957. Redemption
requests by telephone are available for redemptions of
$1,000 or more. Redemption requests for less than
$1,000 must be in writing. In order to use this
procedure, an investor must have previously elected
this option in writing, which election will be
reflected in the records of the Transfer Agent, and the
redemption proceeds must be mailed directly to the
investor or transmitted to the investor's predesignated
account via wire or ACH transfer. Funds sent via ACH
are automatically credited to your account within three
business days. The Transfer Agent will charge a $12
service fee for wire transactions. To change the
designated account, send a written request with
signature(s) guaranteed to the Transfer Agent. To
change the address, call the Transfer Agent or send a
written request with signature(s) guaranteed to the
Transfer Agent. Additional documentation may be
requested from corporations, executors, administrators,
trustees, guardians, agents or attorneys-in-fact. No
telephone redemption requests will be allowed within 15
days of such a change. The Fund reserves the right to
limit the number of telephone redemptions by an
investor. Once made, telephone redemptions may not be
modified or canceled.
The Transfer Agent will use reasonable procedures
to ensure that instructions received by telephone are
genuine. These procedures may include requiring some
form of personal identification prior to acting upon
telephone instructions, recording telephonic
transactions and/or sending written confirmation of
such transactions to investors. Assuming procedures
such as the above have been followed, neither the Fund
nor the Transfer Agent will be liable for any loss,
cost or expense for acting upon an investor's
instructions or for any unauthorized telephone
redemption. The Fund reserves the right to refuse a
telephone redemption request if so advised.
Redeeming Shares Through Financial Intermediaries
If you redeem shares through a financial
intermediary (such as a broker-dealer), such financial
intermediary may charge you transaction fees for their
services. You will not be charged such fees if you
redeem your Fund shares directly through the Fund
without the intervention of a financial intermediary.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan ("SWP") allows you
to make automatic withdrawals from your account at
regular intervals. Redemptions for the purpose of
satisfying such withdrawals may reduce or even exhaust
your account. If the amount remaining in your account
is not sufficient to make an SWP payment, the remaining
amount will be redeemed and the SWP will be terminated.
Redemptions through an SWP made within 12 months of the
date of purchase will be subject to the redemption fee
described above. Please see the SAI for more
information.
Signature Guarantees
Signature guarantees are required for: (i)
redemption requests to be mailed or wired to a person
other than the registered owner(s) of the shares; (ii)
redemption requests to be mailed or wired to other than
the address that appears of record; and (iii) any
redemption request if a change of address has been
received by the Fund or the Transfer Agent within the
last 15 days. A signature guarantee may be obtained
from any eligible guarantor institution, as defined by
the SEC. These institutions include banks, saving
associations, credit unions, brokerage firms and
others. Please note that a notary public stamp or seal
is not acceptable.
Redemption in Kind
The Fund has reserved the right to redeem in kind
(i.e., in securities) any redemption request during any
90-day period in excess of the lesser of: (i) $250,000
or (ii) 1% of the Fund's net asset value being
redeemed. Please see the SAI for more information.
<PAGE>
Money Market Exchange
The Fund has established a program which permits
Fund shareholders to exchange Fund shares for shares of
the Firstar Money Market Fund. This exchange privilege
is a convenient way to buy shares in a money market
fund in order to respond to changes in your goals or in
market conditions. Fund shares which are exchanged for
shares of the Firstar Money Market Fund within 12
months of the date of purchase and which are not
reinvested in the Fund within such 12 month period are
subject to the redemption fee described above. Please
see the SAI for more information on the exchange
privilege.
VALUATION OF FUND SHARES
Net asset value for the Fund is calculated by
taking the value of the Fund's total assets, including
interest or dividends accrued, but not yet collected,
less all liabilities, and dividing by the total number
of shares outstanding. The result, rounded to the
nearest cent, is the net asset value per share. The
net asset value per share is determined as of the close
of trading (generally 4:00 p.m. Eastern Standard Time)
on each day the NYSE is open for business. Net asset
value is not determined on days the NYSE is closed.
The price at which a purchase order or redemption
request is effected is based on the next calculation of
net asset value after the order is placed. The Fund's
net asset value may not be calculated on days during
which the Fund receives no orders to purchase shares
and no shares are tendered for redemption. In
determining net asset value, expenses are accrued and
applied daily and investments for which market
quotations are readily available are valued at market
value. Any investments for which market quotations are
not readily available are valued at fair value as
determined in good faith by the Board of Directors of
the Fund.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
The Fund has adopted a plan pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended
(the "12b-1 Plan"), which authorizes it to pay the
Distributor and certain financial intermediaries (such
as broker-dealers) who assist in distributing Fund
shares or who provide shareholder services to Fund
shareholders a distribution and shareholder servicing
fee of up to 0.25% of its average daily net assets
(computed on an annual basis). To the extent fees are
paid under the 12b-1 Plan, the 12b-1 Plan has the
effect of increasing the Fund's expenses from what they
would otherwise be. Because Rule 12b-1 fees are paid
out of the Fund's net assets on an on-going basis, over
time these fees will increase the cost of your
investment and could cost long-term investors of the
Fund more than paying other types of sales charges.
The Fund currently intends to make payments under the
12b-1 Plan to the maximum extent allowable. For
additional information on the 12b-1 Plan, please see
the SAI.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX
TREATMENT
For federal income tax purposes, all dividends
paid by the Fund and distributions of net realized
short-term capital gains are taxable as ordinary income
whether reinvested or received in cash unless you are
exempt from taxation or entitled to a tax deferral.
Distributions paid by a Fund from net realized long-
term capital gains, whether received in cash or
reinvested in additional shares, are taxable as a
capital gain. The capital gain holding period (and the
applicable tax rate) is determined by the length of
time the Fund has held the security and not the length
of time you have held shares in the Fund. The Fund
expects that, because of its investment objective, its
distributions will consist primarily of long- and short-
term capital gains. Investors are informed annually as
to the amount and nature of all dividends and capital
gains paid during the prior year. Such capital gains
and dividends may also be subject to state or local
taxes. If you are not required to pay taxes on your
income, you are generally not required to pay federal
income taxes on the amounts distributed to you.
The Fund intends to pay dividends and distribute
capital gains, if any, at least annually. When a
dividend or capital gain is distributed, the Fund's net
asset value decreases by the amount of the payment. If
you purchase shares shortly before a distribution, you
will be subject to income taxes on the distribution,
even though the value of your investment (plus cash
received, if any) remains the same. All dividends and
capital gains distributions will automatically be
reinvested in additional Fund shares at the then
prevailing net asset value unless an investor
specifically requests that either dividends or capital
gains or both be paid in cash. An investor may change
an election by telephone, subject to certain
limitations, by calling the Transfer Agent at 1-888-463-
3957.
<PAGE>
Investors requesting to have dividends and/or
capital gains paid in cash may choose to have such
amounts mailed or sent via electronic funds transfer
("EFT"). Transfers via EFT generally take up to three
business days to reach the investor's bank account.
If an investor elects to receive distributions and
dividends by check and the post office cannot deliver
such check, or if such check remains uncashed for six
months, the Fund reserves the right to reinvest the
distribution check in the shareholder's account at the
Fund's then current net asset value per share and to
reinvest all subsequent distributions in shares of the
Fund.
If you do not furnish the Fund with your correct
social security number or taxpayer identification
number, the Fund is required by federal law to withhold
federal income tax from your distributions and
redemption proceeds at a rate of 31%.
An exchange of Fund shares for shares pursuant to
the Fund's exchange privilege is treated the same as an
ordinary sale and purchase for federal income tax
purposes and you will realize a capital gain or loss.
An exchange is not a tax-free transaction.
This section is not intended to be a full
discussion of federal income tax laws and the effect of
such laws on you. There may be other federal, state or
local tax considerations applicable to a particular
investor. You are urged to consult your own tax
advisor.
YEAR 2000 ISSUE
The Fund's operations depend on the seamless
functioning of computer systems in the financial
service industry, including those of the Adviser,
Firstar and Firstar Bank. Many computer software
systems in use today cannot properly process date-
related information after December 31, 1999 because of
the method by which dates are encoded and calculated.
This failure, commonly referred to as the "Year 2000
Issue," could adversely affect the handling of security
trades, pricing and account servicing for the Fund.
The Adviser has made compliance with the Year 2000
Issue a high priority and is taking steps that it
believes are reasonably designed to address the Year
2000 Issue with respect to its computer systems. The
Adviser has also been informed that comparable steps
are being taken by the Fund's other major service
providers. The Adviser does not currently anticipate
that the Year 2000 Issue will have a material impact on
its ability to continue to fulfill its duties as
investment adviser to the Fund. However, there can be
no assurance that the computer systems of the companies
in which the Fund invests will be timely converted or
that the value of such investments will not be
adversely affected by the Year 2000 Issue.
<PAGE>
ADDITIONAL INFORMATION
DIRECTORS
Henry Hewitt
Brian Hatch
John Hewitt, Jr.
Thomas Kinsman
PRINCIPAL OFFICERS
Henry Hewitt, President
Charles M. O'Herin, Vice
President, Treasurer
and Secretary
INVESTMENT ADVISER
Light Index Investment Company
704 Court A
Tacoma, Washington 98402
DISTRIBUTOR
First Data Distributors, Inc.
4400 Computer Drive
Westborough, Massachusetts 01581-5108
CUSTODIAN
Firstar Bank Milwaukee, N.A.
Third Floor
615 E. Michigan Street
Milwaukee, Wisconsin 53202
ADMINISTRATOR, TRANSFER AGENT
AND DIVIDEND-DISBURSING AGENT
Firstar Mutual Fund Services, LLC
Third Floor
615 E. Michigan Street
Milwaukee, Wisconsin 53202
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
Godfery & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202
The SAI for the Fund contains additional
information about the Fund. The Fund's SAI, which is
incorporated by reference into this Prospectus, is
available without charge upon request to the address or
toll-free telephone number noted on the cover page of
this Prospectus. These documents may also be obtained
from certain financial intermediaries, including the
Fund's Distributor, who purchase and sell Fund shares.
General inquiries regarding the Fund can be directed to
the Fund at the address and toll-free telephone number
on the cover page of this Prospectus.
Information about the Fund (including the SAI) can
be reviewed and copied at the SEC's Public Reference
Room in Washington, D.C. Please call the SEC at
1-800-SEC-0330 for information relating to the
operation of the Public Reference Room. Other
information about the Fund is available on the SEC's
Internet site at http://www.sec.gov or upon payment of
a duplicating fee, by writing the Public Reference Room
of the SEC, Washington, D.C. 20549-6009.
The Fund's 1940 Act File Number is 811-8535.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Light Revolution Fund, Inc.
LIGHT REVOLUTION FUND
704 Court A
Tacoma, Washington 98402
(888) 463-3957
This Statement of Additional Information is not a
prospectus and should be read in conjunction with the
Prospectus of the Light Revolution Fund (the "Fund"),
dated February __, 1999. The Fund is a series of Light
Revolution Fund, Inc. (the "Corporation").
A copy of the Prospectus is available without
charge upon request to the above-noted address or toll-
free telephone number.
This Statement of Additional Information is dated February __, 1999.
<PAGE>
TABLE OF CONTENTS
Page No.
FUND ORGANIZATION 1
INVESTMENT RESTRICTIONS 1
IMPLEMENTATION OF INVESTMENT OBJECTIVE 3
DIRECTORS AND OFFICERS 18
PRINCIPAL SHAREHOLDERS 19
INVESTMENT ADVISER 20
FUND TRANSACTIONS AND BROKERAGE 20
CUSTODIAN 22
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT 22
ADMINISTRATOR 22
DISTRIBUTOR AND PLAN OF DISTRIBUTION 22
PURCHASE, EXCHANGE AND PRICING OF SHARES 24
REDEMPTIONS IN KIND 26
TAXATION OF THE FUND 26
PERFORMANCE INFORMATION 26
INDEPENDENT ACCOUNTANTS 28
FINANCIAL STATEMENTS 28
APPENDIX A-1
In deciding whether to invest in the Fund, you
should rely on information in this Statement of
Additional Information and related Prospectus. The
Fund has not authorized others to provide additional
information. The Fund has not authorized the use of
this Statement of Additional Information in any state
or jurisdiction in which such offering may not legally
be made.
<PAGE>
FUND ORGANIZATION
The Corporation is an open-end, diversified,
management investment company, commonly referred to as
a mutual fund. The Fund is a series of common stock of
the Corporation, a Maryland company incorporated on
October 21, 1997. The Corporation is authorized to
issue shares of common stock in series and classes.
Each share of common stock of the Fund is entitled to
one vote, and each share is entitled to participate
equally in dividends and capital gain distributions and
in the assets of the Fund in the event of liquidation.
No certificates will be issued for shares held in your
account. You will, however, have full shareholder
rights. Generally, the Corporation will not hold
annual shareholders' meetings unless required by the
Investment Company Act of 1940, as amended (the "1940
Act") or Maryland law. Shareholders have certain
rights, including the right to call an annual meeting
upon a vote of 10% of the Corporation's outstanding
shares for the purpose of voting to remove one or more
directors or to transact any other business. The 1940
Act requires the Corporation to assist the shareholders
in calling such a meeting.
INVESTMENT RESTRICTIONS
The investment objective of the Fund is to seek
capital appreciation. The following are the Fund's
fundamental investment restrictions which cannot be
changed without the approval of a majority of the
Fund's outstanding voting securities. As used herein,
a "majority of the Fund's outstanding voting
securities" means the lesser of (i) 67% of the shares
of common stock of the Fund represented at a meeting at
which more than 50% of the outstanding shares are
present, or (ii) more than 50% of the outstanding
shares of common stock of the Fund.
The Fund:
1. May not with respect to 75% of its total assets,
purchase the securities of any issuer (except
securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities)
if, as a result, (i) more than 5% of the Fund's
total assets would be invested in the securities
of that issuer, or (ii) the Fund would hold more
than 10% of the outstanding voting securities of
that issuer.
2. May (i) borrow money from banks for temporary or
emergency purposes (but not for leveraging or the
purchase of investments) and (ii) make other
investments or engage in other transactions
permissible under the Investment Company Act of
1940, as amended (the "1940 Act"), which may
involve a borrowing, including borrowing through
reverse repurchase agreements, provided that the
combination of (i) and (ii) shall not exceed 33
1/3% of the value of the Fund's total assets
(including the amount borrowed), less the Fund's
liabilities (other than borrowings). If the
amount borrowed at any time exceeds 33 1/3% of the
Fund's total assets, the Fund will, within three
days thereafter (not including Sundays, holidays
and any longer permissible period), reduce the
amount of the borrowings such that the borrowings
do not exceed 33 1/3% of the Fund's total assets.
The Fund may also borrow money from other persons
to the extent permitted by applicable law.
3. May not issue senior securities, except as
permitted under the 1940 Act.
4. May not act as an underwriter of another issuer's
securities, except to the extent that the Fund may
be deemed to be an underwriter within the meaning
of the Securities Act of 1933, as amended (the
"Securities Act"), in connection with the purchase
and sale of portfolio securities.
5. May not purchase or sell physical commodities
unless acquired as a result of ownership of
securities or other instruments (but this
limitation shall not prevent the Fund from
purchasing or selling options, futures contracts
or other derivative instruments, or from investing
in securities or other instruments backed by
physical commodities).
6. May not make loans if, as a result, more than 33
1/3% of the Fund's total assets would be lent to
other persons, except through (i) purchases of
debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
<PAGE>
7. May not purchase the securities of any issuer if,
as a result, more than 25% of the Fund's total
assets would be invested in the securities of
issuers, the principal business activities of
which are in the same industry. The Fund does not
consider all Light Revolution companies to be in
the same industry.
8. May not purchase or sell real estate unless
acquired as a result of ownership of securities or
other instruments (but this limitation shall not
prohibit the Fund from purchasing or selling
securities or other instruments backed by real
estate or of issuers engaged in real estate
activities).
The following are the Fund's non-fundamental
investment policies which may be changed by the Board
of Directors without shareholder approval.
The Fund may not:
1. Sell securities short, unless the Fund owns or has
the right to obtain securities equivalent in kind
and amount to the securities sold short, or unless
it covers such short sale as required by the
current rules and positions of the Securities and
Exchange Commission (the "SEC") or its staff, and
provided that transactions in options, futures
contracts, options on futures contracts, or other
derivative instruments are not deemed to
constitute selling securities short.
2. Purchase securities on margin, except that the
Fund may obtain such short-term credits as are
necessary for the clearance of transactions, and
provided that margin deposits in connection with
futures contracts, options on futures contracts,
or other derivative instruments shall not
constitute purchasing securities on margin.
3. Invest in illiquid securities if, as a result of
such investment, more than 15% of its net assets
would be invested in illiquid securities.
4. Purchase securities of other investment companies
except in compliance with the 1940 Act.
5. Engage in futures or options on futures
transactions which are impermissible pursuant to
Rule 4.5 under the Commodity Exchange Act (the
"CEA") and, in accordance with Rule 4.5, the Fund
will use futures or options on futures
transactions solely for bona fide hedging
transactions (within the meaning of the CEA);
provided, however, that the Fund may, in addition
to bona fide hedging transactions, use futures and
options on futures transactions if the aggregate
initial margin and premiums required to establish
such positions, less the amount by which any such
options positions are in the money (within the
meaning of the CEA), do not exceed 5% of the
Fund's net assets.
6. Make any loans other than loans of portfolio
securities, except through (i) purchases of debt
securities or other debt instruments, or (ii)
engaging in repurchase agreements.
7. Borrow money except from banks or through reverse
repurchase agreements, and will not purchase
securities when bank borrowings exceed 5% of its
total assets.
Except for the fundamental investment limitations
listed above and the Fund's investment objective, the
Fund's other investment policies are not fundamental
and may be changed with approval of the Corporation's
Board of Directors. Unless noted otherwise, if a
percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage
resulting from a change in the Fund's assets (i.e., due
to cash inflows or redemptions) or in the market value
of the investment or the Fund's assets will not
constitute a violation of that restriction.
<PAGE>
IMPLEMENTATION OF INVESTMENT OBJECTIVE
The following information supplements the
discussion of the Fund's investment objective and
strategy described in the Prospectus under the captions
"Investment Objective" and "How the Fund Invests and
Related Risks." The following represent strategies
that are not principal strategies of the Fund, but may
be used from time to time.
Derivative Instruments
In General. The Fund may invest up to 5% of its
respective net assets in derivative instruments.
Derivative instruments may be used for any lawful
purpose consistent with the Fund's investment objective
such as hedging or managing risk, but not for
speculation. Derivative instruments are commonly
defined to include securities or contracts whose value
depend on (or "derive" from) the value of one or more
other assets, such as securities, currencies, or
commodities. These "other assets" are commonly
referred to as "underlying assets."
A derivative instrument generally consists of, is
based upon, or exhibits characteristics similar to
options or forward contracts. Options and forward
contracts are considered to be the basic "building
blocks" of derivatives. For example, forward-based
derivatives include forward contracts, swap contracts,
as well as exchange-traded futures. Option-based
derivatives include privately negotiated, over-the-
counter (OTC) options (including caps, floors, collars,
and options on forward and swap contracts) and exchange-
traded options on futures. Diverse types of
derivatives may be created by combining options or
forward contracts in different ways, and by applying
these structures to a wide range of underlying assets.
An option is a contract in which the "holder" (the
buyer) pays a certain amount (the "premium") to the
"writer" (the seller) to obtain the right, but not the
obligation, to buy from the writer (in a "call") or
sell to the writer (in a "put") a specific asset at an
agreed upon price at or before a certain time. The
holder pays the premium at inception and has no further
financial obligation. The holder of an option-based
derivative generally will benefit from favorable
movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The
writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to
losses due to changes in the value of the underlying
asset.
A forward contract is a sales contract between a
buyer (holding the "long" position) and a seller
(holding the "short" position) for an asset with
delivery deferred until a future date. The buyer
agrees to pay a fixed price at the agreed future date
and the seller agrees to deliver the asset. The seller
hopes that the market price on the delivery date is
less than the agreed upon price, while the buyer hopes
for the contrary. The change in value of a forward-
based derivative generally is roughly proportional to
the change in value of the underlying asset.
Hedging. The Fund may use derivative instruments
to protect against possible adverse changes in the
market value of securities held in, or are anticipated
to be held in, the Fund's portfolio. Derivatives may
also be used by the Fund to "lock-in" its realized but
unrecognized gains in the value of its portfolio
securities. In addition, derivatives may be used to
hedge against price movements in broad equity market
sectors in which the Fund has invested or expects to
invest. Hedging strategies, if successful, can reduce
the risk of loss by wholly or partially offsetting the
negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies
can also reduce the opportunity for gain by offsetting
the positive effect of favorable price movements in the
hedged investments.
Managing Risk. The Fund may also use derivative
instruments to manage the risks of the Fund's
portfolio. Risk management strategies include, but are
not limited to, facilitating the sale of portfolio
securities, managing the effective maturity or duration
of debt obligations in the Fund's portfolio,
establishing a position in the derivatives markets as a
substitute for buying or selling certain securities, or
creating or altering exposure to certain asset classes,
such as equity, debt, and foreign securities. The use
of derivative instruments may provide a less expensive,
more expedient or more specifically focused way for the
Fund to invest than "traditional" securities (i.e.,
stocks or bonds) would.
Exchange or OTC Derivatives. Derivative
instruments may be exchange-traded or traded in OTC
transactions between private parties. Exchange-traded
derivatives are standardized options and futures
contracts traded in an auction on the floor of a
regulated exchange. Exchange contracts are generally
liquid. The exchange
<PAGE>
clearinghouse is the counterparty
of every contract. Thus, each holder of an exchange
contract bears the credit risk of the clearinghouse
(and has the benefit of its financial strength) rather
than that of a particular counterparty. OTC
transactions are subject to additional risks, such as
the credit risk of the counterparty to the instrument,
and are less liquid than exchange-traded derivatives
since they often can only be closed out with the other
party to the transaction.
Risks and Special Considerations. The use of
derivative instruments involves risks and special
considerations as described below. Risks pertaining to
particular derivative instruments are described in the
sections that follow.
(1) Market Risk. The primary risk of derivatives
is the same as the risk of the underlying assets;
namely, that the value of the underlying asset may go
up or down. Adverse movements in the value of an
underlying asset can expose the Fund to losses.
Derivative instruments may include elements of leverage
and, accordingly, the fluctuation of the value of the
derivative instrument in relation to the underlying
asset may be magnified. The successful use of
derivative instruments depends upon a variety of
factors, particularly the Adviser's ability to predict
movements of the securities, currencies, and
commodities markets, which requires different skills
than predicting changes in the prices of individual
securities. There can be no assurance that any
particular strategy adopted will succeed. A decision
to engage in a derivative transaction will reflect the
Adviser's judgment that the derivative transaction will
provide value to the Fund and its shareholders and is
consistent with the Fund's objectives, investment
limitations, and operating policies. In making such a
judgment, the Adviser will analyze the benefits and
risks of the derivative transaction and weigh them in
the context of the Fund's entire portfolio and
investment objective.
(2) Credit Risk. The Fund will be subject to the
risk that a loss may be sustained by the Fund as a
result of the failure of a counterparty to comply with
the terms of a derivative instrument. The counterparty
risk for exchange-traded derivative instruments is
generally less than for privately-negotiated or OTC
derivative instruments, since generally a clearing
agency, which is the issuer or counterparty to each
exchange-traded instrument, provides a guarantee of
performance. For privately-negotiated instruments,
there is no similar clearing agency guarantee. In all
transactions, the Fund will bear the risk that the
counterparty will default, and this could result in a
loss of the expected benefit of the derivative
transaction and possibly other losses to the Fund. The
Fund will enter into transactions in derivative
instruments only with counterparties that the Adviser
reasonably believes are capable of performing under the
contract.
(3) Correlation Risk. When a derivative
transaction is used to completely hedge another
position, changes in the market value of the combined
position (the derivative instrument plus the position
being hedged) result from an imperfect correlation
between the price movements of the two instruments.
With a perfect hedge, the value of the combined
position remains unchanged for any change in the price
of the underlying asset. With an imperfect hedge, the
value of the derivative instrument and its hedge are
not perfectly correlated. Correlation risk is the risk
that there might be imperfect correlation, or even no
correlation, between price movements of an instrument
and price movements of investments being hedged. For
example, if the value of a derivative instrument used
in a short hedge (such as writing a call option, buying
a put option, or selling a futures contract) increased
by less than the decline in value of the hedged
investments, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due
to factors unrelated to the value of the investments
being hedged, such as speculative or other pressures on
the markets in which these instruments are traded. The
effectiveness of hedges using instruments on indices
will depend, in part, on the degree of correlation
between price movements in the index and price
movements in the investments being hedged.
(4) Liquidity Risk. Derivatives are also subject
to liquidity risk. Liquidity risk is the risk that a
derivative instrument cannot be sold, closed out, or
replaced quickly at or very close to its fundamental
value. Generally, exchange contracts are very liquid
because the exchange clearinghouse is the counterparty
of every contract. OTC transactions are less liquid
than exchange-traded derivatives since they often can
only be closed out with the other party to the
transaction. The Fund might be required by applicable
regulatory requirement to maintain assets as "cover,"
maintain segregated accounts, and/or make margin
payments when it takes positions in derivative
instruments involving obligations to third parties
(i.e., instruments other than purchased options). If
the Fund is unable to close out its positions in such
instruments, it might be required to continue to
maintain such assets or accounts or make such payments
until the position expired, matured, or is closed out.
The requirements might impair the Fund's ability to
sell
<PAGE>
a portfolio security or make an investment at a
time when it would otherwise be favorable to do so, or
require that the Fund sell a portfolio security at a
disadvantageous time. The Fund's ability to sell or
close out a position in an instrument prior to
expiration or maturity depends on the existence of a
liquid secondary market or, in the absence of such a
market, the ability and willingness of the counterparty
to enter into a transaction closing out the position.
Therefore, there is no assurance that any derivatives
position can be sold or closed out at a time and price
that is favorable to the Fund.
(5) Legal Risk. Legal risk is the risk of loss
caused by the legal unenforceability of a party's
obligations under the derivative. While a party
seeking price certainty agrees to surrender the
potential upside in exchange for downside protection,
the party taking the risk is looking for a positive
payoff. Despite this voluntary assumption of risk, a
counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting
various legal uncertainties about certain derivative
products.
(6) Systemic or "Interconnection" Risk.
Interconnection risk is the risk that a disruption in
the financial markets will cause difficulties for all
market participants. In other words, a disruption in
one market will spill over into other markets, perhaps
creating a chain reaction. Much of the OTC derivatives
market takes place among the OTC dealers themselves,
thus creating a large interconnected web of financial
obligations. This interconnectedness raises the
possibility that a default by one large dealer could
create losses for other dealers and destabilize the
entire market for OTC derivative instruments.
General Limitations. The use of derivative
instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon
which they may be traded, and the Commodity Futures
Trading Commission ("CFTC").
The Corporation has filed a notice of eligibility
for exclusion from the definition of the term
"commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in
the futures markets. In accordance with Rule 4.5 of
the regulations under the CEA, the notice of
eligibility for the Fund includes representations that
the Fund will use futures contracts and related options
solely for bona fide hedging purposes within the
meaning of CFTC regulations, provided that the Fund may
hold other positions in futures contracts and related
options that do not qualify as a bona fide hedging
position if the aggregate initial margin deposits and
premiums required to establish these positions, less
the amount by which any such futures contracts and
related options positions are "in the money," do not
exceed 5% of the Fund's net assets. To the extent the
Fund were to engage in derivative transactions, it will
limit such transactions to no more than 5% of its net
assets.
The SEC has identified certain trading practices
involving derivative instruments that involve the
potential for leveraging the Fund's assets in a manner
that raises issues under the 1940 Act. In order to
limit the potential for the leveraging of the Fund's
assets, as defined under the 1940 Act, the SEC has
stated that the Fund may use coverage or the
segregation of the Fund's assets. The Fund will also
set aside permissible liquid assets in a segregated
custodial account if required to do so by SEC and CFTC
regulations. Assets used as cover or held in a
segregated account cannot be sold while the derivative
position is open, unless they are replaced with similar
assets. As a result, the commitment of a large portion
of the Fund's assets to segregated accounts could
impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
In some cases the Fund may be required to maintain
or limit exposure to a specified percentage of its
assets to a particular asset class. In such cases,
when the Fund uses a derivative instrument to increase
or decrease exposure to an asset class and is required
by applicable SEC guidelines to set aside liquid assets
in a segregated account to secure its obligations under
the derivative instruments, the Adviser may, where
reasonable in light of the circumstances, measure
compliance with the applicable percentage by reference
to the nature of the economic exposure created through
the use of the derivative instrument and not by
reference to the nature of the exposure arising from
the assets set aside in the segregated account (unless
another interpretation is specified by applicable
regulatory requirements).
Options. The Fund may use options for any lawful
purpose consistent with the Fund's investment objective
such as hedging or managing risk but not for
speculation. An option is a contract in which the
"holder" (the buyer) pays a certain amount (the
"premium") to the "writer" (the seller) to obtain the
right, but not the obligation, to buy from the writer
(in a "call") or sell to the writer (in a "put") a
specific asset at an agreed upon price (the "strike
price" or
<PAGE>
"exercise price") at or before a certain time
(the "expiration date"). The holder pays the premium
at inception and has no further financial obligation.
The holder of an option will benefit from favorable
movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The
writer of an option will receive fees or premiums but
is exposed to losses due to changes in the value of the
underlying asset. The Fund may purchase (buy) or write
(sell) put and call options on assets, such as
securities, currencies, commodities, and indices of
debt and equity securities ("underlying assets") and
enter into closing transactions with respect to such
options to terminate an existing position. Options
used by the Fund may include European, American, and
Bermuda style options. If an option is exercisable
only at maturity, it is a "European" option; if it is
also exercisable prior to maturity, it is an "American"
option. If it is exercisable only at certain times, it
is a "Bermuda" option.
The Fund may purchase (buy) and write (sell) put
and call options and enter into closing transactions
with respect to such options to terminate an existing
position. The purchase of call options serves as a
long hedge, and the purchase of put options serves as a
short hedge. Writing put or call options can enable
the Fund to enhance income by reason of the premiums
paid by the purchaser of such options. Writing call
options serves as a limited short hedge because
declines in the value of the hedged investment would be
offset to the extent of the premium received for
writing the option. However, if the security
appreciates to a price higher than the exercise price
of the call option, it can be expected that the option
will be exercised and the Fund will be obligated to
sell the security at less than its market value or will
be obligated to purchase the security at a price
greater than that at which the security must be sold
under the option. All or a portion of any assets used
as cover for OTC options written by the Fund would be
considered illiquid to the extent described under
"Implementation of Investment Objective Illiquid
Securities." Writing put options serves as a limited
long hedge because increases in the value of the hedged
investment would be offset to the extent of the premium
received for writing the option. However, if the
security depreciates to a price lower than the exercise
price of the put option, it can be expected that the
put option will be exercised and the Fund will be
obligated to purchase the security at more than its
market value.
The value of an option position will reflect,
among other things, the historical price volatility of
the underlying investment, the current market value of
the underlying investment, the time remaining until
expiration, the relationship of the exercise price to
the market price of the underlying investment, and
general market conditions.
The Fund may effectively terminate its right or
obligation under an option by entering into a closing
transaction. For example, the Fund may terminate its
obligation under a call or put option that it had
written by purchasing an identical call or put option;
this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put
or call option it had purchased by writing an identical
put or call option; this is known as a closing sale
transaction. Closing transactions permit the Fund to
realize the profit or limit the loss on an option
position prior to its exercise or expiration.
The Fund may purchase or write both exchange-
traded and OTC options. Exchange-traded options are
issued by a clearing organization affiliated with the
exchange on which the option is listed that, in effect,
guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts
between the Fund and the other party to the transaction
("counterparty") (usually a securities dealer or a
bank) with no clearing organization guarantee. Thus,
when the Fund purchases or writes an OTC option, it
relies on the counterparty to make or take delivery of
the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in
the loss of any premium paid by the Fund as well as the
loss of any expected benefit of the transaction.
The Fund's ability to establish and close out
positions in exchange-listed options depends on the
existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options
for which there appears to be a liquid secondary
market. However, there can be no assurance that such a
market will exist at any particular time. Closing
transactions can be made for OTC options only by
negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market
exists. Although the Fund will enter into OTC options
only with counterparties that are expected to be
capable of entering into closing transactions with the
Fund, there is no assurance that the Fund will in fact
be able to close out an OTC option at a favorable price
prior to expiration. In the event of insolvency of the
counterparty, the Fund might be unable to close out an
OTC option position at any time prior to its
<PAGE>
expiration. If the Fund were unable to effect a
closing transaction for an option it had purchased, it
would have to exercise the option to realize any
profit.
The Fund may engage in options transactions on
indices in much the same manner as the options on
securities discussed above, except the index options
may serve as a hedge against overall fluctuations in
the securities market in general.
The writing and purchasing of options is a highly
specialized activity that involves investment
techniques and risks different from those associated
with ordinary portfolio securities transactions.
Imperfect correlation between the options and
securities markets may detract from the effectiveness
of attempted hedging.
Stock Index Options. The Fund may (i) purchase
stock index options for any purpose, (ii) sell stock
index options in order to close out existing positions,
and/or (iii) write covered options on stock indexes for
hedging purposes. Stock index options are put options
and call options on various stock indexes. In most
respects, they are identical to listed options on
common stocks. The primary difference between stock
options and index options occurs when index options are
exercised. In the case of stock options, the
underlying security, common stock, is delivered.
However, upon the exercise of an index option,
settlement does not occur by delivery of the securities
comprising the index. The option holder who exercises
the index option receives an amount of cash if the
closing level of the stock index upon which the option
is based is greater than, in the case of a call, or
less than, in the case of a put, the exercise price of
the option. This amount of cash is equal to the
difference between the closing price of the stock index
and the exercise price of the option expressed in
dollars times a specified multiple.
A stock index fluctuates with changes in the
market values of the stocks included in the index. For
example, some stock indexes are based on a broad market
index, such as the Standard & Poor's 500 Stock Index or
the Value Line Composite Index or a narrower market
index, such as the Standard & Poor's 100 Stock Index.
An index may also be based on an industry or market
segment, such as the AMEX Oil and Gas Index or the
Computer and Business Equipment Index. Options on
stock indexes are currently traded on the following
exchanges: the Chicago Board of Options Exchange, the
New York Stock Exchange, the American Stock Exchange,
the Pacific Stock Exchange, and the Philadelphia Stock
Exchange.
The Fund's use of stock index options is subject
to certain risks. Successful use by the Fund of
options on stock indexes will be subject to the ability
of the Adviser to correctly predict movements in the
stock market. This requires different skills and
techniques than predicting changes in the prices of
individual securities. In addition, the Fund's ability
to effectively hedge all or a portion of the securities
in its portfolio, in anticipation of or during a market
decline through transactions in put options on stock
indexes, depends on the degree to which price movements
in the underlying index correlate with the price
movements of the securities held by the Fund. Inasmuch
as the Fund's securities will not duplicate the
components of an index, the correlation will not be
perfect. Consequently, the Fund will bear the risk
that the prices of its securities being hedged will not
move in the same amount as the prices of its put
options on the stock indexes. It is also possible that
there may be a negative correlation between the index
and the Fund's securities which would result in a loss
on both such securities and the options on stock
indexes acquired by the Fund.
The hours of trading for options may not conform
to the hours during which the underlying securities are
traded. To the extent that the options markets close
before the markets for the underlying securities,
significant price and rate movements can take place in
the underlying markets that cannot be reflected in the
options markets. The purchase of options is a highly
specialized activity which involves investment
techniques and risks different from those associated
with ordinary portfolio securities transactions. The
purchase of stock index options involves the risk that
the premium and transaction costs paid by the Fund in
purchasing an option will be lost as a result of
unanticipated movements in prices of the securities
comprising the stock index on which the option is
based.
Spread Transactions. The Fund may use spread
transactions for any lawful purpose consistent with the
Fund's investment objective such as hedging or managing
risk, but not for speculation. The Fund may purchase
covered spread options from securities dealers. Such
covered spread options are not presently exchange-
listed or exchange-traded. The purchase of a spread
option gives the Fund the right to put, or sell, a
security that it owns at a fixed dollar spread or fixed
yield spread in relationship to another security that
the Fund does not own, but which is
<PAGE>
used as a
benchmark. The risk to the Fund in purchasing covered
spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition,
there is no assurance that closing transactions will be
available. The purchase of spread options will be used
to protect the Fund against adverse changes in
prevailing credit quality spreads, i.e., the yield
spread between high quality and lower quality
securities. Such protection is only provided during
the life of the spread option.
Futures Contracts. The Fund may use futures
contracts for any lawful purpose consistent with the
Fund's investment objective such as hedging and
managing risk but not for speculation. The Fund may
enter into futures contracts, including interest rate,
index, and currency futures. The Fund may also
purchase put and call options, and write covered put
and call options, on futures in which it is allowed to
invest. The purchase of futures or call options
thereon can serve as a long hedge, and the sale of
futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options
on futures contracts can serve as a limited short
hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a
strategy similar to that used for writing covered
options in securities. The Fund's hedging may include
purchases of futures as an offset against the effect of
expected increases in currency exchange rates and
securities prices and sales of futures as an offset
against the effect of expected declines in currency
exchange rates and securities prices.
To the extent required by regulatory authorities,
the Fund may enter into futures contracts that are
traded on national futures exchanges and are
standardized as to maturity date and underlying
financial instrument. Futures exchanges and trading
are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures
contracts could be used to reduce the Fund's exposure
to market, currency, or interest rate fluctuations, the
Fund may be able to hedge its exposure more effectively
and perhaps at a lower cost through using futures
contracts.
An interest rate 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., debt security) or currency for a
specified price at a designated date, time, and place.
An index futures contract is an agreement pursuant to
which the parties agree to take or make delivery of an
amount of cash equal to the difference between the
value of the index at the close of the last trading day
of the contract and the price at which the index
futures contract was originally written. Transaction
costs are incurred when a futures contract is bought or
sold and margin deposits must be maintained. A futures
contract may be satisfied by delivery or purchase, as
the case may be, of the instrument or the currency or
by payment of the change in the cash value of the
index. More commonly, futures contracts are closed out
prior to delivery by entering into an offsetting
transaction in a matching futures contract. Although
the value of an index might be a function of the value
of certain specified securities, no physical delivery
of those securities is made. 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.
No price is paid by the Fund upon entering into a
futures contract. Instead, at the inception of a
futures contract, the Fund is required to deposit in a
segregated account with its custodian, in the name of
the futures broker through whom the transaction was
effected, "initial margin," consisting of cash, U.S.
government securities or other liquid, high-grade debt
obligations, in an amount generally equal to 10% or
less of the contract value. Margin must also be
deposited when writing a call or put option on a
futures contract, in accordance with applicable
exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does
not represent a borrowing, but rather is in the nature
of a performance bond or good-faith deposit that is
returned to the Fund at the termination of the
transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as
periods of high volatility, the Fund may be required by
an exchange to increase the level of its initial margin
payment, and initial margin requirements might be
increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to
and from the futures broker daily as the value of the
futures position varies, a process known as "marking to
market." Variation margin does not involve borrowing,
but rather represents a daily settlement of the Fund's
obligations to or from a futures broker. When the Fund
purchases an
<PAGE>
option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast,
when the Fund purchases or sells a futures contract or
writes a call or put option thereon, it is subject to
daily variation margin calls that could be substantial
in the event of adverse price movements. If the Fund
has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a
time when such sales are disadvantageous. Purchasers
and sellers of futures positions and options on futures
can enter into offsetting closing transactions by
selling or purchasing, respectively, an instrument
identical to the instrument held or written. Positions
in futures and options on futures may be closed only on
an exchange or board of trade that provides a secondary
market. The Fund intends to enter into futures
transactions only on exchanges or boards of trade where
there appears to be a liquid secondary market.
However, there can be no assurance that such a market
will exist for a particular contract at a particular
time.
Under certain circumstances, futures exchanges may
establish daily limits on the amount that the price of
a future or option on a futures contract can vary from
the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price
beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily
limit for several consecutive days with little or no
trading, thereby preventing liquidation of unfavorable
positions.
If the Fund were unable to liquidate a futures or
option on a futures contract position due to the
absence of a liquid secondary market or the imposition
of price limits, it could incur substantial losses.
The Fund would continue to be subject to market risk
with respect to the position. In addition, except in
the case of purchased options, the Fund would continue
to be required to make daily variation margin payments
and might be required to maintain the position being
hedged by the future or option or to maintain certain
liquid securities in a segregated account.
Certain characteristics of the futures market
might increase the risk that movements in the prices of
futures contracts or options on futures contracts might
not correlate perfectly with movements in the prices of
the investments being hedged. For example, all
participants in the futures and options on futures
contracts markets are subject to daily variation margin
calls and might be compelled to liquidate futures or
options on futures contracts positions whose prices are
moving unfavorably to avoid being subject to further
calls. These liquidations could increase the price
volatility of the instruments and distort the normal
price relationship between the futures or options and
the investments being hedged. Also, because initial
margin deposit requirements in the futures markets are
less onerous than margin requirements in the securities
markets, there might be increased participation by
speculators in the future markets. This participation
also might cause temporary price distortions. In
addition, activities of large traders in both the
futures and securities markets involving arbitrage,
"program trading," and other investment strategies
might result in temporary price distortions.
Options on Futures. The Fund may also purchase or
write put and call options on futures contracts and
enter into closing transactions with respect to such
options to terminate an existing position. A futures
option gives the holder the right, in return for the
premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified
exercise price prior to the expiration of the option.
Upon exercise of a call option, the holder acquires a
long position in the futures contract and the writer is
assigned the opposite short position. In the case of a
put option, the opposite is true. Prior to exercise or
expiration, a futures option may be closed out by an
offsetting purchase or sale of a futures option of the
same series.
The Fund may use options on futures contracts in
connection with hedging strategies. Generally, these
strategies would be employed under the same market and
market sector conditions in which the Fund uses put and
call options on securities or indexes. The purchase of
put options on futures contracts is analogous to the
purchase of puts on securities or indexes so as to
hedge the Fund's securities holdings against the risk
of declining market prices. The writing of a call
option or the purchasing of a put option on a futures
contract constitutes a partial hedge against declining
prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price
at expiration of a written call option is below the
exercise price, the Fund will retain the full amount of
the option premium which provides a partial hedge
against any decline that may have occurred in the
Fund's holdings of securities. If the futures price
when the option is exercised is above the exercise
price, however, the Fund will incur a loss, which may
be offset, in whole or in part, by the increase in the
value of the securities held by the Fund that were
being hedged. Writing a put option or purchasing a
call option on a futures contract serves as a partial
hedge against an increase in the value of the
securities the Fund intends to acquire.
<PAGE>
As with investments in futures contracts, the Fund
is required to deposit and maintain margin with respect
to put and call options on futures contracts written by
it. Such margin deposits will vary depending on the
nature of the underlying futures contract (and the
related initial margin requirements), the current
market value of the option, and other futures positions
held by the Fund. The Fund will set aside in a
segregated account at the Fund's custodian liquid
assets, such as cash, U.S. government securities or
other high grade liquid debt obligations equal in value
to the amount due on the underlying obligation. Such
segregated assets will be marked to market daily, and
additional assets will be placed in the segregated
account whenever the total value of the segregated
account falls below the amount due on the underlying
obligation.
The risks associated with the use of options on
futures contracts include the risk that a Fund may
close out its position as a writer of an option only if
a liquid secondary market exists for such options,
which cannot be assured. The Fund's successful use of
options on futures contracts depends on the
subadviser's ability to correctly predict the movement
in prices of futures contracts and the underlying
instruments, which may prove to be incorrect. In
addition, there may be imperfect correlation between
the instruments being hedged and the futures contract
subject to the option. For additional information, see
"Futures Contracts."
Foreign Currencies. The Fund may purchase and
sell foreign currency on a spot basis, and may use
currency-related derivatives instruments such as
options on foreign currencies, futures on foreign
currencies, options on futures on foreign currencies
and forward currency contracts (i.e., an obligation to
purchase or sell a specific currency at a specified
future date, which may be any fixed number of days from
the contract date agreed upon by the parties, at a
price set at the time the contract is entered into).
The Fund may use these instruments for hedging or any
other lawful purpose consistent with its investment
objective, including transaction hedging, anticipatory
hedging, cross hedging, proxy hedging, and position
hedging. The Fund's use of currency-related derivative
instruments will be directly related to the Fund's
current or anticipated portfolio securities, and the
Fund may engage in transactions in currency-related
derivative instruments as a means to protect against
some or all of the effects of adverse changes in
foreign currency exchange rates on its portfolio
investments. In general, if the currency in which a
portfolio investment is denominated appreciates against
the U.S. dollar, the dollar value of the security will
increase. Conversely, a decline in the exchange rate
of the currency would adversely effect the value of the
portfolio investment expressed in U.S. dollars.
For example, the Fund might use currency-related
derivative instruments to "lock in" a U.S. dollar price
for a portfolio investment, thereby enabling the Fund
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.
The Fund also might use currency-related derivative
instruments when the Adviser believes that one currency
may experience a substantial movement against another
currency, including the U.S. dollar, and it may use
currency-related derivative instruments to sell or buy
the amount of the former foreign currency,
approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign
currency. Alternatively, where appropriate, the Fund
may use currency-related derivative instruments to
hedge 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. The use of this
basket hedging technique may be more efficient and
economical than using separate currency-related
derivative instruments for each currency exposure held
by the Fund. Furthermore, currency-related derivative
instruments may be used for short hedges - for example,
the Fund may sell a forward currency contract to lock
in the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign
currency.
In addition, the Fund may use a currency-related
derivative instrument to shift exposure to foreign
currency fluctuations from one foreign country to
another foreign country where the Adviser believes that
the foreign currency exposure purchased will appreciate
relative to the U.S. dollar and thus better protect the
Fund against the expected decline in the foreign
currency exposure sold. For example, if the Fund owns
securities denominated in a foreign currency and the
Adviser believes that currency will decline, it might
enter into a forward contract to sell an appropriate
amount of the first foreign currency, with payment to
be made in a second foreign currency that the Adviser
believes would better protect the Fund against the
decline in the first security than would a U.S. dollar
exposure. Hedging transactions that use two foreign
currencies are sometimes referred to as "cross hedges."
The effective use of currency-related derivative
instruments by the Fund in a cross hedge is dependent
upon a correlation between price movements of the two
currency instruments and the underlying security
involved, and the use of two currencies magnifies the
risk
<PAGE>
that movements in the price of one instrument may
not correlate or may correlate unfavorably with the
foreign currency being hedged. Such a lack of
correlation might occur due to factors unrelated to the
value of the currency instruments used or investments
being hedged, such as speculative or other pressures on
the markets in which these instruments are traded.
The Fund also might seek to hedge against changes
in the value of a particular currency when no hedging
instruments on that currency are available or such
hedging instruments are more expensive than certain
other hedging instruments. In such cases, the Fund may
hedge against price movements in that currency by
entering into transactions using currency-related
derivative instruments on another foreign currency or a
basket of currencies, the values of which the Adviser
believes will have a high degree of positive
correlation to the value of the currency being hedged.
The risk that movements in the price of the hedging
instrument will not correlate perfectly with movements
in the price of the currency being hedged is magnified
when this strategy is used.
The use of currency-related derivative instruments
by the Fund involves a number of risks. The value of
currency-related derivative instruments depends on the
value of the underlying currency relative to the U.S.
dollar. Because foreign currency transactions
occurring in the interbank market might involve
substantially larger amounts than those involved in the
use of such derivative instruments, the Fund could be
disadvantaged by having to deal in the odd lot market
(generally consisting of transactions of less than $1
million) for the underlying foreign currencies at
prices that are less favorable than for round lots
(generally consisting of transactions of greater than
$1 million).
There is no systematic reporting of last sale
information for currencies or any regulatory
requirement that quotations available through dealers
or other market sources be firm or revised on a timely
basis. Quotation information generally is
representative of very large transactions in the
interbank market and thus might not reflect odd-lot
transactions where rates might be less favorable. The
interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options
or futures markets are closed while the markets for the
underlying currencies remain open, significant price
and rate movements might take place in the underlying
markets that cannot be reflected in the markets for the
derivative instruments until they re-open.
Settlement of transactions in currency-related
derivative instruments might be required to take place
within the country issuing the underlying currency.
Thus, the Fund might be required to accept or make
delivery of the underlying foreign currency in
accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking
arrangements by U.S. residents and might be required to
pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
When the Fund engages in a transaction in a
currency-related derivative instrument, it relies on
the counterparty to make or take delivery of the
underlying currency at the maturity of the contract or
otherwise complete the contract. In other words, the
Fund will be subject to the risk that it may sustain a
loss as a result of the failure of the counterparty to
comply with the terms of the transaction. The
counterparty risk for exchange-traded instruments is
generally less than for privately-negotiated or OTC
currency instruments, since generally a clearing
agency, which is the issuer or counterparty to each
instrument, provides a guarantee of performance. For
privately-negotiated instruments, there is no similar
clearing agency guarantee. In all transactions, the
Fund will bear the risk that the counterparty will
default, and this could result in a loss of the
expected benefit of the transaction and possibly other
losses to the Fund. The Fund will enter into
transactions in currency-related derivative instruments
only with counterparties that the Adviser reasonably
believes are capable of performing under the contract.
Purchasers and sellers of currency-related
derivative instruments may enter into offsetting
closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument
purchased or sold. Secondary markets generally do not
exist for forward currency contracts, with the result
that closing transactions generally can be made for
forward currency contracts only by negotiating directly
with the counterparty. Thus, there can be no assurance
that the Fund will, in fact, be able to close out a
forward currency contract (or any other currency-
related derivative instrument) at a time and price
favorable to the Fund. In addition, in the event of
insolvency of the counterparty, the Fund might be
unable to close out a forward currency contract at any
time prior to maturity. In the case of an exchange-
traded instrument, the Fund will be able to close the
position out only on an exchange which provides a
market for the instruments. The ability to establish
and close out positions on an exchange is subject to
the maintenance of a liquid market, and there can be no
assurance that a liquid market will exist for any
instrument at any specific time. In the case
<PAGE>
of a
privately-negotiated instrument, the Fund will be able
to realize the value of the instrument only by entering
into a closing transaction with the issuer or finding a
third party buyer for the instrument. While the Fund
will enter into privately-negotiated transactions only
with entities who are expected to be capable of
entering into a closing transaction, there can be no
assurance that the Fund will, in fact, be able to enter
into such closing transactions.
The precise matching of currency-related
derivative instrument amounts and the value of the
portfolio securities involved generally will not be
possible because the value of such securities, measured
in the foreign currency, will change after the currency-
related derivative instrument position has been
established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market. The
projection of short-term currency market movements is
extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain.
Permissible foreign currency options will include
options traded primarily in the OTC market. Although
options on foreign currencies are traded primarily in
the OTC market, the Fund will normally purchase or sell
OTC options on foreign currency only when the Adviser
reasonably believes a liquid secondary market will
exist for a particular option at any specific time.
There will be a cost to the Fund of engaging in
transactions in currency-related derivative instruments
that will vary with factors such as the contract or
currency involved, the length of the contract period
and the market conditions then prevailing. In using
these instruments, the Fund may have to pay a fee or
commission or, in cases where the instruments are
entered into on a principal basis, foreign exchange
dealers or other counterparties will realize a profit
based on the difference ("spread") between the prices
at which they are buying and selling various
currencies. Thus, for example, 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.
When required by the SEC guidelines, the Fund will
set aside permissible liquid assets in segregated
accounts or otherwise cover its potential obligations
under currency-related derivatives instruments. To the
extent the Fund's assets are so set aside, they cannot
be sold while the corresponding currency position is
open, unless they are replaced with similar assets. As
a result, if a large portion of the Fund's assets are
so set aside, this could impede portfolio management or
the Fund's ability to meet redemption requests or other
current obligations.
The Adviser's decision to engage in a transaction
in a particular currency-related derivative instrument
will reflect the Adviser's judgment that the
transaction will provide value to the Fund and its
shareholders and is consistent with the Fund's
objectives and policies. In making such a judgment,
the Adviser will analyze the benefits and risks of the
transaction and weigh them in the context of the Fund's
entire portfolio and objectives. The effectiveness of
any transaction in a currency-related derivative
instrument is dependent on a variety of factors,
including the Adviser's skill in analyzing and
predicting currency values and upon a correlation
between price movements of the currency instrument and
the underlying security. There might be imperfect
correlation, or even no correlation, between price
movements of an instrument and price movements of
investments being hedged. Such a lack of correlation
might occur due to factors unrelated to the value of
the investments being hedged, such as speculative or
other pressures on the markets in which these
instruments are traded. In addition, the Fund's use of
currency-related derivative instruments is always
subject to the risk that the currency in question could
be devalued by the foreign government. In such a case,
any long currency positions would decline in value and
could adversely affect any hedging position maintained
by the Fund.
The Fund's dealing in currency-related derivative
instruments will generally be limited to the
transactions described above. However, the Fund
reserves the right to use currency-related derivatives
instruments for different purposes and under different
circumstances. Of course, the Fund is not required to
use currency-related derivatives instruments and will
not do so unless deemed appropriate by the Adviser. It
should also be realized that use of these instruments
does not eliminate, or protect against, price movements
in the Fund's securities that are attributable to other
(i.e., non-currency related) causes. Moreover, while
the use of currency-related derivatives instruments may
reduce the risk of loss due to a decline in the value
of a hedged currency, at the same time the use of these
instruments tends to limit any potential gain which may
result from an increase in the value of that currency.
Additional Derivative Instruments and Strategies.
In addition to the derivative instruments and
strategies described above, the Adviser expects to
discover additional derivative instruments and other
hedging or risk
<PAGE>
management techniques. The Adviser may
utilize these new derivative instruments and techniques
to the extent that they are consistent with the Fund's
investment objective and permitted by the Fund's
investment limitations, operating policies, and
applicable regulatory authorities.
Depositary Receipts and Foreign Securities
The Fund may invest up to 20% of its net assets in
foreign securities directly or by purchasing depositary
receipts, including American Depositary Receipts
("ADRs") and European Depositary Receipts ("EDRs") or
other securities convertible into securities or issuers
based in foreign countries. These securities may not
necessarily be denominated in the same currency as the
securities into which they may be converted.
Generally, ADRs, in registered form, are denominated in
U.S. dollars and are designed for use in the U.S.
securities markets, while EDRs, in bearer form, may be
denominated in other currencies and are designed for
use in European securities markets. ADRs are receipts
typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities.
EDRs are European receipts evidencing a similar
arrangement. For purposes of the Fund's investment
objectives, ADRs and EDRs are deemed to have the same
classification as the underlying securities they
represent. Thus, an ADR or EDR representing ownership
of common stock will be treated as common stock.
ADR facilities may be established as either
"unsponsored" or "sponsored." While ADRs issued under
these two types of facilities are in some respects
similar, there are distinctions between them relating
to the rights and obligations of ADR holders and the
practices of market participants. For example, a non-
sponsored depositary may not provide the same
shareholder information that a sponsored depositary is
required to provide under its contractual arrangements
with the issuer, including reliable financial
statements. Under the terms of most sponsored
arrangements, depositories agree to distribute notices
of shareholder meetings and voting instructions, and to
provide shareholder communications and other
information to the ADR holders at the request of the
issuer of the deposited securities.
Investments in securities of foreign issuers
involve risks which are in addition to the usual risks
inherent in domestic investments. In many countries
there is less publicly available information about
issuers than is available in the reports and ratings
published about companies in the United States.
Additionally, foreign countries are not subject to
uniform accounting, auditing and financial reporting
standards. Other risks inherent in foreign investments
include expropriation; confiscatory taxation;
withholding taxes on dividends or interest; less
extensive regulation of foreign brokers, securities
markets, and issuers; costs incurred in conversions
between currencies; possible delays in settlement in
foreign securities markets; limitations on the use or
transfer of assets (including suspension of the ability
to transfer currency from a given country); the
difficulty of enforcing obligations in other countries;
diplomatic developments; and political or social
instability. Foreign economies may differ favorably or
unfavorably from the U.S. economy in various respects
and many foreign securities are less liquid and their
prices are more volatile than comparable U.S.
securities. From time to time foreign securities may
be difficult to liquidate rapidly without adverse price
effects. Certain costs attributable to foreign
investing, such as custody charges and brokerage costs,
may be higher than those attributable to domestic
investment. The value of the Fund's assets denominated
in foreign currencies will increase or decrease in
response to fluctuations in the value of those foreign
currencies relative to the U.S. dollar. Currency
exchange rates can be volatile at times in response to
supply and demand in the currency exchange markets,
international balances of payments, governmental
intervention, speculation and other political and
economic conditions. In addition, a number of European
countries have entered into the European Monetary Union
("EMU"), an economic and monetary union which will
result in a single currency and a single monetary
policy for all EMU countries beginning January 1, 1999.
The EMU may have adverse effects on foreign securities
if it is not implemented as planned or if one or more
countries withdraws from the EMU. The EMU may also
have adverse effects on foreign securities if portfolio
management software used by the Adviser or the
accounting and trading systems used by the Fund do not
recognize the Euro, the new currency adopted by the
EMU. In the Euro's infancy, investment advisers, like
the Adviser, will be unfamiliar with new indices and
benchmarks for EMU countries and companies.
Foreign Investment Companies
Some of the countries in which the Fund may invest
may not permit direct investment by outside investors.
Investments in such countries may only be permitted
through foreign government-approved or -authorized
investment vehicles, which may include other investment
companies. Investing through such vehicles may involve
frequent or layered fees or expenses and may also be
subject to limitation under the 1940 Act. Under the
1940 Act, the Fund may
<PAGE>
invest up to 10% of its assets
in shares of investment companies and up to 5% of its
assets in any one investment company as long as the
investment does not represent more than 3% of the
voting stock of the acquired investment company.
Illiquid Securities
The Fund may invest up to 15% of its net assets in
illiquid securities (i.e., securities that are not
readily marketable). For purposes of this restriction,
illiquid securities include, but are not limited to,
restricted securities (securities the disposition of
which is restricted under the federal securities laws),
repurchase agreements with maturities in excess of
seven days, and other securities that are not readily
marketable. The Board of Directors of the Corporation,
or its delegate, has the ultimate authority to
determine, to the extent permissible under the federal
securities laws, which securities are liquid or
illiquid for purposes of this 15% limitation. Certain
securities exempt from registration or issued in
transactions exempt from registration under the
Securities Act, such as securities that may be resold
to institutional investors under Rule 144A under the
Securities Act, may be considered liquid under
guidelines adopted by the Board of Directors. However,
investing in securities which may be resold pursuant to
Rule 144A under the Securities Act could have the
effect of increasing the level of the Fund's
illiquidity to the extent that institutional investors
become, for a time, uninterested in purchasing such
securities.
The Board of Directors has delegated to the
Adviser the day-to-day determination of the liquidity
of any security, although it has retained oversight and
ultimate responsibility for such determinations.
Although no definitive liquidity criteria are used, the
Board of Directors has directed the Adviser to look to
such factors as (i) the nature of the market for a
security (including the institutional private resale
market), (ii) the terms of certain securities or other
instruments allowing for the disposition to a third
party or the issuer thereof (e.g., certain repurchase
obligations and demand instruments), (iii) the
availability of market quotations (e.g., for securities
quoted in the PORTAL system), and (iv) other
permissible relevant factors.
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. Where
registration is required, the 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 that which prevailed when it
decided to sell. Restricted securities will be priced
at fair value as determined in good faith by the Board
of Directors. If, through the appreciation of
restricted securities or the depreciation of
unrestricted securities, the Fund should be in a
position where more than 15% of the value of its net
assets are invested in illiquid securities, including
restricted securities which are not readily marketable
(except for Rule 144A securities deemed to be liquid by
the Adviser), the affected Fund will take such steps as
is deemed advisable, if any, to protect liquidity.
Short-Term Fixed Income Securities
The Fund intends to be fully invested at all times
and accordingly will only hold cash or short-term fixed
income securities to meet anticipated redemption
requests, pending investment and to pay expenses.
Short-term fixed income securities are defined to
include without limitation, the following:
1. U.S. government securities, including bills,
notes and bonds differing as to maturity and
rates of interest, which are either issued or
guaranteed by the U.S. Treasury or by U.S.
government agencies or instrumentalities.
U.S. government agency securities include
securities issued by: (a) the Federal
Housing Administration, Farmers Home
Administration, Export-Import Bank of the
United States, Small Business Administration
and the Government National Mortgage
Association, whose securities are supported
by the full faith and credit of the United
States; (b) the Federal Home Loan Banks,
Federal Intermediate Credit Banks and the
Tennessee Valley Authority, whose securities
are supported by the right of the agency to
borrow from the U.S. Treasury; (c) the
Federal National Mortgage Association, whose
securities are supported by the discretionary
authority of the U.S. government to purchase
certain obligations of the agency or
instrumentality; and (d) the Student Loan
Marketing Association, whose securities are
supported only by its credit. While the U.S.
government provides financial support to such
U.S. government-sponsored agencies or
<PAGE>
instrumentalities, no assurance can be given
that it always will do so since it is not so
obligated by law. The U.S. government, its
agencies and instrumentalities do not
guarantee the market value of their
securities and consequently the value of such
securities may fluctuate.
2. Certificates of Deposit issued against funds
deposited in a bank or savings and loan
association. Such certificates are for a
definite period of time, earn a specified
rate of return and are normally negotiable.
If such certificates of deposit are non-
negotiable, they will be considered illiquid
securities and be subject to the Fund's
restriction on investments in illiquid
securities. Pursuant to the certificate of
deposit, the issuer agrees to pay the amount
deposited plus interest to the bearer of the
certificate on the date specified thereon.
Under current Federal Deposit Insurance
Corporation regulations, the maximum
insurance payable as to any one certificate
of deposit is $100,000; therefore,
certificates of deposit purchased by the Fund
may not be fully insured.
3. Bankers' acceptances which are short-term
credit instruments used 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 asset or it may be sold
in the secondary market at the going rate of
interest for a specific maturity.
4. Repurchase agreements which involve purchases
of debt securities. In such an action, at
the time the Fund purchases the security, it
simultaneously agrees to resell and redeliver
the security to the seller, who also
simultaneously agrees to buy back the
security at a fixed price and time. This
assures a predetermined yield for the Fund
during its holding period since the resale
price is always greater than the purchase
price and reflects an agreed-upon market
rate. Such actions afford an opportunity for
the Fund to invest temporarily available
cash. The Fund may enter into repurchase
agreements only with respect to obligations
of the U.S. government, its agencies or
instrumentalities, certificates of deposit,
or bankers acceptances in which the Fund may
invest. Repurchase agreements may be
considered loans to the seller,
collateralized by the underlying securities.
The risk to the Fund is limited to the
ability of the seller to pay the agreed-upon
sum on the repurchase date. In the event of
default, the repurchase agreement provides
that the affected Fund is entitled to sell
the underlying collateral. However, if the
value of the collateral declines after the
agreement is entered into, and if the seller
defaults under a repurchase agreement when
the value of the underlying collateral is
less than the repurchase price, the Fund
could incur a loss of both principal and
interest. The Adviser monitors the value of
the collateral at the time the transaction is
entered into and at all times during the term
of the repurchase agreement. The Adviser does
so in an effort to determine that the value
of the collateral always equals or exceeds
the agreed-upon repurchase price to be paid
to the Fund. If the seller were to be
subject to a federal bankruptcy proceeding,
the ability of a Fund to liquidate the
collateral could be delayed or impaired
because of certain provisions of the
bankruptcy laws.
5. Bank time deposits, which are monies kept on
deposit with banks or savings and loan
associations for a stated period of time at a
fixed rate of interest. There may be
penalties for the early withdrawal of such
time deposits, in which case the yields of
these investments will be reduced.
6. Commercial paper consists of short-term
unsecured promissory notes, including
variable rate master demand notes issued by
corporations to finance their current
operations. Master demand notes are direct
lending arrangements between the Fund and a
corporation. There is no secondary market
for the notes. However, they are redeemable
by the Fund at any time. The Adviser will
consider the financial condition of the
corporation (e.g., earning power, cash flow
and liquidity ratios) and will continuously
monitor the corporation's ability to meet all
of its financial obligations, because the
Fund's liquidity might be impaired if the
corporation were unable to pay principal and
interest on demand. Investments in
commercial paper will be limited to
commercial paper rated in the two highest
categories by a major rating agency or
unrated commercial paper which is, in the
opinion of the Adviser, of comparable
quality.
<PAGE>
Repurchase Agreements
The Fund may enter into repurchase agreements with
certain banks or non-bank dealers. In a repurchase
agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase
the obligation at a mutually agreed upon time and price
(usually within seven days). The repurchase agreement,
thereby, determines the yield during the purchaser's
holding period, while the seller's obligation to
repurchase is secured by the value of the underlying
security. The Adviser will monitor, on an ongoing
basis, the value of the underlying securities to ensure
that the value always equals or exceeds the repurchase
price plus accrued interest. Repurchase agreements
could involve certain risks in the event of a default
or insolvency of the other party to the agreement,
including possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities.
Although no definitive creditworthiness criteria are
used, the Adviser reviews the creditworthiness of the
banks and non-bank dealers with which the Fund enters
into repurchase agreements to evaluate those risks.
Lending Portfolio Securities
The Fund may lend portfolio securities with a
value not exceeding 33 1/3% of the Fund's total assets
to brokers or dealers, banks or other institutional
borrowers of securities as a means of earning income.
In return, the Fund will receive collateral in cash or
money market instruments. Such collateral will be
maintained at all times in an amount equal to at least
100% of the current market value of the loaned
securities. The purpose of such securities lending is
to permit the borrower to use such securities for
delivery to purchasers when such borrower has sold
short. The Fund will continue to receive the
equivalent of the interest or dividends paid by the
issuer of the securities lent, and the Fund may also
receive interest on the investment of collateral, or a
fee from the borrower as compensation for the loan.
The Fund may pay reasonable custodial and
administrative fees in connection with the loan. The
Fund will retain the right to call, upon notice, lent
securities. While there may be delays in recovery or
even a loss of right in collateral should the borrower
fail financially, the Fund's investment adviser will
review the credit worthiness of the entities to which
such loans are made to evaluate those risks. Although
the Fund is authorized to lend securities, the Fund
does not presently intend to engage in lending.
Borrowing
The Fund is authorized to borrow money from banks
and make other investments or engage in other
transactions permissible under the 1940 Act which may
be considered a borrowing (such as reverse repurchase
agreements), provided that the amount borrowed may not
exceed 33 1/3% of the value of the Fund's net assets.
The Fund's borrowings create an opportunity for greater
return to the Fund and, ultimately, the Fund's
shareholders, but at the same time increase exposure to
losses. In addition, interest payments and fees paid
by the Fund on any borrowings may offset or exceed the
return earned on borrowed funds. The Fund currently
intends to borrow money only for temporary,
extraordinary or emergency purposes.
Reverse Repurchase Agreements
The Fund may, with respect to up to 5% of its net
assets, engage in reverse repurchase agreements. In a
reverse repurchase agreement, the Fund would sell a
security and enter into an agreement to repurchase the
security at a specified future date and price. The
Fund generally retains the right to interest and
principal payments on the security. Since the Fund
receives cash upon entering into a reverse repurchase
agreement, it may be considered a borrowing. When
required by guidelines of the SEC, the Fund will set
aside permissible liquid assets in a segregated account
to secure its obligations to repurchase the security.
Convertible Securities
The Fund may invest in convertible securities,
which are bonds, debentures, notes, preferred stocks,
or other securities that may be converted into or
exchanged for a specified amount of common stock or
warrants of the same or a different company within a
particular period of time at a specified price or
formula. A convertible security entitles the holder to
receive interest normally paid or accrued on debt or
the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted,
or exchanged. Convertible securities have unique
investment
<PAGE>
characteristics in that they generally (i)
have higher yields than common stocks, but lower yields
than comparable non-convertible securities, (ii) are
less subject to fluctuation in value than the
underlying stock (or warrant) since they have fixed
income characteristics, and (iii) provide the potential
for capital appreciation if the market price of the
underlying common stock (or warrant) increases. A
convertible security may be subject to redemption at
the option of the issuer at a price established in the
convertible security's governing instrument. If a
convertible security held by the Fund is called for
redemption, the Fund will be required to permit the
issuer to redeem the security, convert it into the
underlying common stock (or warrant), or sell it to a
third party.
Warrants
The Fund may invest in warrants, valued at the
lower of cost or market value, if, after giving effect
thereto, not more than 5% of its net assets will be
invested in warrants other than warrants acquired in
units or attached to other securities. Warrants are
options to purchase equity securities at a specific
price for a specific period of time. They do not
represent ownership of the securities but only the
right to buy them. Investing in warrants is purely
speculative in that they have no voting rights, pay no
dividends and have no rights with respect to the assets
of the corporation issuing them. In addition, the
value of a warrant does not necessarily change with the
value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to
its expiration date.
Short Sales Against the Box
The Fund may sell securities short against the box
to hedge unrealized gains on portfolio securities.
Selling securities short against the box involves
selling a security that the Fund owns or has the right
to acquire, for delivery at a specified date in the
future. If the Fund sells securities short against the
box, it may protect unrealized gains, but will lose the
opportunity to profit on such securities if the price
rises.
When-Issued Securities
The Fund may from time to time invest up to 5% of
its net assets in securities purchased on a "when-
issued" basis. The price of securities purchased on a
when-issued basis is fixed at the time the commitment
to purchase is made, but delivery and payment for the
securities take place at a later date. Normally, the
settlement date occurs within 45 days of the purchase.
During the period between the purchase and settlement,
no payment is made by the Fund to the issuer, no
interest is accrued on debt securities and no dividend
income is earned on equity securities. Forward
commitments involve a risk of loss if the value of the
security to be purchased declines prior to the
settlement date, which risk is in addition to the risk
of decline in value of the Fund's other assets. While
when-issued securities may be sold prior to the
settlement date, the Fund intends to purchase such
securities with the purpose of actually acquiring them.
At the time the 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. The Fund does not
believe that its net asset value will be adversely
affected by its purchases of securities on a when-
issued basis.
The Fund will maintain cash and marketable
securities equal in value to commitments for when-
issued securities. Such segregated securities either
will mature or, if necessary, be sold on or before the
settlement date. When the time comes to pay for when-
issued securities, the Fund will meet its obligations
from then available cash flow, sale of the securities
held in the separate account, described above, sale of
other securities or, although it would not normally
expect to do so, from the sale of the when-issued
securities themselves (which may have a market value
greater or less than the Fund's payment obligation).
Unseasoned Companies
The Fund may invest up to 5% of its total assets
in unseasoned companies, which are companies with less
than three years of continuous operation. While
smaller companies generally have potential for rapid
growth, they often involve higher risks because they
lack the management experience, financial resources,
product diversification and competitive strengths of
larger corporations. In addition, in many instances,
the securities of smaller companies are traded only
over-the-counter or on regional securities exchanges,
and the frequency and volume of their trading is
substantially less than is typical of larger companies.
Therefore, the securities of these companies may be
subject to wider price fluctuations. When making large
sales, the Fund may have to sell portfolio holdings of
these companies at
<PAGE>
discounts from quoted prices or may
have to make a series of smaller sales over an extended
period of time due to the trading volume in smaller
company securities.
Concentration
The Fund has adopted a fundamental investment
policy which prohibits the Fund from investing more
than 25% of its assets in the securities of companies
in any one industry. An industry is defined as a
business-line subsector of a stock-market sector.
While the Fund may be heavily invested in a single
market sector like technology or health care, for
example, it will not invest more than 25% of its assets
in securities of companies in any one industry or
subsector. Technology industries or subsectors include
networking, telecommunications, software,
semiconductors, and voice-processing business lines.
Health care industries or subsectors include medical
devices and information systems business lines. The
Fund does not consider all Light Revolution companies
to be in the same industry.
DIRECTORS AND OFFICERS
Under the laws of the State of Maryland, the Board
of Directors of the Corporation is responsible for
managing its business and affairs. The directors and
officers of the Corporation, together with information
as to their principal business occupations during the
last five years, and other information, are shown
below. Each director who is deemed an "interested
person," as defined in the 1940 Act, is indicated by an
asterisk (*).
*Henry Hewitt, 45, created the Light Index. He
will be responsible for the day-to-day management of
the Fund. An Oxford graduate, he began working in the
securities business in 1985 as a broker for Merrill
Lynch. He has been a registered investment adviser
since 1993 and has published a monthly newsletter
called The Light Revolution(TM) Herald since September
1993. The Light Revolution(TM) Herald examines current
technological and financial developments surrounding
the companies which are included in the Light Index.
Mr. Hewitt serves as President, Chief Executive Officer
and a Director of the Adviser, and will serve as
President and a Director of the Corporation.
*Brian Hatch, 57, is a legislative advocate before
the California legislature, representing the California
Professional Firefighters. Mr. Hatch is a founder and
a director of Working Assets Money Fund, an open end
investment company (money market fund) registered under
the 1940 Act. Mr. Hatch will serve as a Director of
the Corporation.
John Hewitt Jr., 69, has been an investment
adviser in Tacoma since 1964. He is a Yale graduate
and a retired Marine Captain. Mr. Hewitt will serve as
a Director of the Corporation.
Thomas Kinsman, 50, is a self-employed consultant
who's business emphasizes management training. His
clients are principally companies involved in
technology. He was employed by Xerox Corporation for
20 years in management training and general management
positions. Mr. Kinsman is a graduate of University of
Arizona. He will serve as a Director of the
Corporation.
Charles O'Herin is a retired Army officer and has
been a small business owner since 1990. Mr. O'Herin
has over 25 years of experience developing, managing,
defining and reengineering high technology programs and
information management organizations and systems. He
is co-founder of New Definitions, a Management
Consulting firm designed to improve businesses, and co-
founder of Washington Online Services, an Internet
Business Consulting firm designed to help businesses
benefit from use of the Internet and electronic
commerce. Mr. O'Herin serves as Secretary, Treasurer
and a Director of the Adviser, and will serve as Vice
President, Secretary and Treasurer of the Corporation.
The address for the directors and officers of the
Corporation is Light Index Investment Company, 704
Court A, Tacoma, Washington 98402.
As of February ___, 1999, officers and directors
of the Corporation did not beneficially own any of the
shares of common stock of the Fund's then outstanding
shares; however, the Adviser owned 10% of such shares.
Directors
<PAGE>
and officers of the Corporation who are also
officers, directors, employees or shareholders of the
Adviser do not receive any remuneration from the Fund
for serving as directors or officers.
The following table provides information relating
to annual compensation to be paid to directors of the
Corporation for their services as such (1):
Name Cash Other Total
Compensation(2) Compensation
Henry Hewitt $ 0 $0 $ 0
Brian Hatch $ 0 $0 $ 0
Thomas Kinsman $1,000 $0 $1,000
John Hewitt, Jr. $1,000 $0 $1,000
All directors $2,000 $0 $2,000
as a group
(4 persons)
____________________
(1) The amounts indicated are estimates of amounts to
be paid by the Corporation.
(2) Each director who is not deemed an "interested
person" as defined in the 1940 Act, will receive $500
for each Board of Directors meeting attended by such
person and reasonable expenses incurred in connection
therewith. The Board anticipates holding two meetings
during fiscal 1999. Thus, each disinterested director
is entitled to up to $1,000 during such time period
from the Corporation, plus reasonable expenses.
PRINCIPAL SHAREHOLDERS
As of ____________, 1999, the following persons
owned of record or beneficially or is known by the
Corporation to own of record or beneficially 5% or more
of the outstanding shares of the Fund:
Name and Address No. Shares Percentage
John C. Harrington 100 10%
1001 2nd Street, Suite 325
Napa, California 94559
Sylvia B. Harris 300 30%
8201 6th Avenue
Tacoma, Washington 98406
Light Index Investment
Company 100 10%
704 Court A
Tacoma, Washington 98402
Gene Roy Little 250 25%
4539 Shincke Road
Olympia, Washington 98506
Stetson Maine & Co. LLC 250 25%
11204 Lake Steilacoom Drive
Tacoma, Washington 98498
<PAGE>
Based on the foregoing, as of ____________, 1999,
Ms. Harris owned a controlling interest in the
Corporation. Shareholders with a controlling interest
could effect the outcome of proxy voting or the
direction of management of the Corporation.
INVESTMENT ADVISER
Light Index Investment Company (the "Adviser") is
the investment adviser to the Fund. The Adviser is
controlled by Henry Hewitt.
The investment advisory agreement between the
Corporation and the Adviser dated as of ___________,
1999 (the "Advisory Agreement") has an initial term of
two years and thereafter is required to be approved
annually by the Board of Directors of the Corporation
or by vote of a majority of the Fund's outstanding
voting securities. Each annual renewal must also be
approved by the vote of a majority of the Corporation's
directors who are not parties to the Advisory Agreement
or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such
approval. The Advisory Agreement was approved by the
Board of Directors, including a majority of the
disinterested directors on ___________, 1999 and by the
initial shareholder of the Fund on ___________, 1999.
The Advisory Agreement is terminable without penalty,
on 60 days' written notice by the Board of Directors of
the Corporation, by vote of a majority of the Fund's
outstanding voting securities or by the Adviser, and
will terminate automatically in the event of its
assignment.
Under the terms of the Advisory Agreement, the
Adviser manages the Fund's investments and business
affairs, subject to the supervision of the
Corporation's Board of Directors. At its expense, the
Adviser provides office space and all necessary office
facilities, equipment and personnel for managing the
investments of the Fund. As compensation for its
services, the Fund pays the Adviser an annual
management fee of 1.00% of its average daily net
assets. The advisory fee is accrued daily and paid
monthly.
The Adviser has agreed that until March 31, 2000,
the Adviser will waive its management fee and/or
reimburse the Fund's operating expenses to the extent
necessary to ensure that the total annual operating
expenses for the Fund do not exceed 2.00% of average
daily net assets. After such date, the Adviser may
from time to time voluntarily waive all or a portion of
its fee and/or reimburse expenses for the Fund. Any
waiver of fees or reimbursement of expenses will be
made on a monthly basis and, with respect to the
latter, will be paid to the Fund by reduction of the
Adviser's fee. Any such waiver and/or reimbursement is
subject to later adjustment during the term of the
Advisory Agreement to allow the Adviser to recoup
amounts waived and/or reimbursed, including initial
organization costs of the Fund, to the extent actual
fees and expenses are less than the expense limitation
caps, provided, however, that, the Adviser shall only
be entitled to recoup such amounts for a maximum period
of three years from the date such amount was waived or
reimbursed.
FUND TRANSACTIONS AND BROKERAGE
Under the Advisory Agreement, the Adviser, in its
capacity as portfolio manager, is responsible for
decisions to buy and sell securities for the Fund and
for the placement of the Fund's securities business,
the negotiation of the commissions to be paid on such
transactions and the allocation of portfolio brokerage
business. The Adviser seeks to obtain the best
execution at the best security price available with
respect to each transaction. The best price to the
Fund means the best net price without regard to the mix
between purchase or sale price and commission, if any.
While the Adviser seeks reasonably competitive
commission rates, the Fund does not necessarily pay the
lowest available commission. Brokerage will not be
allocated based on the sale of the Fund's shares.
When the Adviser buys or sells the same security
for two or more advisory accounts, including the Fund,
the Adviser may place concurrent orders with a single
broker to be executed as a single, aggregated block in
order to facilitate orderly and efficient execution.
Whenever the Adviser does so, each advisory account on
whose behalf an order was placed will receive the
average price at which the block was executed and will
bear a proportionate share of all transaction costs,
based on the size of the advisory account's order.
While the Adviser believes combining orders for
advisory accounts will, over time, be advantageous to
all participants, in particular cases the average price
at which
<PAGE>
the block was executed could be less
advantageous to one particular advisory account than if
the advisory account had been the only account
effecting the transaction or had completed its
transaction before the other participants.
Section 28(e) of the Securities Exchange Act of
1934, as amended ("Section 28(e)"), permits an
investment adviser, under certain circumstances, to
cause an account to pay a broker or dealer who supplies
brokerage and research services a commission for
effecting a transaction in excess of the amount of
commission another broker or dealer would have charged
for effecting the transaction. Brokerage and research
services include (a) furnishing advice as to the value
of securities, the advisability of investing,
purchasing or selling securities and the availability
of securities or purchasers or sellers of securities;
(b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and
(c) effecting securities transactions and performing
functions incidental thereto (such as clearance,
settlement and custody).
In selecting brokers or dealers, the Adviser
considers investment and market information and other
research, such as economic, securities and performance
measurement research provided by such brokers or
dealers and the quality and reliability of brokerage
services, including execution capability, performance
and financial responsibility. Accordingly, the
commissions charged by any such broker or dealer may be
greater than the amount another firm might charge if
the Adviser determines in good faith that the amount of
such commissions is reasonable in relation to the value
of the research information and brokerage services
provided by such broker or dealer to the Fund. The
Adviser believes that the research information received
in this manner provides the Fund with benefits by
supplementing the research otherwise available to the
Fund. Such higher commissions will not be paid by the
Fund unless (a) the Adviser determines in good faith
that the amount is reasonable in relation to the
services in terms of the particular transaction or in
terms of the Adviser's overall responsibilities with
respect to the accounts, including the Fund, as to
which it exercises investment discretion; (b) such
payment is made in compliance with the provisions of
Section 28(e) and other applicable state and federal
laws; and (c) in the opinion of the Adviser, the total
commissions paid by the Fund will be reasonable in
relation to the benefits to the Fund over the long
term.
The Adviser may, from time to time, cause advisory
accounts, including the Fund, to participate in initial
public offerings ("IPOs"). The Adviser's policy is to
allocate, to the extent operationally and otherwise
practical, IPOs, including those IPOs where the Adviser
anticipates the security will initially trade in the
market at a premium ("hot issues"), to each advisory
account without regard to the size or fee structure of
the advisory account. The Adviser allocates IPOs to
advisory accounts based on numerous issues, including
cash availability, the time advisory account funds have
been available for investment or have had investments
available for sale, investment objectives and
restrictions, an advisory account's participation in
other IPOs and relative size of portfolio holdings of
the same or comparable securities. An additional
consideration used in the Adviser's allocation of "hot
issues" is the relative investment performance of an
advisory account versus the index benchmarks and/or the
average of all of the Adviser's advisory accounts.
From time to time, the Adviser may allocate "hot
issues" to enhance the performance of advisory accounts
that the Adviser believes have lagged relative to the
performance of other accounts. The Adviser's
participation in and allocation of "hot issues" is
extremely limited.
The Adviser places portfolio transactions for
other advisory accounts managed by the Adviser.
Research services furnished by firms through which the
Fund effects its securities transactions may be used by
the Adviser in servicing all of its accounts; not all
of such services may be used by the Adviser in
connection with the Fund. The Adviser believes it is
not possible to measure separately the benefits from
research services to each of the accounts (including
the Fund) managed by it. Because the volume and nature
of the trading activities of the accounts are not
uniform, the amount of commissions in excess of those
charged by another broker paid by each account for
brokerage and research services will vary. However,
the Adviser believes such costs to the Fund will not be
disproportionate to the benefits received by the Fund
on a continuing basis. The Adviser seeks to allocate
portfolio transactions equitably whenever concurrent
decisions are made to purchase or sell securities by
the Fund and another advisory account. In some cases,
this procedure could have an adverse effect on the
price or the amount of securities available to the
Fund. In making such allocations between the Fund and
other advisory accounts, the main factors considered by
the Adviser are the respective investment objectives,
the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for
investment and the size of investment commitments
generally held.
<PAGE>
CUSTODIAN
As custodian of the Fund's assets, Firstar Bank
Milwaukee, N.A. ("Firstar Bank"), Third Floor, 615 East
Michigan Street, Milwaukee, Wisconsin 53202, has
custody of all securities and cash of the Fund,
delivers and receives payment for portfolio securities
sold, receives and pays for portfolio securities
purchased, collects income from investments and
performs other duties, all as directed by the officers
of the Corporation.
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Firstar Mutual Fund Services, LLC ("Firstar"),
Third Floor, 615 East Michigan Street, Milwaukee,
Wisconsin 53202, acts as transfer agent and dividend-
disbursing agent for the Fund. Firstar is compensated
based on an annual fee per open account of $14 (subject
to a minimum annual fee of $22,500) plus out-of-pocket
expenses, such as postage and printing expenses in
connection with shareholder communications. Firstar
also receives an annual fee per closed account of $14.
From time to time, the Corporation, on behalf of
the Fund, directly or indirectly through arrangements
with the Adviser, the Distributor (as defined below) or
Firstar, may pay amounts to third parties that provide
transfer agent type services and other administrative
services relating to the Fund to persons who
beneficially have interests in the Fund, such as
participants in 401(k) plans. These services may
include, among other things, sub-accounting services,
transfer agent type activities, answering inquiries
relating to the Fund, transmitting proxy statements,
annual reports, updated prospectuses, other
communications regarding the Fund and related services
as the Fund or beneficial owners may reasonably
request. In such cases, the Fund will not pay fees
based on the number of beneficial owners at a rate that
is greater than the rate the Fund is currently paying
Firstar for providing these services to the Fund's
shareholders (i.e., $14 per account plus expenses).
ADMINISTRATOR
Pursuant to a Fund Administration Servicing
Agreement and a Fund Accounting Servicing Agreement,
Firstar also performs accounting and certain compliance
and tax reporting functions for the Corporation. For
these services, Firstar receives from the Corporation
out-of-pocket expenses plus the following aggregate
annual fees, computed daily and payable monthly, based
on the Fund's aggregate average net assets:
Administrative Services Fees
First $200 million of average net assets .06 of 1%*
Next $500 million of average net assets .05 of 1%
Average net assets in excess of $500 million .03 of 1%
_____________________________
* Subject to a minimum fee of $30,000.
Accounting Services Fees
First $40 million of average net assets $22,000
Next $200 million of average net assets .01 of 1%
Average net assets in excess of $240 million .005 of 1%
DISTRIBUTOR AND PLAN OF DISTRIBUTION
Distributor
Under a distribution agreement dated February 23,
1998 (the "Distribution Agreement"), First Data
Distributors, Inc., 4400 Computer Drive, Westborough,
Massachusetts 01581, acts as principal distributor of
the Fund's shares. The Distribution Agreement provides
that the Distributor will use appropriate efforts to
distribute the Fund's shares, which shares are offered
for sale by the Fund continuously at net asset value
per share without the imposition of
<PAGE>
a sales charge.
All or a portion of the distribution and shareholder
servicing fee may be used by the Distributor to pay
expenses under the distribution and shareholder
servicing plan discussed below.
Distribution and Shareholder Servicing Plan
The Corporation, on behalf of the Fund, has
adopted a plan pursuant to Rule 12b-1 under the 1940
Act (the "12b-1 Plan"), which authorizes it to pay the
Distributor, in its capacity as the principal
distributor of Fund shares, or any Recipient (as
defined below) a distribution and shareholder servicing
fee of up to 0.25% per annum of the Fund's average
daily net assets. Under the terms of the 12b-1 Plan,
the Corporation or the Distributor may pay all or a
portion of this fee to any securities dealer, financial
institution or any other person (the "Recipient") who
renders assistance in distributing or promoting the
sale of Fund shares, or who provides certain
shareholder services to Fund shareholders, pursuant to
a written agreement (the "Related Agreement"). The
12b-1 Plan is a "reimbursement" plan, which means that
the fees paid by the Fund are intended as reimbursement
for services rendered up to the maximum allowable fee.
If more money for services rendered is due than is
immediately payable because of the expense limitation
under the 12b-1 Plan, the unpaid amount is carried
forward from period to period while the 12b-1 Plan is
in effect until such time as it may be paid. No
interest, carrying or other forward charge will be
borne by the Fund with respect to unpaid amounts
carried forward. The 12b-1 Plan has the effect of
increasing the Fund's expenses from what they would
otherwise be. The Board of Directors reviews the
Fund's distribution and shareholder servicing fee
payments in connection with its determination as to the
continuance of the 12b-1 Plan.
The 12b-1 Plan, including forms of Related
Agreements, has been unanimously approved by a majority
of the Board of Directors of the Corporation, and of
the members of the Board who are not "interested
persons" of the Corporation as defined in the 1940 Act
and who have no direct or indirect financial interest
in the operation of the 12b-1 Plan or any Related
Agreements (the "Disinterested Directors") voting
separately. The 12b-1 Plan, and any Related Agreement
which is entered into, will continue in effect for a
period of more than one year only so long as its
continuance is specifically approved at least annually
by a vote of a majority of the Corporation's Board of
Directors and of the Disinterested Directors, cast in
person at a meeting called for the purpose of voting on
the 12b-1 Plan or the Related Agreement, as applicable.
In addition, the 12b-1 Plan and any Related Agreement
may be terminated at any time, without penalty, by vote
of a majority of the outstanding voting securities of
the Fund, or by vote of a majority of Disinterested
Directors (on not more than 60 days' written notice in
the case of the Related Agreement only). Payment of the
distribution and shareholder servicing fee is to be
made monthly. The Distributor and/or Recipients will
provide reports or invoices to the Corporation of all
amounts payable to them (and the purposes for which the
amounts were expended) pursuant to the 12b-1 Plan.
Interests of Certain Persons
With the exception of the Adviser, in its capacity
as the Fund's investment adviser, and the Distributor,
in its capacity as principal distributor of Fund
shares, no "interested person" of the Fund, as defined
in the 1940 Act, and no director of the Fund who is not
an "interested person" has or had a direct or indirect
financial interest in the 12b-1 Plan or any Related
Agreement.
Anticipated Benefits to the Fund
The Board of Directors considered various factors
in connection with its decision to approve the 12b-1
Plan, including: (a) the nature and causes of the
circumstances which make implementation of the 12b-1
Plan necessary and appropriate; (b) the way in which
the 12b-1 Plan would address those circumstances,
including the nature and potential amount of
expenditures; (c) the nature of the anticipated
benefits; (d) the merits of possible alternative plans
or pricing structures; (e) the relationship of the
12b-1 Plan to other distribution efforts of the Fund;
and (f) the possible benefits of the 12b-1 Plan to any
other person relative to those of the Fund.
Based upon its review of the foregoing factors and
the material presented to it, and in light of its
fiduciary duties under relevant state law and the 1940
Act, the Board of Directors determined, in the exercise
of its business judgment, that the 12b-1 Plan was
reasonably likely to benefit the Fund and its
shareholders in at least one or several potential ways.
Specifically, the Board concluded that the Distributor
and any Recipients operating under Related Agreements
would have little or no incentive to incur promotional
expenses on behalf of the Fund if a 12b-1 Plan were
<PAGE>
not
in place to reimburse them, thus making the adoption of
such 12b-1 Plan important to the initial success and
thereafter, continued viability of the Fund. In
addition, the Board determined that the payment of
distribution fees to these persons should motivate them
to provide an enhanced level of service to Fund
shareholders, which would benefit such shareholders.
Finally, the adoption of the 12b-1 Plan would help to
increase net assets under management in a relatively
short amount of time, given the marketing efforts on
the part of the Distributor and Recipients to sell Fund
shares, which should result in certain economies of
scale.
While there is no assurance that the expenditure
of Fund assets to finance distribution of Fund shares
will have the anticipated results, the Board of
Directors believes there is a reasonable likelihood
that one or more of such benefits will result, and
since the Board will be in a position to monitor the
distribution and shareholder servicing expenses of the
Fund, it will be able to evaluate the benefit of such
expenditures in deciding whether to continue the 12b-1
Plan.
PURCHASE, EXCHANGE AND PRICING OF SHARES
Automatic Investment Plan
The Automatic Investment Plan ("AIP") allows you
to make regular, systematic investments in the Fund
from your bank checking or NOW account. There is no
minimum initial investment for investors using the AIP.
To establish the AIP, complete the appropriate section
in the shareholder application.
Under the AIP, you may choose to make monthly
investments on the days of your choosing (or the next
business day thereafter) from your financial
institution in amounts of $100 or more. There is no
service fee for participating in the AIP. However, a
service fee of $20 will be deducted from your Fund
account for any AIP purchase that does not clear due to
insufficient funds or, if prior to notifying the Fund
in writing or by telephone of your intention to
terminate the plan, you close your bank account or in
any manner prevent withdrawal of funds from the
designated checking or NOW account. You can set up the
AIP with any financial institution that is a member of
Automated Clearing House.
The AIP is a method of using dollar cost averaging
which is an investment strategy that involves investing
a fixed amount of money at a regular time interval.
However, a program of regular investment cannot ensure
a profit or protect against a loss from declining
markets. By always investing the same amount, you will
be purchasing more shares when the price is low and
fewer shares when the price is high. Since such a
program involves continuous investment regardless of
fluctuating share values, you should consider your
financial ability to continue the program through
periods of low share price levels.
Individual Retirement Accounts
In addition to purchasing Fund shares as described
in the Prospectus under "How to Purchase Shares,"
individuals may establish their own tax-sheltered
individual retirement accounts ("IRAs"). The Fund
offers three types of IRAs, including the Traditional
IRA, that can be adopted by executing the appropriate
Internal Revenue Service ("IRS") Form.
Traditional IRA. In a Traditional IRA, amounts
contributed to the IRA may be tax deductible at the
time of contribution depending on whether the investor
is an "active participant" in an employer-sponsored
retirement plan and the investor's income.
Distributions from a Traditional IRA will be taxed at
distribution except to the extent that the distribution
represents a return of the investor's own contributions
for which the investor did not claim (or was not
eligible to claim) a deduction. Distributions prior to
age 59-1/2 may be subject to an additional 10% tax
applicable to certain premature distributions.
Distributions must commence by April 1 following the
calendar year in which the investor attains age 70-1/2.
Failure to begin distributions by this date (or
distributions that do not equal certain minimum
thresholds) may result in adverse tax consequences.
Roth IRA. In a Roth IRA, amounts contributed to
the IRA are taxed at the time of contribution, but
distributions from the IRA are not subject to tax if
the investor has held the IRA for certain minimum
periods of time (generally, until age 59-1/2).
Investors whose income exceeds certain limits are
ineligible to contribute to a Roth IRA. Distributions
that do not satisfy the requirements for tax-free
withdrawal are subject to income taxes
<PAGE>
(and possibly
penalty taxes) to the extent that the distribution
exceeds the investor's contributions to the IRA. The
minimum distribution rules applicable to Traditional
IRAs do not apply during the lifetime of the investor.
Following the death of the investor, certain minimum
distribution rules apply.
For Traditional and Roth IRAs, the maximum annual
contribution generally is equal to the lesser of $2,000
or 100% of the investor's compensation (earned income).
An individual may also contribute to a Traditional IRA
or Roth IRA on behalf of his or her spouse provided
that the individual has sufficient compensation (earned
income). Contributions to a Traditional IRA reduce the
allowable contributions under a Roth IRA, and
contributions to a Roth IRA reduce the allowable
contribution to a Traditional IRA.
Education IRA. In an Education IRA, amounts
contributed to the IRA are taxed at the time of
contribution, but distributions from the IRA are not
subject to tax if they do not exceed the beneficiary's
"qualified higher education expenses" or are rolled
over into another Education IRA. Investors whose
income exceeds certain limits are ineligible to
contribute to an Education IRA. Distributions that do
not satisfy the requirements for tax-free withdrawal
are subject to income taxes (and possibly penalty
taxes) to the extent they exceed "qualified higher
education expenses." Distributions from an Education
IRA may be rolled over into another beneficiary's
Education IRA prior to the date the beneficiary to whom
the distribution was made attains the age of 30.
Within 30 days after the beneficiary of an Education
IRA attains the age of 30, distribution of the IRA must
be made. Following the death of a beneficiary, the
Education IRA must be rolled over on a nontaxable basis
or distributed on a taxable basis.
Under current IRS regulations, all IRA applicants
must be furnished a disclosure statement containing
information specified by the IRS. Applicants generally
have the right to revoke their account within seven
days after receiving the disclosure statement and
obtain a full refund of their contributions. Firstar
Bank, the Fund's custodian, may, in its discretion,
hold the initial contribution uninvested until the
expiration of the seven-day revocation period. Firstar
Bank does not anticipate that it will exercise its
discretion but reserves the right to do so.
Systematic Withdrawal Plan
Shareholders may set up automatic withdrawals from
their Fund accounts at regular intervals. To begin
distributions, a shareholder's account must have an
initial balance of $10,000 and at least $50 per payment
must be withdrawn. To establish the systematic
withdrawal plan ("SWP"), the appropriate section in the
shareholder application must be completed. Redemptions
will take place on a monthly, quarterly, semi-annual or
annual basis (or the following business day) as
indicated on the shareholder application. The amount
or frequency of withdrawal payments may be varied or
temporarily discontinued by calling 1-888-463-3957.
Depending upon the size of the account and the
withdrawals requested (and fluctuations in the net
asset value of the shares redeemed), redemptions for
the purpose of satisfying such withdrawals may reduce
or even exhaust a shareholder's account. If the amount
remaining in a shareholder's account is not sufficient
to meet a plan payment, the remaining amount will be
redeemed and the SWP will be terminated.
Money Market Exchange
As a service to our shareholders, the Fund has
established a program whereby our shareholders can
exchange shares of the Fund for shares of the Firstar
Money Market Fund (the "Firstar Fund"). Exchange
requests are available for exchanges of $1,000 or more.
The Firstar Fund is a no-load money market fund managed
by an affiliate of Firstar. The Firstar Fund is
unrelated to the Corporation or the Fund. However, the
Distributor may be compensated by the Firstar Fund for
servicing and related services provided in connection
with exchanges made by shareholders of the Fund. This
exchange privilege is a convenient way to buy shares in
a money market fund in order to respond to changes in
your goals or in market conditions. Before exchanging
into the Firstar Fund, please read the prospectus,
which may be obtained by calling 1-888-463-3957. There
is no charge for written exchange requests. Firstar
will, however, charge a $5 fee for each exchange
transaction that is executed via the telephone.
An exchange from the Fund to the Firstar Fund is
treated the same as an ordinary sale and purchase for
federal income tax purposes and you will realize a
capital gain or loss. An exchange is not a tax-free
transaction.
<PAGE>
Pricing of Shares
Shares of the Fund are sold on a continual basis
at the net asset value per share next computed
following receipt of an order in proper form by a
dealer, the Distributor or Firstar, the Fund's transfer
agent.
The net asset value per share is determined as of
the close of trading (generally 4:00 p.m. Eastern
Standard Time) on each day the New York Stock Exchange
(the "NYSE") is open for business. Purchase orders
received or shares tendered for redemption on a day the
NYSE is open for trading, prior to the close of trading
on that day, will be valued as of the close of trading
on that day. Applications for purchase of shares and
requests for redemption of shares received after the
close of trading on the NYSE will be valued as of the
close of trading on the next day the NYSE is open. The
Fund's net asset value may not be calculated on days
during which the Fund receives no orders to purchase
shares and no shares are tendered for redemption. Net
asset value is calculated by taking the fair value of
the Fund's total assets, including interest or
dividends accrued, but not yet collected, less all
liabilities, and dividing by the total number of shares
outstanding. The result, rounded to the nearest cent,
is the net asset value per share.
In determining net asset value, expenses are
accrued and applied daily and securities and other
assets for which market quotations are available are
valued at market value. Common stocks and other equity-
type securities are valued at the last sales price on
the national securities exchange or NASDAQ on which
such securities are primarily traded; however,
securities traded on a national securities exchange or
NASDAQ for which there were no transactions on a given
day, and securities not listed on a national securities
exchange or NASDAQ, are valued at the average of the
most recent bid and asked prices. Fixed income
securities are valued by a pricing service that
utilizes electronic data processing techniques to
determine values for normal institutional-sized trading
units of fixed income securities without regard to sale
or bid prices when such values are believed to more
accurately reflect the fair market value of such
securities; otherwise, actual sale or bid prices are
used. Any securities or other assets for which market
quotations are not readily available are valued at fair
value as determined in good faith by the Board of
Directors of the Corporation. The Board of Directors
may approve the use of pricing services to assist the
Fund in the determination of net asset value. Fixed
income securities having remaining maturities of 60
days or less when purchased are generally valued by the
amortized cost method. Under this method of valuation,
a security is initially valued at its acquisition cost
and, thereafter, amortization of any discount or
premium is assumed each day, regardless of the impact
of fluctuating interest rates on the market value of
the security.
REDEMPTIONS IN KIND
The Fund has filed a Notification under Rule 18f-1
of the 1940 Act, pursuant to which it has agreed to pay
in cash all requests for redemption by any shareholder
of record, limited in amount with respect to each
shareholder during any 90-day period to the lesser
amount of (i) $250,000 or (ii) 1% of the Fund's net
asset value, valued at the beginning of the election
period. The Fund intends also to pay redemption
proceeds in excess of such lesser amount in cash, but
reserves the right to pay such excess amount in kind,
if it is deemed to be in the best interests of the Fund
to do so. If you receive an in kind distribution, you
will likely incur a brokerage charge on the disposition
of such securities through a securities dealer.
TAXATION OF THE FUND
The Fund intends to qualify annually as a
"regulated investment company" under Subchapter M of
the Code, and, if so qualified, will not be liable for
federal income taxes to the extent earnings are
distributed to shareholders on a timely basis. In the
event the Fund fails to qualify as a "regulated
investment company," it will be treated as a regular
corporation for federal income tax purposes.
Accordingly, the Fund would be subject to federal
income taxes and any distributions that it makes would
be taxable and non-deductible by the Fund. This would
increase the cost of investing in the Fund for
shareholders and would make it more economical for
shareholders to invest directly in securities held by
the Fund instead of investing indirectly in such
securities through the Fund.
PERFORMANCE INFORMATION
The Fund's historical performance or return may be
shown in the form of various performance figures. The
Fund's performance figures are based upon historical
results and are not necessarily representative of
future
<PAGE>
performance. Factors affecting the Fund's
performance include general market conditions,
operating expenses and investment management.
Total Return
The average annual total return of the Fund is
computed by finding the average annual compounded rates
of return over the periods that would equate the
initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of the stated periods
at the end of the stated periods.
Performance for a specific period is calculated by
first taking an investment (assumed to be $1,000)
("initial investment") in the Fund's shares on the
first day of the period and computing the "ending
value" of that investment at the end of the period.
The total return percentage is then determined by
subtracting the initial investment from the ending
value and dividing the remainder by the initial
investment and expressing the result as a percentage.
The calculation assumes that all income and capital
gains dividends paid by the Fund have been reinvested
at the net asset value of the Fund on the reinvestment
dates during the period. Total return may also be
shown as the increased dollar value of the hypothetical
investment over the period.
Cumulative total return represents the simple
change in value of an investment over a stated period
and may be quoted as a percentage or as a dollar
amount. Total returns may be broken down into their
components of income and capital (including capital
gains and changes in share price) in order to
illustrate the relationship between these factors and
their contributions to total return.
Comparisons
From time to time, in marketing and other Fund
literature, the Fund's performance may be compared to
the performance of other mutual funds in general or to
the performance of particular types of mutual funds
with similar investment goals, as tracked by
independent organizations. Among these organizations,
Lipper Analytical Services, Inc. ("Lipper"), a widely
used independent research firm which ranks mutual funds
by overall performance, investment objectives and
assets, may be cited. Lipper performance figures are
based on changes in net asset value, with all income
and capital gains dividends reinvested. Such
calculations do not include the effect of any sales
charges imposed by other funds. The Fund will be
compared to Lipper's appropriate fund category, that
is, by fund objective and portfolio holdings.
The Fund's performance may also be compared to the
performance of other mutual funds by Morningstar, Inc.
("Morningstar"), which ranks funds on the basis of
historical risk and total return. Morningstar's
rankings range from five stars (highest) to one star
(lowest) and represent Morningstar's assessment of the
historical risk level and total return of a fund as a
weighted average for 3, 5 and 10 year periods.
Rankings are not absolute or necessarily predictive of
future performance.
Evaluations of Fund performance made by
independent sources may also be used in advertisements
concerning the Fund, including reprints of or
selections from, editorials or articles about the Fund.
Sources for Fund performance and articles about the
Fund may include publications such as Money, Forbes,
Kiplinger's, Financial World, Business Week, U.S. News
and World Report, the Wall Street Journal, Barron's and
a variety of investment newsletters.
The Fund may compare its performance to a wide
variety of indices and measures of inflation including
the Standard & Poor's Index of 500 Stocks, the NASDAQ
Over-the-Counter Composite Index and the Russell 2000
Index.
<PAGE>
There are differences and similarities between
the investments that the Fund may purchase for its
portfolio and the investments measured by these
indices.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 100 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202, independent
accountants for the Fund, audit and report on the
Fund's financial statements.
FINANCIAL STATEMENTS
The following financial statements of the Fund
shall be filed by amendment:
(a) Report of Independent Accountants.
(b) Statement of Assets and Liabilities.
(c) Statement of Operations.
(d) Notes to the Financial Statements.
<PAGE>
APPENDIX
SHORT-TERM RATINGS
Standard & Poor's Short-Term Debt Credit Ratings
A Standard & Poor's credit rating is a current
opinion of the creditworthiness of an obligor with
respect to a specific financial obligation, a specific
class of financial obligations or a specific financial
program. It takes into consideration the
creditworthiness of guarantors, insurers or other forms
of credit enhancement on the obligation and takes into
account the currency in which the obligation is
denominated. The credit rating is not a recommendation
to purchase, sell or hold a financial obligation,
inasmuch as it does not comment as to market price or
suitability for a particular investor.
Credit ratings are based on current information
furnished by the obligors or obtained by Standard &
Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in
connection with any credit rating and may, on occasion,
rely on unaudited financial information. Credit
ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such
information, or based on other circumstances.
Short-term ratings are generally assigned to those
obligations considered short-term in the relevant
market. In the U.S., for example, that means
obligations with an original maturity of no more than
365 days_including commercial paper. Short-term
ratings are also used to indicate the creditworthiness
of an obligor with respect to put features on long-term
obligations. The result is a dual rating, in which the
short-term rating addresses the put feature, in
addition to the usual long-term rating.
Ratings are graded into several categories,
ranging from `A-1' for the highest quality obligations
to `D' for the lowest. These categories are as
follows:
A-1 A short-term obligation rated `A-1' is rated
in the highest category by Standard & Poor's.
The obligor's capacity to meet its financial
commitment on the obligation is strong.
Within this category, certain obligations are
designated with a plus sign (+). This
indicates that the obligor's capacity to meet
its financial commitment on these obligations
is extremely strong.
A-2 A short-term obligation rated `A-2' is
somewhat more susceptible to the adverse
effects of changes in circumstances and
economic conditions than obligations in
higher rating categories. However, the
obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
A-3 A short-term obligation rated `A-3' exhibits
adequate protection parameters. However,
adverse economic conditions or changing
circumstances are more likely to lead to a
weakened capacity of the obligor to meet its
financial commitment on the obligation.
B A short-term obligation rated `B' is regarded
as having significant speculative
characteristics. The obligor currently has
the capacity to meet its financial commitment
on the obligation; however, it faces major
ongoing uncertainties which could lead to the
obligor's inadequate capacity to meet its
financial commitment on the obligation.
C A short-term obligation rated `C' is
currently vulnerable to nonpayment and is
dependent upon favorable business, financial
and economic conditions for the obligor to
meet its financial commitment on the
obligation.
D A short-term obligation rated `D' is in
payment default. The `D' rating category is
used when payments on an obligation are not
made on the date due even if the applicable
grace period has not expired, unless Standard
& Poor's believes that such payments will be
made during such grace period. The `D'
rating also will be used upon the filing of a
bankruptcy petition or the taking of a
similar action if payments on an obligation
are jeopardized.
<PAGE>
Moody's Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of
the ability of issuers to repay punctually senior debt
obligations. These obligations have an original
maturity not exceeding one year, unless explicitly
noted. Moody's ratings are opinions, not
recommendations to buy or sell, and their accuracy is
not guaranteed.
Moody's employs the following three designations,
all judged to be investment grade, to indicate the
relative repayment ability of rated issuers:
PRIME-1 Issuers rated `Prime-1' (or supporting
institutions) have a superior ability for
repayment of senior short-term debt
obligations. Prime-1 repaying ability will
often be evidenced by many of the following
characteristics:
Leading market positions in well-established
industries.
High rates of return on funds employed.
Conservative capitalization structure with
moderate reliance on debt and ample asset
protection.
Broad margins in earnings coverage of fixed
financial charges and high internal cash
generation.
Well-established access to a range of financial
markets and assured sources of alternate liquidity.
PRIME-2 Issuers rated `Prime-2' (or supporting
institutions) have a strong ability for
repayment of senior short-term debt
obligations. This will normally be evidenced
by many of the characteristics cited above,
but to a lesser degree. Earnings trends and
coverage ratios, while sound, may be more
subject to variation. Capitalization
characteristics, while still appropriate, may
be more affected by external conditions.
Ample alternate liquidity is maintained.
PRIME-3 Issuers rated `Prime-3' (or supporting
institutions) have an acceptable ability for
repayment of senior short-term obligations.
The effect of industry characteristics and
market compositions may be more pronounced.
Variability in earnings and profitability may
result in changes in the level of debt
protection measurements and may require
relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME Issuers rated `Not Prime' do not fall within
any of the Prime rating categories.
Fitch IBCA International Short-Term Debt Credit Ratings
Fitch IBCA's international debt credit ratings are
applied to the spectrum of corporate, structured and
public finance. They cover sovereign (including
supranational and subnational), financial, bank,
insurance and other corporate entities and the
securities they issue, as well as municipal and other
public finance entities, securities backed by
receivables or other financial assets and
counterparties. When applied to an entity, these short-
term ratings assess its general creditworthiness on a
senior basis. When applied to specific issues and
programs, these ratings take into account the relative
preferential position of the holder of the security and
reflect the terms, conditions and covenants attaching
to that security.
International credit ratings assess the capacity
to meet foreign currency or local currency commitments.
Both "foreign currency" and "local currency" ratings
are internationally comparable assessments. The local
currency rating measures the probability of payment
within the relevant sovereign state's currency and
jurisdiction and therefore, unlike the foreign currency
rating, does not take account of the possibility of
foreign exchange controls limiting transfer into
foreign currency.
A short-term rating has a time horizon of less
than 12 months for most obligations, or up to three
years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to
meet financial commitments in a timely manner.
<PAGE>
F-1 Highest credit quality. Indicates the
strongest capacity for timely payment of
financial commitments; may have an added "+"
to denote any exceptionally strong credit
feature.
F-2 Good credit quality. A satisfactory capacity
for timely payment of financial commitments,
but the margin of safety is not as great as
in the case of the higher ratings.
F-3 Fair credit quality. The capacity for timely
payment of financial commitments is adequate;
however, near term adverse changes could
result in a reduction to non-investment
grade.
B Speculative. Minimal capacity for timely
payment of financial commitments, plus
vulnerability to near term adverse changes in
financial and economic conditions.
C High default risk. Default is a real
possibility. Capacity for meeting financial
commitments is solely reliant upon a
sustained, favorable business and economic
environment.
D Default. Denotes actual or imminent payment
default.
Duff & Phelps, Inc. Short-Term Debt Ratings
Duff & Phelps Credit Ratings' short-term debt
ratings are consistent with the rating criteria used by
money market participants. The ratings apply to all
obligations with maturities of under one year,
including commercial paper, the uninsured portion of
certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of
credit and current maturities of long-term debt. Asset-
backed commercial paper is also rated according to this
scale.
Emphasis is placed on liquidity which is defined
as not only cash from operations, but also access to
alternative sources of funds including trade credit,
bank lines and the capital markets. An important
consideration is the level of an obligor's reliance on
short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps Credit
Ratings' short-term debt ratings is the refinement of
the traditional `1' category. The majority of short-
term debt issuers carry the highest rating, yet quality
differences exist within that tier. As a consequence,
Duff & Phelps Credit Rating has incorporated gradations
of `1+' (one plus) and `1-` (one minus) to assist
investors in recognizing those differences.
These ratings are recognized by the SEC for broker-
dealer requirements, specifically capital computation
guidelines. These ratings meet Department of Labor
ERISA guidelines governing pension and profit sharing
investments. State regulators also recognize the
ratings of Duff & Phelps Credit Rating for insurance
company investment portfolios.
Rating Scale: Definition
High Grade
D-1+ Highest certainty of timely payment. Short-
term liquidity, including internal operating
factors and/or access to alternative sources
of funds, is outstanding, and safety is just
below risk-free U.S. Treasury short-term
obligations.
D-1 Very high certainty of timely payment.
Liquidity factors are excellent and supported
by good fundamental protection factors. Risk
factors are minor.
D-1- High certainty of timely payment. Liquidity
factors are strong and supported by good
fundamental protection factors. Risk factors
are very small.
<PAGE>
Good Grade
D-2 Good certainty of timely payment. Liquidity
factors and company fundamentals are sound.
Although ongoing funding needs may enlarge
total financing requirements, access to
capital markets is good. Risk factors are
small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection
factors qualify issue as to investment grade.
Risk factors are larger and subject to more
variation. Nevertheless, timely payment is
expected.
Non-investment Grade
D-4 Speculative investment characteristics.
Liquidity is not sufficient to insure against
disruption in debt service. Operating
factors and market access may be subject to a
high degree of variation.
Default
D-5 Issuer failed to meet scheduled principal
and/or interest payments.
LONG-TERM RATINGS
Standard & Poor's Long-Term Debt Credit Ratings
A Standard & Poor's credit rating is a current
opinion of the creditworthiness of an obligor with
respect to a specific financial obligation, a specific
class of financial obligations or a specific financial
program. It takes into consideration the
creditworthiness of guarantors, insurers or other forms
of credit enhancement on the obligation and takes into
account the currency in which the obligation is
denominated. The credit rating is not a recommendation
to purchase, sell or hold a financial obligation,
inasmuch as it does not comment as to market price or
suitability for a particular investor.
Credit ratings are based on current information
furnished by the obligors or obtained by Standard &
Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in
connection with any credit rating and may, on occasion,
rely on unaudited financial information. Credit
ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such
information, or based on other circumstances.
Credit ratings are based, in varying degrees, on
the following considerations: (1) likelihood of
payment_capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance
with the terms of the obligation; (2) nature of and
provisions of the obligation; and (3) protection
afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other
arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
The rating definitions are expressed in terms of
default risk. As such, they pertain to senior
obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to
reflect the lower priority in bankruptcy. (Such
differentiation applies when an entity has both senior
and subordinated obligations, secured and unsecured
obligations, or operating company and holding company
obligations.) Accordingly, in the case of junior debt,
the rating may not conform exactly with the category
definition.
AAA An obligation rated `AAA' has the highest
rating assigned by Standard & Poor's. The
obligor's capacity to meet its financial
commitment on the obligation is EXTREMELY
STRONG.
AA An obligation rated `AA' differs from the
highest rated obligations only in small
degree. The obligor's capacity to meet its
financial commitment on the obligation is
VERY STRONG.
<PAGE>
A An obligation rated `A' is somewhat more
susceptible to the adverse effects of changes
in circumstances and economic conditions than
obligations in higher rated categories.
However, the obligor's capacity to meet its
financial commitment on the obligation is
still STRONG.
BBB An obligation rated `BBB' exhibits ADEQUATE
protection parameters. However, adverse
economic conditions or changing circumstances
are more likely to lead to a weakened
capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated `BB', `B', `CCC, `CC', and `C'
are regarded as having significant speculative
characteristics. `BB' indicates the least degree of
speculation and `C' the highest. While such
obligations will likely have some quality and
protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse
conditions.
BB An obligation rated `BB' is LESS VULNERABLE
to nonpayment than other speculative issues.
However, it faces major ongoing uncertainties
or exposure to adverse business, financial or
economic conditions which could lead to the
obligor's inadequate capacity to meet its
financial commitment on the obligation.
B An obligation rated `B' is MORE VULNERABLE to
nonpayment than obligations rated `BB', but
the obligor currently has the capacity to
meet its financial commitment on the
obligation. Adverse business, financial or
economic conditions will likely impair the
obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC An obligation rated `CCC' is CURRENTLY
VULNERABLE to nonpayment, and is dependent
upon favorable business, financial and
economic conditions for the obligor to meet
its financial commitment on the obligation.
In the event of adverse business, financial
or economic conditions, the obligor is not
likely to have the capacity to meet its
financial commitment on the obligation.
CC An obligation rated `CC' is CURRENTLY HIGHLY
VULNERABLE to nonpayment.
C The `C' rating may be used to cover a
situation where a bankruptcy petition has
been filed or similar action has been taken,
but payments on this obligation are being
continued.
D An obligation rated `D' is in payment
default. The `D' rating category is used
when payments on an obligation are not made
on the date due even if the applicable grace
period has not expired, unless Standard &
Poor's believes that such payments will be
made during such grace period. The `D'
rating also will be used upon the filing of a
bankruptcy petition or the taking of a
similar action if payments on an obligation
are jeopardized.
Plus (+) or minus (_): The ratings from `AA' to
`CCC' may be modified by the addition of a plus or
minus sign to show relative standing within the major
rating categories.
Moody's Long-Term Debt Ratings
Aaa Bonds which are rated `Aaa' are judged to be
of the best quality. They carry the smallest
degree of investment risk and are generally
referred to as "gilt edged." Interest
payments are protected by a large or by an
exceptionally stable margin and principal is
secure. While the various protective
elements are likely to change, such changes
as can be visualized are most unlikely to
impair the fundamentally strong position of
such issues.
Aa Bonds which are rated `Aa' are judged to be
of high quality by all standards. Together
with the Aaa group they comprise what are
generally known as high-grade bonds. They
are rated lower than the best bonds because
margins of protection may not be as large as
in Aaa securities or fluctuation of
protective elements may be of greater
amplitude or there may be other elements
present which make the long-term risk appear
somewhat larger than Aaa securities.
<PAGE>
A Bonds which are rated `A' possess many
favorable investment attributes and are to be
considered as upper-medium-grade obligations.
Factors giving security to principal and
interest are considered adequate, but
elements may be present which suggest a
susceptibility to impairment some time in the
future.
Baa Bonds which are rated `Baa' are considered as
medium-grade obligations (i.e., they are
neither highly protected nor poorly secured).
Interest payments and principal security
appear adequate for the present but certain
protective elements may be lacking or may be
characteristically unreliable over any great
length of time. Such bonds lack outstanding
investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated `Ba' are judged to have
speculative elements; their future cannot be
considered as well-assured. Often the
protection of interest and principal payments
may be very moderate, and thereby not well
safeguarded during both good and bad times
over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated `B' generally lack
characteristics of the desirable investment.
Assurance of interest and principal payments
or of maintenance of other terms of the
contract over any long period of time may be
small.
Caa Bonds which are rated `Caa' are of poor
standing. Such issues may be in default or
there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated `Ca' represent
obligations which are speculative in a high
degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated `C' are the lowest
rated class of bonds, and issues so rated can
be regarded as having extremely poor
prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in
each generic rating classification from `Aa' through
`B.' The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category;
the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of that
generic rating category.
Fitch IBCA International Long-Term Debt Credit Ratings
Fitch IBCA's international debt credit ratings are
applied to the spectrum of corporate, structured and
public finance. They cover sovereign (including
supranational and subnational), financial, bank,
insurance and other corporate entities and the
securities they issue, as well as municipal and other
public finance entities, securities backed by
receivables or other financial assets and
counterparties. When applied to an entity, these long-
term ratings assess its general creditworthiness on a
senior basis. When applied to specific issues and
programs, these ratings take into account the relative
preferential position of the holder of the security and
reflect the terms, conditions and covenants attaching
to that security.
International credit ratings assess the capacity
to meet foreign currency or local currency commitments.
Both "foreign currency" and "local currency" ratings
are internationally comparable assessments. The local
currency rating measures the probability of payment
within the relevant sovereign state's currency and
jurisdiction and therefore, unlike the foreign currency
rating, does not take account of the possibility of
foreign exchange controls limiting transfer into
foreign currency.
Investment Grade
AAA Highest credit quality. `AAA' ratings
denote the lowest expectation of credit
risk. They are assigned only in case of
exceptionally strong capacity for timely
payment of financial commitments. This
capacity is highly unlikely to be
adversely affected by foreseeable
events.
<PAGE>
AA Very high credit quality. `AA' ratings
denote a very low expectation of credit
risk. They indicate very strong
capacity for timely payment of financial
commitments. This capacity is not
significantly vulnerable to foreseeable
events.
A High credit quality. `A' ratings denote
a low expectation of credit risk. The
capacity for timely payment of financial
commitments is considered strong. This
capacity may, nevertheless, be more
vulnerable to changes in circumstances
or in economic conditions than is the
case for higher ratings.
BBB Good credit quality. `BBB' ratings
indicate that there is currently a low
expectation of credit risk. The
capacity for timely payment of financial
commitments is considered adequate, but
adverse changes in circumstances and in
economic conditions are more likely to
impair this capacity. This is the
lowest investment grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that
there is a possibility of credit risk
developing, particularly as the result
of adverse economic change over time;
however, business or financial
alternatives may be available to allow
financial commitments to be met.
B Highly speculative. `B' ratings
indicate that significant credit risk is
present, but a limited margin of safety
remains. Financial commitments are
currently being met; however, capacity
for continued payment is contingent upon
a sustained, favorable business and
economic environment.
CCC, CC, C High default risk. Default is a
real possibility. Capacity for meeting
financial commitments is solely reliant
upon sustained, favorable business or
economic developments. A `CC' rating
indicates that default of some kind
appears probable. `C' ratings signal
imminent default.
DDD, DD and D Default. Securities are not
meeting current obligations and are
extremely speculative. `DDD' designates
the highest potential for recovery of
amounts outstanding on any securities
involved. For U.S. corporates, for
example, `DD' indicates expected
recovery of 50% - 90% of such
outstandings, and `D' the lowest
recovery potential, i.e. below 50%.
Duff & Phelps, Inc. Long-Term Debt Ratings
These ratings represent a summary opinion of the
issuer's long-term fundamental quality. Rating
determination is based on qualitative and quantitative
factors which may vary according to the basic economic
and financial characteristics of each industry and each
issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such
factors as competition, government action, regulation,
technological obsolescence, demand shifts, cost
structure and management depth and expertise. The
projected viability of the obligor at the trough of the
cycle is a critical determination.
Each rating also takes into account the legal form
of the security (e.g., first mortgage bonds,
subordinated debt, preferred stock, etc.). The extent
of rating dispersion among the various classes of
securities is determined by several factors including
relative weightings of the different security classes
in the capital structure, the overall credit strength
of the issuer and the nature of covenant protection.
The Credit Rating Committee formally reviews all
ratings once per quarter (more frequently, if
necessary). Ratings of `BBB-` and higher fall within
the definition of investment grade securities, as
defined by bank and insurance supervisory authorities.
Structured finance issues, including real estate, asset-
backed and mortgage-backed financings, use this same
rating scale. Duff & Phelps Credit Rating claims
paying ability ratings of insurance companies use the
same scale with minor modification in the definitions.
Thus, an investor can compare the credit quality of
investment alternatives across industries and
structural types. A "Cash Flow Rating" (as noted for
specific ratings) addresses the
<PAGE>
likelihood that
aggregate principal and interest will equal or exceed
the rated amount under appropriate stress conditions.
Rating Scale Definition
AAA Highest credit quality. The risk factors are
negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are
strong. Risk is modest but may
AA vary slightly from time to time because of
economic conditions.
AA-
A+ Protection factors are average but adequate.
However, risk factors are more
A variable and greater in periods of economic
stress.
A-
BBB+ Below-average protection factors but still
considered sufficient for prudent
BBB investment. Considerable variability in risk
during economic cycles.
BBB-
BB+ Below investment grade but deemed likely to
meet obligations when due.
BB Present or prospective financial protection
factors fluctuate according to
BB- industry conditions or company fortunes.
Overall quality may move up or
down frequently within this category.
B+ Below investment grade and possessing risk
that obligations will not be met
B when due. Financial protection factors will
fluctuate widely according to
B- economic cycles, industry conditions and/or
company fortunes. Potential
exists for frequent changes in the rating
within this category or into a higher
or lower rating grade.
CCC Well below investment grade securities.
Considerable uncertainty exists as to
timely payment of principal, interest or
preferred dividends.
Protection factors are narrow and risk can be
substantial with unfavorable
economic/industry conditions, and/or with
unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to
meet scheduled principal and/or
interest payments.
DP Preferred stock with dividend arrearages.
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits
See "Exhibit Index."
Item 24. Persons Controlled by or under Common Control
with Registrant
The Registrant neither controls any person nor is
under common control with any other person.
Item 25. Indemnification
Pursuant to the authority of the Maryland
General Corporation Law, particularly Section 2-
418 thereof, the Registrant's Board of Directors
has adopted the following bylaw which is in full
force and effect and has not been modified or
canceled:
ARTICLE VII
GENERAL PROVISIONS
* * *
Section 7. Indemnification
A. The corporation shall indemnify all of its
corporate representatives against expenses, including
attorneys fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by them in
connection with the defense of any action, suit or
proceeding, or threat or claim of such action, suit or
proceeding, whether civil, criminal, administrative, or
legislative, no matter by whom brought, or in any
appeal in which they or any of them are made parties or
a party by reason of being or having been a corporate
representative, if the corporate representative acted
in good faith and in a manner reasonably believed to be
in or not opposed to the best interests of the
corporation, if he received no improper benefit in
money, property or services, and with respect to any
criminal proceeding, if he had no reasonable cause to
believe his conduct was unlawful; provided that the
corporation shall not indemnify corporate
representatives in relation to matters as to which any
such corporate representative shall be adjudged in such
action, suit or proceeding to be liable for gross
negligence, willful misfeasance, bad faith, reckless
disregard of the duties and obligations involved in the
conduct of his office, or when indemnification is
otherwise not permitted by the Maryland General
Corporation Law.
B. In the absence of an adjudication which expressly
absolves the corporate representative, or in the event
of a settlement, each corporate representative shall be
indemnified hereunder only if there has been a
reasonable determination based on a review of the facts
that indemnification of the corporate representative is
proper because he has met the applicable standard of
conduct set forth in paragraph A. Such determination
shall be made (i) by the board of directors, by a
majority vote of a quorum which consists of directors
who were not parties to the action, suit or proceeding,
or if such a quorum cannot be obtained, then by a
majority vote of a committee of the board consisting
solely of two or more directors, not, at the time,
parties to the actions, suit or proceeding and who were
duly designated to act in the matter by the full board
in which the designated directors who are parties to
the action, suit or proceeding may participate; or (ii)
by special legal counsel selected by the board of
directors or a committee of the board by vote as set
forth in (i) of this paragraph, or, if the requisite
quorum of the full board cannot be obtained therefor
and the committee cannot be established, by a majority
vote of the full board in which directors who are
parties to the action, suit or proceeding may
participate.
C. The termination of any action, suit or proceeding
by judgment, order or settlement shall not create a
presumption that the corporate representative did not
meet the requisite standard of conduct set forth in
Paragraph A. The termination of any action, suit or
proceeding by conviction or upon a plea of nolo
contendere or its
<PAGE>
equivalent, or upon an entry of an
order of probation prior to judgment, shall create a
rebuttable presumption that the person was guilty of
willful misfeasance, bad faith, gross negligence or
reckless disregard to the duties and obligations
involved in the conduct of his or her office, and, with
respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was
unlawful.
D. Expenses, including attorneys' fees, incurred in
the preparation of and/or presentation of the defense
of a civil or criminal action, suit or proceeding may
be paid by the corporation in advance of the final
disposition of such action, suit or proceeding as
authorized in the manner provided in Section 2-418(f)
of the Maryland General Corporation Law upon receipt
of: (i) an undertaking by or on behalf of the
corporate representative to repay such amount unless it
shall ultimately be determined that he or she is
entitled to be indemnified by the corporation as
authorized in this bylaw; and (ii) a written
affirmation by the corporate representative of the
corporate representative's good faith belief that the
standard of conduct necessary for indemnification by
the corporation has been met.
E. The indemnification provided by this bylaw shall
not be deemed exclusive of any other rights to which
those indemnified may be entitled under these bylaws,
any agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in his or her
official capacity and as to action in another capacity
while holding such office, and shall continue as to a
person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person
subject to the limitations imposed from time to time by
the Investment Company Act of 1940, as amended.
F. This corporation shall have power to purchase and
maintain insurance on behalf of any corporate
representative against any liability asserted against
him or her and incurred by him or her in such capacity
or arising out of his or her status as such, whether or
not the corporation would have the power to indemnify
him or her against such liability under this bylaw,
provided that no insurance may be purchased or
maintained to protect any corporate representative
against liability for gross negligence, willful
misfeasance, bad faith or reckless disregard of the
duties and obligations involved in the conduct of his
or her office.
G. "Corporate Representative" means an individual who
is or was a director, officer, agent or employee of the
corporation or who serves or served another
corporation, partnership, joint venture, trust or other
enterprise in one of these capacities at the request of
the corporation and who, by reason of his or her
position, is, was, or is threatened to be made, a party
to a proceeding described herein.
Insofar as indemnification for and with respect to
liabilities arising under the Securities Act of 1933
may be permitted to directors, officers and controlling
persons of Registrant pursuant to the foregoing
provisions or otherwise, Registrant has been advised
that in the opinion of the Securities and Exchange
Commission such indemnification is against public
policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other than
the payment by Registrant of expenses incurred or paid
by a director, officer or controlling person or
Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director,
officer or controlling person in connection with the
securities being registered, Registrant will, unless in
the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such
indemnification is against public policy as expressed
in the Act and will be governed by the final
adjudication of such issue.
Item 26. Business and Other Connections of the
Investment Adviser
In addition to serving as investment adviser to
private accounts and publishing the Light Index, the
Adviser serves as the managing member of the Light
Index Year 2000 Investment Fund, L.L.C. The Adviser is
not currently and has not during the past two fiscal
years engaged in any other business, profession,
vocation or employment of a substantial nature.
Information regarding the business, profession,
vocation or employment of a substantial nature of each
of the Adviser's directors and officers is hereby
incorporated by reference from the information
contained under the heading "Directors and Officers" in
the SAI.
<PAGE>
Item 27. Principal Underwriters
(a) ABN Amro Funds (f/k/a Rembrandt Funds),
Alleghany Funds (f/k/a CT&T Funds), BT
Insurance Funds Trust, First Choice Funds
Trust, Forward Funds, Inc., The Galaxy Fund,
The Galaxy VIP Fund, Galaxy Fund II, IBJ
Funds Trust, ICM Series Trust, LKCM Funds,
Panorama Trust, Undiscovered Managers Funds,
Wilshire Target Funds, Inc., The Potomac
Funds, WorldWide Index Funds, Weiss, Peck &
Greer Funds Trust, Weiss, Peck & Greer
International Fund, WPG Growth Fund, WPG
Growth and Income Fund, WPG Tudor Fund,
RWB/WPG U.S. Large Stock Fund, Tomorrow Funds
Retirement Trust, The Gosett Funds, Inc., IAA
Trust Growth Fund, Inc., IAA Trust Asset
Allocation Fund, Inc., IAA Trust Tax Exempt
Bond Fund, Inc., IAA Trust Taxable Fixed
Income Series Fund, Inc., Matthews
International Funds, McM Funds, Metropolitan
West Funds, Smith Breeden Series Fund, Smith
Breeden Trust, The Sports Funds Trust,
Stratton Growth Fund, Inc., Stratton Monthly
Dividend REIT Shares, Inc., The Stratton
Funds, Inc. and Trainer, Wortham First Mutual
Funds.
(b) The principal business address of First Data
Distributors, Inc. ("First Data"), the
Registrant's principal underwriter, is 4400
Computer Drive, Westborough, Massachusetts
01581. The following information relates to
each director and officer of First Data:
Positions
and Offices Positions and
Name With Underwriter Offices
With
Registrant
Frank Koudelka President and CEO None
Scott Hacker Vice President, None
Treasurer and Chief
Compliance Officer
Bernard Rothman Vice President - Tax None
Bruno DiStefano Vice President None
Susan Moscaritolo Vice President None
Christine Ritch Chief Legal Officer
and Clerk
Bradley Stearns Assistant Clerk None
(c) None.
Item 28. Location of Accounts and Records
All accounts, books or other documents required to
be maintained by Section 31(a) of the Investment
Company Act of 1940, as amended, and the rules
promulgated thereunder are in the possession of Light
Index Investment Company, the Registrant's investment
adviser, at the Registrant's corporate offices, except
records held and maintained by Firstar Mutual Fund
Services, LLC, the Registrant's administrator, fund
accountant, and dividend-disbursing and transfer agent
and Firstar Bank Milwaukee, N.A., the Registrant's
custodian, both of which are located at 615 East
Michigan Street, Milwaukee, Wisconsin 53202, and First
Data, the Registrant's distributor, which is located at
4400 Computer Drive, Westborough, Massachusetts 01581
Item 29. Management Services
All management-related service contracts entered
into by Registrant are discussed in Parts A and B of
this Registration Statement.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act
of 1933 and the Investment Company Act of 1940, the
Registrant has duly caused this Pre-Effective Amendment
No. 4 to the Registration Statement on Form N-1A to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tacoma and State of
Washington on the 12th day of February, 1999.
LIGHT REVOLUTION FUND,
INC. (Registrant)
By:/s/ Henry Hewitt
-----------------------
Henry Hewitt,
President
Each person whose signature appears below hereby
constitutes and appoints Henry Hewitt and Charles M.
O'Herin, and each of them, his or her true and lawful
attorney-in-fact and agent, with full power of
substitution, to sign on his or her behalf individually
and in the capacity stated below and to perform any
acts necessary to be done in order to file all
amendments and post-effective amendments to this
Registration Statement, and any and all instruments or
documents filed as part of or in connection with this
Registration Statement or the amendments thereto, and
each of the undersigned does hereby ratify and confirm
all that said attorney-in-fact and agent, or his
substitutes, shall do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act
of 1933, this Pre-Effective Amendment No. 4 to the
Registration Statement on Form N-1A has been signed
below by the following persons in the capacities and on
the date(s) indicated.
Name Title Date
/s/ Henry Hewitt President and a Director February 12, 1999
- -----------------------
Henry Hewitt
/s/ Charles O'Herin Vice President, Secretary February 12, 1999
- ------------------------ and Treasurer
Charles O'Herin
- ------------------------ Director February ___, 1999
Thomas Kinsman
/s/ Brian Hatch Director February 12, 1999
- ------------------------
Brian Hatch
/s/ John Hewitt, Jr. Director February 16, 1999
- ------------------------
John Hewitt, Jr.
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
(a.1) Registrant's Articles of Incorporation(1)
(a.2) Amendment to Registrant's Articles of Incorporation(2)
(b) Registrant's By-Laws(1)
(c) None
(d) Form of Investment Advisory Agreement
dated as of _________________, 1999 between
Light Index Investment Company and
____________________________(2)
(e) Form of Distribution Agreement dated as
of ________________, 1999 between Light
Revolution Fund, Inc. and First Data
Distributors, Inc.(2)
(f) None
(g) Custodian Servicing Agreement dated as
of January 1, 1998 between Light Revolution
Fund, Inc. and Firstar Trust Company(2)
(h.1) Transfer Agency Agreement dated as
of January 1, 1998 between Light Revolution
Fund, Inc. and Firstar Trust Company(2)
(h.2) Fund Administration Servicing
Agreement dated as of January 1, 1998 between
Light Revolution Fund, Inc. and Firstar Trust
Company(2)
(h.3) Fulfillment Servicing Agreement
dated as of January 1, 1998 between Light
Revolution Fund, Inc. and Firstar Trust
Company(2)
(h.4) Fund Accounting Servicing Agreement
dated as of January 1, 1998 between Light
Revolution Fund, Inc. and Firstar Trust
Company(2)
(i) Opinion and Consent of Godfrey & Kahn, S.C.(2)
(j) Consent of PricewaterhouseCoopers, LLP(2)
(k) None
(l) Initial Subscription Agreement(2)
(m) None
(n) Financial Data Schedule(2)
(o) None
___________________
(1) Incorporated by reference to Registrant's Form N-
1A as filed with the Commission on October 4, 1997.
(2) To be filed by amendment.
