[Filed pursuant to Rule 497 (e)]
EUCLID MARKET NEUTRAL FUND
A Series of
EUCLID MUTUAL FUNDS
900 Third Avenue, New York, N.Y. 10022-4728
STATEMENT OF ADDITIONAL INFORMATION
April 29, 1998
Euclid Market Neutral Fund (the "Fund"), is a diversified, open-end
management investment company organized as a series of Euclid Mutual Funds, a
Delaware business trust (the "Trust").
This Statement of Additional Information, which should be kept for future
reference, is not a prospectus. It should be read in conjunction with the
Prospectus of the Fund (the "Prospectus" ), dated April 29, 1998, which can be
obtained without cost by contacting your financial professional or by calling or
writing the Fund at the telephone number and address printed on this cover page.
This Statement of Additional Information is intended to provide you with further
information about the Fund.
Euclid Mutual Funds
(Toll Free 1-800-272-2700)
TABLE OF CONTENTS Page
INVESTMENT OBJECTIVE AND POLICIES 2
INVESTMENT RESTRICTIONS 2
OTHER INVESTMENT POLICIES 3
PURCHASE AND REDEMPTION OF SHARES 6
REINSTATEMENT PRIVILEGE 6
EXCHANGE PRIVILEGE 7
INVOLUNTARY REDEMPTIONS 7
RETIREMENT PLANS 7
NET ASSET VALUE AND TAXES 7
TRUSTEES AND OFFICERS OF THE TRUST 9
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES 12
INVESTMENT MANAGEMENT AND OTHER SERVICES 12
Manager 12
Distributor 12
Distribution Plans 13
Custodian, Fund Accounting Agent, Transfer Agent and Dividend Paying Agent 14
Independent Accountants 14
Counsel 14
ADVISOR'S PRIOR PERFORMANCE 14
PORTFOLIO TRANSACTIONS AND BROKERAGE 16
YIELD AND PERFORMANCE INFORMATION 17
REGISTRATION STATEMENT 17
FINANCIAL STATEMENTS 18
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective and policies and permitted investments are
described in the Prospectus under the headings "Investment Objective", "Our
General Investment Philosophy and Strategy", "Other Investment Policies" and
"Risk Factors". Set forth below is additional information with respect to the
investment policies and a description of certain financial instruments and
techniques utilized by the Fund. Except as explicitly set forth in this
Statement of Additional Information, the investment objective and policies of
the Fund may be changed without shareholder approval.
INVESTMENT RESTRICTIONS
The first eight investment restrictions set forth below are fundamental
policies of the Fund. These restrictions cannot be changed without a vote of a
majority of the outstanding voting securities of the Fund. However, these
policies may be modified by the Trustees without shareholder approval to the
extent necessary to facilitate the implementation of a master-feeder structure
for the Fund ( i.e., a structure under which the Fund acts as a feeder and
invests all of its assets in a single pooled master fund with substantially the
same investment objectives and policies).
Fundamental Policies Except as stated above with respect to a
master-feeder structure, the Fund may not:
1. Purchase the securities of issuers conducting their principal business
activities in the same industry if immediately after such purchase the value of
the Fund's investments in such industry would be 25% or more of the value of its
total assets (there is no such limitation with respect to obligations of the
U.S. Government, its agencies or instrumentalities or with respect to
investments in other investment companies complying with such policy).
2. With respect to 75% of the Fund's assets, purchase the securities of
any one issuer if immediately after such purchase (i) more than 5% of the value
of the Fund's total assets would be invested in such issuer or (ii) the Fund
would own more than 10% of the outstanding voting securities of such issuer.
(Such limitations do not apply to securities issued by the U.S. Government, its
agencies or instrumentalities or with respect to investments in other investment
companies complying with such policy).
3. Invest in real estate, provided that this limitation shall not prohibit
the purchase of securities issued by companies that invest in real estate or
interests therein, including real estate investment trusts.
4. Make loans, except that this restriction shall not prohibit the
purchase and holding of a portion of an issue of publicly distributed debt
securities, the lending of portfolio securities (if the aggregate value of the
loaned securities does not at any time exceed one-third of the total assets of
the Fund), or the entry into repurchase agreements.
5. Issue "senior securities," except as permitted under the Investment
Company Act of 1940.
6. Act as an underwriter, except that the Fund technically may be deemed
to be an underwriter in a registration under the Securities Act of 1933 to
resell restricted securities.
7. Invest in physical commodities or commodity contracts; provided that
this limitation shall not prevent the Fund from purchasing and selling futures
contracts and options.
8. Borrow money in excess of 20% of its total assets taken at cost or at
market value, whichever is lower, and then only from banks as a temporary
measure for extraordinary or emergency purposes. If such borrowings exceed 5% of
the Fund's total assets, the Fund will make no further investments until such
borrowing is repaid. (Short sales and related borrowings of securities are not
subject to these restrictions.)
Non-Fundamental Restrictions The following investment restrictions and
policies are non-fundamental and can be changed by the Board of Trustees without
shareholder approval. Currently, the Fund may not:
9. Maintain a short position, or sell securities short if, when added
together, more than 100% of the value of the Fund's net assets would be (I)
deposited as collateral for the obligation to replace securities borrowed to
effect short sales, and (ii) allocated to segregated accounts in connection with
short sales. Short sales "against the box" are not considered in applying this
limitation.
10. Pledge its assets in an amount greater than 10% of the value of its
total assets, and then only to secure borrowings permitted by Restriction 8
(collateral or deposit arrangements with respect to short sales, swaps and other
derivatives, or the deposit of initial or maintenance margin in connection with
futures contracts, will not be deemed to be a pledge of the Fund's assets).
11. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions and initial and variation margin
payments in connection with transactions in futures and options contracts.
(Short sales may be made in a margin account).
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12. Purchase securities which are not readily marketable, such as
securities subject to legal or contractual restrictions on resale or securities
which are otherwise illiquid including repurchase agreements having more than
seven days remaining to maturity, if, as a result, more than 15% of the Fund's
net assets would consist of such securities.
13. Purchase securities of any other investment company, except (i) by
purchase in the open market involving only customary brokers' commissions, (ii)
in connection with a merger, consolidation, reorganization or acquisition of
assets, or (iii) as otherwise permitted by applicable law.
14. Participate on a joint or a joint and several basis in any trading
account in securities. (The bunching of orders for the sale or purchase of
portfolio securities of two or more accounts managed by the Manager or its
affiliates, shall not be considered participation in a joint securities trading
account).
Limitations apply at the time an investment is made; a subsequent increase or
decrease in percentage resulting from changes in values or net assets will not
be deemed to be an investment that is contrary to these restrictions.
The phrases "shareholder approval" and "vote of a majority of the
outstanding voting securities", as used in the Prospectus or in this Statement
of Additional Information means the affirmative vote of (i) 67% or more of the
Fund's voting securities present at a meeting of shareholders if the holders of
more than 50% of the Fund's outstanding voting securities are present in person
or by proxy, or (ii) more than 50% of the Fund's outstanding voting securities,
whichever is less. Shares of the fund have voting power based on dollar value
and are thus allocated in proportion to the value of each shareholder's
investment on the record date.
The Board of Trustees, which has the primary responsibility for the
overall management of the Fund, has determined that, while there are certain
risks inherent in using short sales, futures and options, the Manager has
demonstrated its expertise and ability to use these financial instruments and
investment techniques effectively. The flexibility and potential for enhanced
long-term performance and risk reduction warrant their use, in the opinion of
the Board of Trustees.
OTHER INVESTMENT POLICIES
Short Sales The Fund will seek to neutralize the exposure of its long
equity positions to general equity market risk and to realize additional gains
through the use of short sales (selling a security it does not own) in
anticipation of a decline in the value of the security sold short relative to
the long positions held by the Fund. To complete such a transaction, the Fund
must borrow the security to make delivery to the buyer. The Fund then is
obligated to replace the security borrowed by purchasing it at the market price
at the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to repay the lender any dividends or interest
that accrue during the period of the loan. To borrow the security, the Fund also
may be required to pay a premium, which would increase the cost of the security
sold. The net proceeds of the short sale will be retained by the broker (or by
the Fund's custodian in a special custody account) until the short position is
closed out, to the extent necessary to meet margin requirements. The Fund also
will incur transaction costs in effecting short sales. The amount of any gain
will be decreased, and the amount of any loss increased, by the amount of the
premium, dividends, interest or expenses the Fund may be required to pay in
connection with a short sale. An increase in the value of a security sold short
by the Fund over the price at which it was sold short will result in a loss to
the Fund, and there can be no assurance that the Fund will be able to close out
the position at any particular time or at an acceptable price.
Index Futures, and Index and Equity Options In addition to purchasing or
selling short individual securities, the Fund may purchase or sell short any
type of future or option related to its investments. These may include options
not traded on exchanges, futures or options tied to stock indexes or averages
and options on individual securities. Futures and options also may be used or
combined with each other in order to implement the Fund's overall strategy.
Futures and options tied to a securities index such as the Standard &
Poor's 500 Composite Stock Price Index (the "S&P 500") have been used by mutual
funds for many years to manage their portfolios more efficiently. An S&P 500
futures contract is a contract to buy or sell units of the S&P 500 at a
specified future date at a price agreed upon when the contract is made. A unit
is the value of the S&P 500 from time to time. Entering into a contract to buy
units is commonly referred to as buying or purchasing a contract, or holding a
long position in the S&P 500. Entering into a contract to sell units is commonly
referred to as selling a contract, or holding a short position in the S&P 500.
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Futures Contracts In contrast to purchases of a common stock, no price is
paid or received by the Fund upon the purchase of a futures contract. Upon
entering into a futures contract, the Fund will be required to deposit in an
account for the futures broker a specified amount of cash or liquid securities,
currently 2% to 5% of the contract amount. This is known as "initial margin".
The type of instruments that may be deposited as initial margin, and the
required amount of initial margin, are determined by the futures exchange(s) on
which the futures are traded. The nature of initial margin in futures
transactions is different from that of margin in securities transactions in that
futures contract margin does not involve the borrowing of funds by the customer
to finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. In addition to initial margin, the Fund is
required to deposit cash, liquid debt securities, liquid equity securities or
cash equivalents in an amount equal to the notional value of all long futures
contracts, less the initial margin amount, in a segregated account with the
custodian to ensure that the use of such futures contracts is not leveraged. If
the value of the securities placed in the segregated account declines,
additional securities, cash or cash equivalents must be placed in the segregated
account so that the value of the account will at least equal the amount of the
Fund's commitments with respect to such futures contracts. Subsequent payments
to and from the broker, called "variation margin," will be made on a daily basis
as the price of the future fluctuates, a process known as "marking-to-the-
market". For example, if the Fund purchases an S&P 500 future and the S&P 500
has risen, the Fund's corresponding futures position will increase in value and
the Fund will receive from the broker a variation margin payment equal to that
increase in value. Conversely, when the S&P 500 declines, the Fund's futures
position will be less valuable and the Fund will be required to make a variation
margin payment to the broker. When the Fund terminates a position in a futures
contract, a final determination of variation margin is made, additional cash is
paid to or by the Fund, and the Fund realizes a gain or a loss.
The price of index futures may not correlate perfectly with movement in
the underlying index due to certain market distortions. First, all participants
in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
could distort the normal relationship between the index and futures markets.
Secondly, the deposit requirements in the futures market are less onerous than
margin requirements in the securities market, and as a result the futures market
may attract more speculators than does the securities market which also may
cause temporary price distortions.
Positions in futures contracts may be closed out only if there is a
secondary market for such futures. Although the Fund intends to purchase or sell
futures only where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
or at any particular time. In such event, it may not be possible to close a
futures position and, in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of maintenance margin
Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction for a futures contract sale is effected
by the Fund entering into a futures contract purchase for the same aggregate
amount of the specific type of financial instrument with the same delivery date.
If the price in the sale exceeds the price in the offsetting purchase, the Fund
immediately is paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the price in the sale, the Fund pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Fund entering into a futures contract sale. If the offsetting
sale price exceeds the purchase price, the Fund realizes a gain, and if the
purchase price exceeds the offsetting price, the Fund realizes a loss.
The hours of trading for futures contracts may not conform to the hours
during which the underlying securities are traded. To the extent that the
futures contracts markets close after the markets for the underlying securities,
significant price movements can take place in the futures contracts markets that
cannot be reflected in the markets of the underlying securities.
Successful use of futures contracts by the Fund is also subject to the Manager's
ability to correctly predict movements in the direction of prices for
securities. Due to the possibility of price distortion in the futures market and
because of the imperfect correlation between movements in securities prices and
movements in the prices of futures contracts, a correct forecast of securities
prices by the Manager may still not result in a successful hedging transaction
over a short period of time. The Fund does not intend to devote more than 15% of
its assets to margin on futures contracts.
Options When the Fund purchases an option, an amount equal to the premium
paid by the Fund for the option (its cost) is recorded initially as an
investment. The amount of the investment is "marked-to-the-market" daily to
reflect the current market value of the option. If the current market value of
an option exceeds the
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premium paid, the excess represents unrealized appreciation; conversely, if the
premium paid exceeds the current market value, the excess represents unrealized
depreciation.
When the Fund writes an option, an amount equal to the premium received by
the Fund is recorded as an asset and as an offsetting liability. The amount of
the liability is "marked-to-the-market" daily to reflect the current market
value of the option. If an option written by the Fund expires, or the Fund
enters into a closing purchase transaction, the Fund will realize a gain (or a
loss if the cost of a closing transaction exceeds the premium received) and the
liability related to such option will be extinguished.
If the Fund writes a covered call option and is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires and may be required to deliver the
underlying security upon exercise. Although the Fund generally will purchase or
write only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market exist for any
particular option, or at any particular time, and for some options no secondary
market on an exchange may exist. In such event, it might not be possible to
effect closing transactions in particular options, with the result that the Fund
would have to exercise the option in order to realize any profit or would incur
transaction costs on the sale of underlying securities pursuant to the exercise
of put options it had written.
Reasons for the absence of a liquid secondary market include the
following: (a) there may be insufficient interest in trading certain options;
(b) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (c) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (d) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (e) the facilities of an exchange or
the Options Clearing Corporation (the "OCC" ) may not at all times be adequate
to handle current trading volume; or (f) one or more exchanges might, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the OCC as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
In addition, there is no assurance that higher-than-anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of the OCC inadequate, and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution of
customers' orders. In the event of a shortage of the underlying securities
deliverable on exercise of a listed option, the OCC has the authority to permit
other, generally comparable securities to be delivered in fulfillment of option
exercise obligations. If the OCC exercises its discretionary authority to allow
such other securities to be delivered, it may also adjust the exercise prices of
the affected options by setting different prices at which otherwise ineligible
securities may be delivered. As an alternative to permitting such substitute
deliveries, the OCC may impose special exercise settlement procedures.
The Fund is required to deposit cash, liquid debt securities, liquid equity
securities or cash equivalents in an amount equal to the exercise price of any
option it has written; in a segregated account with the custodian to ensure that
the use of such options is not leveraged. The Fund does not intend to devote
more than 5% of its assets to option premiums.
Options on Futures Contracts Options on index futures contracts give the
purchaser the right, in return for the premium paid, to assume a position in an
index futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the holder of the long
position would assume the underlying futures position and would receive a
variation margin payment of cash or securities approximating the increase in the
value of the holder's option position. If an option is exercised on the last
trading day prior to the expiration date of the futures contract, the settlement
will be made entirely in cash based on the difference between the exercise price
of the option and the final settlement price of the futures contract on the
expiration date.
The ability to establish and close out positions in options on futures
contracts will be subject to the development and maintenance of a liquid
secondary market. It is not certain that such a market will develop. Although
the Fund generally will purchase only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option or at any particular
time. In the event no such market exists for particular options, it might not be
possible to effect closing transactions in such options, with the result that
the Fund would have to exercise the options in order to realize any profit.
Compared to the purchase or sale of futures contracts, the purchase of
options on futures contracts may involve less potential risk to the Fund because
the maximum amount at risk is the premium paid for the options
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(plus transaction costs). However, there may be circumstances when the use of an
option on a futures contract would result in a loss to the Fund when the use of
a futures contract would not, such as when there is no movement in the prices of
debt securities. Purchasers of options who fail to exercise their options prior
to the exercise date suffer a loss of the premium paid.
Writing an option on a futures contract involves risks similar to those
arising in the sale of futures contracts.
In purchasing and selling futures contracts and in purchasing options on
futures contracts, the Fund presently intends to comply with rules and
interpretations of the Commodity Futures Trading Commission ("CFTC") under which
it is exempted from regulation as a commodity pool operator. The CFTC
regulations which exempt the Fund from regulation as a commodity pool operator
require, among other things, (i) that futures and related options be used solely
for bona fide hedging purposes, as defined in CFTC regulations or,
alternatively, with respect to each long futures or options position, the Fund
will ensure that the underlying commodity value of such contract does not exceed
the sum of segregated cash or money market instruments, margin deposits on such
contracts, cash proceeds from investments due in 30 days and accrued profits on
such contracts held by the commodity broker, and (ii) that the Fund not enter
into futures and related options for which the aggregate initial margin and
premiums exceed 5% of the fair market value of the Fund's total assets. There is
no other limitation on the percentage of the Fund's assets that may be invested
in futures and related options.
Repurchase Agreements In a repurchase agreement transaction, the Fund agrees to
purchase and resell, and the seller also agrees to buy back, usually on the next
business day, a security at a fixed time and price which reflects an agreed-upon
market rate. Repurchase agreements may be thought of as loans to the seller
collateralized by the security to be repurchased. The risk to the Fund is 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 Fund is entitled to
sell the collateral. If the seller defaults 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 manager monitors the value of the collateral
daily during the term of the repurchase agreement to determine that the value of
the collateral equals or exceeds the agreed-upon repurchase price. If a
defaulting seller were to be subject to a Federal bankruptcy proceeding, the
ability of the Fund to liquidate the collateral could be delayed or impaired
because of certain provisions of the bankruptcy laws. Except for temporary
defensive purposes, the Fund does not intend to invest more than 20% of its
assets in repurchase agreements.
PURCHASE AND REDEMPTION OF SHARES
The Fund does not issue share certificates. Instead, an account is
established for each investor and all shares purchased or received, including
those obtained through reinvestment of distributions, are credited to such
account on the books of the Fund.
Reference is made to the materials in the Prospectus under the headings
"Choosing Among Classes When Purchasing Shares," "How to Invest in the Fund" and
"How to Redeem Your Fund Shares," which describe the methods of purchase and
redemption of the Fund's shares. If you invest through an investment dealer or
agent, that firm may have its own service features, transaction charges and
fees. This SAI and the accompanying Prospectus should be read in conjunction
with such firms' material regarding their fees and services. If you wish us to
refer you to an investment professional, call us at 1-800-272-2700. Investment
professionals receive compensation for providing investment advice, and such
compensation may differ for selling shares of different classes of the Fund.
If the Board of Trustees should determine that it is advisable in the
interest of the remaining shareholders of the Fund or Class to make payment
wholly or partly in kind, the Fund may pay redemption proceeds in whole or in
part by a distribution in kind of securities from the portfolio of the Fund, in
lieu of cash, in conformity with the applicable rules of the Commission. If
shares are redeemed in kind, the redeeming shareholder might incur brokerage
costs in converting the assets into cash. Where the Fund makes a redemption in
kind, such redemption will be made in readily marketable securities whose value
is easily ascertainable. The method of valuing portfolio securities for this
purpose is as described under Net Asset Value and Taxes. The Fund has, however,
elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which it is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
its net assets during any 90-day period for any one shareholder.
REINSTATEMENT PRIVILEGE
Reinvestment of redemption proceeds under the reinstatement privilege
described in the prospectus will be made at the net asset value next determined
after receipt of the reinstatement order. If the shareholder has realized a gain
on the redemption, the transaction is taxable and reinvestment will not alter
any capital gains tax
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payable. If there has been a loss on the redemption, some or all of the loss may
not be allowed as a tax deduction depending on the amount reinvested.
For purposes of determining the amount of CDSC payable on any subsequent
redemptions, the purchase payment made through exercise of the reinvestment
privilege will be deemed to have been made at the time of the initial purchase
(rather than at the time the reinvestment was effected).
EXCHANGE PRIVILEGE
The minimum value of any class of shares that may be exchanged into the
fund in which shares are not already held is $1,000 and no exchange out of the
fund (other than by a complete exchange of all the shares of that fund) may be
made if it would reduce the shareholder's interest in that fund to less than
$1,000. Participating securities dealers who have signed a Selling Agreement
with the Distributor may exchange by telephone their clients' shares for the
same class of another fund distributed by the Distributor.
The Fund reserves the right at any time to modify or terminate the
exchange privilege with respect to one or more classes of shares, if the Board
of Trustees determines that continuing the privilege may be detrimental to
shareholders.
INVOLUNTARY REDEMPTIONS
As with voluntary redemptions, an involuntary redemption may result in the
payment of a tax by the shareholder. (See "Distributions and Taxes" in the
Prospectus.)
RETIREMENT PLANS
Shares may be purchased in connection with all types of tax-deferred
retirement plans. The minimum initial investment in connection with tax-deferred
retirement plans is $250 and the minimum may be waived on payments made directly
to the Transfer Agent. There is no minimum for additional purchase payments for
tax-deferred retirement plans.
Class A shares of the Fund are available to Merrill Lynch Daily K Plan
(the "Plan") participants at NAV without an initial sales charge if:
(i) the Plan is recordkept on a daily valuation basis by Merrill Lynch
and, on the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement, the Plan has $3 million or more in assets invested in broker/dealer
funds not advised or managed by Merrill Lynch Asset Management L.P. ("MLAM")
that are made available pursuant to a Service Agreement between Merrill Lynch
and the fund's principal underwriter or distributor and in funds advised or
managed by MLAM (collectively, the "Applicable Investments");
(ii) the Plan is recordkept on a daily valuation basis by an independent
recordkeeper whose services are provided through a contract or alliance
arrangement with Merrill Lynch, and on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the Plan has $3 million or more
in assets, excluding money market funds, invested in Applicable Investments, or
(iii) the Plan has 500 or more eligible employees, as determined
by Merrill Lynch plan conversion manager, on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement.
Alternatively, Class B shares of the Fund are made available to Plan
participants at NAV without a CDSC if the Plan conforms with the requirements
for eligibility set forth in (i) through (iii) above but either does not meet
the $3 million asset threshold or does not have 500 or more eligible employees.
Plans recordkept on a daily basis by Merrill Lynch or an independent
recordkeeper under a contract with Merrill Lynch that are currently investing in
Class B shares of the Fund convert to Class A shares once the Plan has reached
$5 million invested in Applicable Investments, or after the normal holding
period of seven years from the initial date of purchase.
NET ASSET VALUE AND TAXES
The net asset value per share of each class of shares is determined as of
the close of regular trading on the NYSE, on each day that the NYSE is open. The
NYSE is closed on the following holidays (or the weekdays on which these
holidays are celebrated when they fall on a weekend): New Year's Day,
President's Day, Martin Luther King, Jr. Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
We subtract the non-class specific liabilities of the Fund from the Fund's
assets to determine its total net assets. We then determine each class's
proportionate interest in the Fund's net assets. The liabilities attributable to
that class, including its distribution fees, are then deducted and the resulting
amount is divided by the number of shares of that class outstanding to produce
its net asset value per share.
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Stocks, futures and options are valued at the closing prices reported on
recognized securities exchanges or if no sale was reported, and for unlisted
securities, at the mean between the last-reported bid and asked prices.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Trustees. Short-term obligations having a remaining maturity of 60 days or less
are valued at amortized cost (which approximates market value).
Tax Status. By paying dividends representing its investment company
taxable income within the time periods specified in the Internal Revenue Code of
1986, as amended (the Code ) and by meeting certain other requirements, the Fund
intends to qualify as a regulated investment company under the Code. Since the
Fund will distribute annually its investment company taxable income, net capital
gains, and capital gain net income, it will not be subject to income or excise
taxes otherwise applicable to undistributed income of a regulated investment
company. If the Fund were to fail to distribute all its income and gains, it
would be subject to income tax and, in certain circumstances, a 4% excise tax.
Taxation of Shareholders. Dividends from net investment income and
distributions from short-term capital gains are taxable to shareholders as
ordinary income. Regardless of how long the Fund shares have been held,
distributions of long-term gains realized upon the sale of capital assets are
subject to a maximum tax rate for noncorporate taxpayers: if held for more than
18 months - 20% (10% for individuals in the 15% tax bracket); if held more than
12 months but not more than 18 months - 28% (15% for individuals in the 15% tax
bracket). Any loss realized by a shareholder upon the disposition of Fund shares
held for six months or less will be treated as long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gain held
for more than one year during such six-month period.
Distributions by the Fund out of dividend income from domestic
corporations may qualify in whole or in part for the dividends received
deduction if the distributing Fund does not sell the stock in respect of which
it received such dividends before satisfying a 46-day holding period requirement
(91 days for certain preferred stock), and the shareholder holds Fund shares for
at least 46 days. For this purpose, the distributing Fund holding period in such
stock may be reduced for periods during which the Fund reduces its risk of loss
from holding the stock (e.g., by entering into option contracts).
Investors who purchase shares shortly before the record date for a
distribution will pay a share price that includes the value of the anticipated
distribution and will be taxed on the distribution when it is received even
though with respect to them the distribution in effect represents a return of a
portion of their purchase price. Any loss realized on a sale or exchange of
shares will be disallowed if the shares disposed of are replaced within a period
of 61 days beginning 30 days before being acquired.
Individuals and certain other non-exempt payees will be subject to a 31%
backup Federal withholding tax on dividends and other distributions from the
Fund, as well as on the proceeds of redemptions if the Fund is not provided with
the shareholder's correct taxpayer identification number and certification that
the shareholder is not subject to such backup withholding, or if the Internal
Revenue Service notifies the Fund that the shareholder has failed to report
proper interest or dividends. For most individuals, the taxpayer identification
number is the taxpayer's social security number.
Tax Treatment of Certain Transactions. In general, and as explained more
fully below, if the Fund enters into combinations of investment positions by
virtue of which its risk of loss from holding an investment position is reduced
on account of one (or more) other positions (i) losses realized on one position
may be deferred to the extent of any unrecognized gain on another position and
(ii) long-term capital gains or short-term capital losses may be
recharacterized, respectively, as short-term gains and long-term losses.
Investments in foreign currency denominated instruments or securities may
generate, in whole or in part, ordinary income or loss. The Federal income tax
treatment of gains and losses realized from transactions involving options on
stock or securities entered into by the Fund will be as follows: Gain or loss
from a closing transaction with respect to options written by the fund, or gain
from the lapse of any such option, will be treated as short-term capital gain or
loss. Gain or loss from the sale of put and call options that the Fund
purchases, and loss attributable to the lapse of such options, will be treated
as capital gain or loss. Whether, in the case of individual shareholders,
distributions of such gain or loss is subject to the 20% rate (10% for
individuals in the 15% tax bracket), 28% rate, or 39.6% rate depends upon
whether the affected option has been held for more than 18 months, more than 12
months but not more than 18 months, or not more than 12 months, respectively.
For this purpose, an unexercised option will be deemed to have been sold on the
date it expired. It should be noted, however, that if a put is acquired at a
time when the underlying stock or security has been held for not more than one
year, or if shares of
8
<PAGE>
the underlying stock or security are acquired while such put is held, any gain
on the subsequent exercise, sale or expiration of the put will generally be
short-term gain.
Any regulated futures contract or listed non-equity option held by the
Fund at the close of its taxable year will be treated as sold for its fair
market value on the last business day of such taxable year. Sixty percent of any
gain or loss with respect to such deemed sales, as well as the gain or loss from
the termination during the taxable year of the Fund's obligation (or rights)
with respect to such contracts by offsetting, by taking or making delivery, by
exercise or being exercised, by assignment or being assigned, by lapse, or
otherwise, will be treated as long-term capital gain or loss and the remaining
forty percent will be treated as short term capital gain or loss. The Fund may
make certain elections that modify the above tax treatment with respect to
regulated futures contracts or listed non-equity options that are part of a
mixed straddle, as defined by the Code.
The Fund may invest in certain investments that may cause it to realize
income prior to the receipt of cash distributions, including securities bearing
original issue discount. The level of such investments is not expected to affect
the Fund's ability to distribute adequate income to qualify as a regulated
investment company.
Treasury Regulations pursuant to Section 1092 provide for the coordination
of the wash sale rules and the short sale rules with the straddle rules.
Generally, the wash sale rules prevent the recognition of loss where a position
is sold at a loss and a substantially identical position is acquired within a
prescribed period. The short sale rules generally prevent the use of short sales
to convert short-term capital gain to long-term capital gain and long-term
capital loss to short-term capital loss.
In addition to the Federal income tax consequences described above
relating to an investment in the Fund, there may be other Federal, state, local
or foreign tax considerations that depend upon the circumstances of each
particular investor. Prospective shareholders are therefore urged to consult
their tax advisers with respect to the effects of this investment on their
specific situations.
TRUSTEES AND OFFICERS OF THE TRUST
The trustees and officers of the Trust and their business affiliations for
the past five years are as follows:
<TABLE>
<CAPTION>
Name,Address and Age Position With the Trust Principal Occupation During Past 5 Years
- -------------------- ----------------------- ----------------------------------------
<S> <C> <C>
James Balog Trustee Retired; Director and member of the
2205 N. South Wind Blvd. Audit, Investment, Stock Option and
Vero Beach, FL 32963 Compensation Committees of
(69) Transatlantic Holdings, Inc.
(reinsurance); Director and Member of
the Executive Committee of Elan, Plc
(pharmaceuticals); Director and Member
of the Executive and Investment &
Credit Committees of Great West Life
and Annuity Insurance Company; Member
of the Technical Advisory Board of
Galen Partners (health care); and
Trustee of Zweig Series Trust. Former
Director, Chairman of the Audit
Committee and Member of the Executive
Committee of A.L. Pharma, Inc. (health
care); Chairman of 1838 Investment
Advisors, L.P. and Chairman of Lambert
Brussels Capital Corporation
(investments);
Claire B. Benenson Trustee Consultant on Financial Conferences
870 U.N. Plaza and Former Director of Financial
New York, NY 10017 (79) Conferences and Chairman, Department
of Business and Financial Affairs, The
New School for Social Research.
President of the Money Marketeers of
New York University; Trustee of Zweig
Series Trust and of Simms Global Fund;
and Director of The Burnham Fund
Inc.; Former Director of Zweig Cash
Fund Inc.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Name,Address and Age Position With the Trust Principal Occupation During Past 5 Years
- -------------------- ----------------------- ----------------------------------------
<S> <C> <C>
S. Leland Dill Trustee Retired; Director of Coutts & Co.
5070 North Ocean Dr. Trust Holdings Limited, Coutts & Co.
Singer Island, FL 33404 Group, Coutts & Co. (USA) (private
(68) banking); Trustee of BT Portfolios, BT
Investment Funds and Zweig Series
Trust. Former partner of Peat Marwick
Mitchell & Co. and Director of Zweig
Cash Fund Inc. and Vintners
International Company, Inc.(winery).
Eugene J. Glaser* Chairman, President, President of the Manager and of
900 Third Avenue Chief Executive Zweig/Glaser Advisers; President and
New York, NY 10022 Officer and Trustee Director of the Distributor; Chairman
(57) and Trustee of Zweig Series Trust;
Director of The Zweig Fund, Inc.; and
former Director of Zweig Cash Fund
Inc.
David Katzen* Executive Vice President Executive Vice President of the Manager; Senior
900 Third Avenue and Trustee Vice President of Zweig/Glaser Advisors and Zweig
New York, NY 10022 Series Trust, and Vice President of Zweig
(40) Advisors Inc. Former Director of Quantitative
Research at Avatar Investors Associates
Corp.; Director of Equity Research for Zweig Total
Return Advisors, Inc.; Research Director of
Zweig Advisors Inc.; and Vice President of The
Zweig Fund, Inc. and ZZK Management, Inc.
Donald B. Romans Trustee President of Romans & Company (private
233 East Wacker Dr. investors and financial consultants);
Chicago, IL 60601 Director of Zweig Series Trust and
(66) The Burnham Fund Inc.; Former
Consultant to and Executive Vice President
and Chief Financial Officer of Bally
Manufacturing Corporation and Director
of Zweig Cash Fund Inc.
Barry Mandinach First Vice President Executive Vice President of the Distributor;
900 Third Avenue Senior Vice President of the Manager and of
New York, NY 10022 Zweig/Glaser Advisers. First Vice President
(42) of Zweig Series Trust.
Alfred J. Ratcliffe First Vice President, First Vice President of the Manager and of
900 Third Avenue Treasurer, Principal Zweig/Glaser Advisers; First Vice
New York, NY 10022 Accounting Officer President, Principal Accounting Officer,
(50) and Assistant Secretary Treasurer and Assistant Secretary of Zweig
Series Trust; Former Vice President of The
Bank of New York.
Charles I. Leone First Vice President First Vice President and Chief Financial
900 Third Avenue and Assistant Secretary Officer of the Manager and of Zweig/Glaser
New York, NY 10022 Advisers; First Vice President, Chief
(36) Financial Officer and Assistant Secretary of
the Distributor; First Vice President and
Assistant Secretary of Zweig Series Trust;
Former Assistant Treasurer of Zweig Cash
Fund Inc.
Annemarie Gilly First Vice President First Vice President of the Manager and the
900 Third Avenue Distributor; Vice President of Zweig Series
New York, NY 10022 Trust; Former Vice President of Concord
(46) Financial Group and Executive Vice President
and Chief Operating Officer of The Gabelli
Equity Trust, Inc.
Rhonda Lee Berzner Assistant Vice Senior Research Analyst for the Manager and
900 Third Avenue President Zweig/Glaser Advisers; and Assistant Vice
New York, NY 10022 President of Zweig Series Trust.
(33)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Name,Address and Age Position With the Trust Principal Occupation During Past 5 Years
- -------------------- ----------------------- ----------------------------------------
<S> <C> <C>
Tom Disbrow Assistant Vice Vice President of the Manager and of
900 Third Avenue President and Zweig/Glaser Advisers;
New York, NY 10022 Assistant Treasurer Assistant Vice President and Assistant
(32) Treasurer of Zweig Series Trust.
Tom Farrell Assistant Vice Assistant Vice President of the Manager and
900 Third Avenue President and of Zweig/Glaser Advisers.
New York, NY 10022 Assistant Treasurer
(34)
Marc Baltuch Secretary First Vice President of the Manager and of
900 Third Avenue Zweig/Glaser Advisers; Director, First Vice
New York, NY 10022 President, Chief Compliance Officer and
(52) Secretary of the Distributor.; Director and
President of Watermark Securities, Inc.
Secretary of Zweig Series Trust; Assistant
Secretary of Gotham Advisors, Inc., Zweig
Total Return Advisors, Inc. and of Zweig
Advisors Inc.; Former Secretary of Zweig
Cash Fund Inc.
</TABLE>
*Designates a Trustee who is an interested person of the Trust within the
meaning of the 1940 Act.
Set forth below is a table showing the estimated compensation of the Board
of Trustees:
Total Compensation
Aggregate Compensation from the Trust paid
Name of Person, Position from the Trust to the Trustees
- --------------------------------------------------------------------------------
James Balog, Trustee $5,500 $5,500
Claire B. Benenson, Trustee 5,500 5,500
S. Leland Dill, Trustee 5,500 5,500
Eugene J Glaser, Chairman,
Chief Executive Officer and
Trustee 0 0
David Katzen, Executive Vice
President and Trustee 0 0
Donald B. Romans, Trustee 5,500 5,000
Those trustees and officers of the Trust who are affiliated with the
Distributor or the Manager are not separately compensated for their services as
trustees or officers of the Trust. The Fund currently pays each of its
"disinterested" trustees a fee of $2,500 per year, plus $750 per meeting
attended ($500 per phone meeting) and reimburses their expenses for attendance
at meetings. The trustees and officers of the Trust, as a group, owned less than
1% of any Class of the Fund.
Trustees may be removed from office at any meeting of shareholders by a
vote of two-thirds of the outstanding shares of the Trust. A shareholders
meeting may be called by the Trustees or by the President of the Trust, or shall
be called promptly by the Trustees upon the written request of shareholders of
the Trust holding at least ten percent (10%) of the outstanding shares entitled
to vote. Except as set forth above, the trustees shall continue to hold office
and may appoint their successors.
11
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Until its initial public offering, all shares of the fund will be held by
Zweig/Glaser Advisers, the parent of the Manager.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Manager The Trust and Euclid Advisors LLC, the Manager, entered into an
investment management agreement, dated April 16, 1998, (the "Management
Agreement" ) pursuant to which the Manager reviews the portfolio of securities
and investments of the Fund, and advises and assists the Fund with respect to
the selection, acquisition, holding or disposal of securities. In addition to
managing the investments, the Manager also makes recommendations with respect to
other aspects and affairs of each Fund. The Manager also furnishes the Trust
with certain administrative services, office space and equipment, and permits
its officers and employees who may be elected trustees or officers of the Trust
to serve in the capacities to which they are elected without additional
compensation from the Trust. All other expenses incurred in the operation of the
Fund are borne by the Fund, including: interest, taxes, fees and commissions of
every kind; expenses of issue, repurchase or redemption of shares; costs of
registering or qualifying shares for sale (including printing costs, legal fees
and other expenses relating to the preparation and filing of the Fund's
registration statement with the appropriate regulatory authorities and the
production and filing of the Fund's prospectus); costs of insurance; association
membership dues; all charges of custodians, including fees as custodian, escrow
agent, and fees for keeping books and performing portfolio valuations; all
charges of transfer agents, registrars, pricing services, independent
accountants and legal counsel; expenses of preparing, printing and distributing
prospectuses and all proxy materials, reports and notices to shareholders;
expenses of distribution of shares pursuant to Rule 12b-1 Plans; out-of-pocket
expenses of Trustees; fees of trustees who are not "affiliated persons" as
defined in the 1940 Act; and all other costs incident to the Trust's existence
as a business trust. The Distributor purchases copies of the Fund's prospectus
and shareholder reports used for sales purposes at printer's overrun cost.
The Fund pays the Manager for its services pursuant to the Management
Agreement a monthly fee at the annual rate of 1.50% of the average daily net
assets of the Fund. The Manager has voluntarily undertaken to limit the expenses
of the Fund (exclusive of taxes, interest, brokerage commissions, 12b-1 fees and
extraordinary expenses) until April 30, 1999 to 2.00% of its average daily net
assets. The Manager reserves the right to discontinue this policy at any time
after April 30, 1999.
The Management Agreement will continue in effect from year to year if
specifically approved annually by a majority of the Board of Trustees who are
not parties to such contract or "interested persons" of any such party. The
Management Agreement may be terminated without penalty by either party on 60
days' written notice and must terminate in the event of its assignment.
The Management Agreement provides that the Manager is liable only for its
acts or omissions caused by its willful misfeasance, bad faith or gross
negligence in the performance of its duties or reckless disregard of its
obligations under the Management Agreement. The Management Agreement permits the
Manager to render services to others and to engage in other activities.
The Manager may draw upon the resources of the Distributor and its
qualified affiliates in rendering its services to the Fund. The Distributor or
its affiliates may provide the Manager (without charge to the Fund) with
investment information and recommendations that may serve as the principal basis
for investment decisions with respect to the Fund.
The Manager has adopted a Code of Ethics (the "Code") that requires all
persons subject to the Code to pre-clear any proposed non-exempt personal
securities transaction. Permission for any proposed transaction will be granted
provided it is determined that such would not negatively impact activity in
client accounts. In the event that a client of the Manager's affiliates also
owns such security, or it is proposed that such client purchase such security,
available investments or opportunities for sales will be allocated in a manner
deemed to be equitable by the Manager.
Distributor Pursuant to its Distribution Agreement with the Trust (the
"Distribution Agreement"), Zweig Securities Corp., the Distributor, acts as
distributor of the Fund's shares. The Distribution Agreement was approved by the
Trustees on April 16,1998. The compensation of the Distributor and selling
dealer is described the Prospectus under "Choosing Among Classes When Purchasing
Shares." Normally, the Distributor receives a front-end sales commission on
sales of Class A Shares, a declining CDSC ranging from 5% to 1% on Class B
Shares held for less than seven years, and a CDSC of 1.25% on Class C Shares
held for less than one year. A 1% CDSC may apply on redemptions within 18 months
of purchases of Class A Shares not subject to a sales charge. The Distributor
also is compensated under the Rule 12b-1 distribution plans as described more
fully
12
<PAGE>
below.
The Distributor may reallow amounts in excess of the sales concessions
listed in the Prospectus, and pay certain costs, to dealers who provide
additional services and special assistance in selling shares of the Fund.
Distribution Plans The Fund has adopted a distribution plan for each
class of shares except Class I Shares in accordance with Rule 12b-1 under the
Act (the "Plan"), to compensate the Distributor for the services it provides and
for the expenses it bears under the Distribution Agreement. Each class of shares
(other than Class I Shares) pays a service fee at a rate of 0.25% per annum of
the average daily net assets of such class and a distribution fee based on
average daily net assets at the rate of 0.05% per annum for Class A Shares and
0.75% per annum for Class B Shares and Class C Shares.
A report of the amounts expended under the Plan must be made to, and
reviewed by, the Board of Trustees at least quarterly. In addition, the Plan
provides that it may not be amended to increase materially the costs which the
Fund may bear for distribution pursuant to the Plan without shareholder approval
and that other material amendments to the Plan must be approved by a majority of
the Board, including a majority of the Board who are neither "interested
persons" of the Fund (as defined in the 1940 Act) nor have any direct or
indirect financial interest in the operation of the Plan (the "Qualified
Trustees"), by vote cast in person at a meeting called for the purpose of
considering such amendments.
The Plan is subject to annual approval by a majority of the Board of
Trustees, including a majority of the Qualified Trustees, by vote cast in person
at a meeting called for the purpose of voting on the Plan. The Plan is
terminable at any time by vote of a majority of the Qualified Trustees or, with
respect to any class - by vote of a majority of the shares of such class. .If
the Plan is terminated (or not renewed) with respect to one or more classes, it
may continue in effect with respect to any class as to which it has not been
terminated (or has not been renewed). Pursuant to the Plan, any new trustees who
are not "interested persons" must be nominated by existing trustees who are not
"interested persons".
Because all amounts paid pursuant to the Plan are paid to the Distributor,
the Distributor, its officers, directors and employees, may all be deemed to
have a direct or indirect financial interest in the operation of the Plan. None
of the Trustees who is not an "interested person" of the Fund has a direct or
indirect financial interest in the operation of the Plan.
Benefits from the Plan may accrue to the Fund and its shareholders from
the growth in assets due to sales of shares to the public pursuant to the Plan.
Increases in the Fund's net assets from sales pursuant to its Plan may benefit
shareholders by reducing per share expenses, permitting increased investment
flexibility and diversification of the Fund's assets, and facilitating economies
of scale (e.g., block purchases) in the Fund's securities transactions. Under
its terms, the Plan will continue from year to year, provided that such
continuance is approved annually by a vote of the Trustees in the manner
described above.
The adoption of the Plan was approved by the Board of Trustees, including
a majority of the Qualified Trustees, at a meeting held on April 16, 1998. Prior
to approving the adoption of the Plan, the Board requested and received from the
Distributor all the information which it deemed necessary to arrive at an
informed determination as to the adoption of the Plan. In making its
determination to adopt the Plan, the Board considered, among other factors: (1)
the experience under a substantially identical Plan and previous Rule 12b-1
Plan's of Zweig Series Trust, and whether such experience indicates that the
Plan would operate as anticipated; (2) the benefits the Fund would be likely to
obtain under the Plan; including the fact that the Plan was necessary to permit
the Fund to offer exchangeability of its shares for shares of the same class of
the funds that comprise Zweig Series Trust (3) what services would be provided
under the Plan by the Distributor to the Fund and its shareholders; and (4) the
reasonableness of the fees to be paid to the Distributor for its services under
the Plan. Based upon their review, the Board, including each of the Qualified
Trustees, determined that the adoption of the Plan would be in the best interest
of the Fund, and that there was a reasonable likelihood that the Plan would
benefit the Fund and its shareholders. In the Board's quarterly review of the
Plan, the Trustees will consider its continued appropriateness and the level of
compensation provided therein.
The Board of Trustees has the right to terminate the Rule 12b-1 Plan for
the Class B Shares, and in the event of such termination, no further payments
would be made thereunder. However, in the event the Board of Trustees were to
terminate the Rule 12b-1 Plan for the Class B Shares for the Fund, the Fund may
not thereafter adopt a new Rule 12b-1 Plan for a class of that Fund having, in
the good faith determination of the Board of Trustees, substantially similar
economic characteristics to the Class B Shares. Termination of the Rule 12b-1
Plan for the Class B Shares or the Distribution Agreement does not affect the
obligation of the Class B shareholders to pay CDSCs. The Distributor has sold
its right to receive certain payments under the Distribution Agreement to
financial institutions in order to finance the distribution of the Class B
Shares.
13
<PAGE>
The Board of Trustees has also adopted a Rule 18f-3 Multi-Class Share Plan
permitting the issuance of shares in multiple classes.
Custodian, Fund Accounting Agent, Transfer Agent and Dividend Paying
Agent. The Bank of New York, 48 Wall Street, New York, New York 10286 serves as
custodian and fund accounting agent, and State Street Bank and Trust Company,
P.O. Box 8505, Boston, Massachusetts 02260-8505, serves as the transfer agent
and dividend paying agent for the Fund.
Independent Accountants. Coopers & Lybrand L.L.P., 1301 Avenue of the
Americas, New York, New York 10019, serves as independent accountants for the
Fund. In addition to reporting annually on the financial statements of the Fund,
the Fund's accountants also review certain filings of the Fund with the
Securities and Exchange Commission.
Counsel. Shearman & Sterling, 599 Lexington Avenue, New York, New York
10022, is counsel to the Fund. The firm also acts as counsel to the Manager and
the Distributor.
ADVISOR'S PRIOR PERFORMANCE
Euclid Advisors LLC also serves as the manager of other accounts. The
performance information shown below is based on a composite of all accounts with
investment objective, policies and strategies that are substantially similar to
those of the fund managed by Euclid Advisors LLC or by Euclid Advisors, Inc.,
the Manager's predecessor, and Zweig/Katzen Investors, L.P. (collectively, the
"Accounts"). David Katzen was the portfolio manager for each of the Accounts
since inception. The performance information shown in the table below has been
adjusted to give effect to the estimated annualized expenses of the different
classes of shares during the Fund's first year of operations expenses (without
giving effect to any expense waivers or reimbursements). Performance from
inception has a negligible correlation with the stock market (R-squared of .01
against the Standard & Poor's 500 Index - whereas an R-squared of 1.00 would be
a perfect correlation) or the bond market (R-squared of .03 against the Lehman
Government/Corporate Bond index. The information below should not be considered
a prediction of future performance of the Fund. The performance of the Fund may
be higher or lower than the performance of the Accounts. The Accounts were not
registered under the 1940 Act and therefore were not subject to the
diversification and other requirements of the 1940 Act and the Internal Revenue
Code. If the Accounts had been subject to these requirements, their performance
might have been adversely affected. The following table also shows the average
annual total return on 3-month U.S. Treasury bills for the same periods.
<TABLE>
<CAPTION>
Performance of Accounts adjusted for the One-Year Period Three-Year Period Five-Year Period Eight-Year
Period
fees and expenses of the different classes of Shares of Ending Ending Ending From inception
the Fund on January 1,
1990
Dec. 31, 1997 Dec. 31, 1997 Dec. 31, 1997 to Dec. 31, 1997
<S> <C> <C> <C> <C>
Class A with maximum sales charge 3.34% 9.02% 7.43% 11.11%
Class A with no sales charge 9.36% 11.10% 8.66% 11.90%
Class B with CDSC 3.17% 9.21% 7.47% 11.22%
Class B with no CDSC 8.60% 10.33% 7.90% 11.22%
Class C with CDSC 7.24% 10.33% 7.90% 11.12%
Class C with no CDSC 8.60% 10.33% 7.90% 11.12%
Class I 9.68% 11.43% 8.98% 12.23%
Performance of 3-month U.S. Treasury Bills. 5.31% 5.45% 4.78% 5.14%
</TABLE>
The above table is not the performance of the Fund. Giving effect to the
expense limitation set forth in the "Fee Table" section, the average annual
total return of the Accounts for the one-year, three-year, five-year and
eight-year (since-inception) periods ended December 31, 1997 for the Accounts
would have been approximately 0.16% higher for all classes of shares.
An investment in 3-month U.S. Treasury Bills is different from an
investment in the Fund or in the Accounts because Treasury Bills are backed by
the full faith and credit of the United States, have a fixed rate of return and
a short duration, and investors in Treasury Bills do not risk losing capital.
The following table shows the total return of the Accounts, quarter by
quarter, since inception adjusted for the estimated expenses of the
different classes of shares but without adjustment for sales
14
<PAGE>
charges. Sales charges apply at the time of purchase (Class A Shares) or
if shares are redeemed within specified periods (Class B and Class C
Shares) - see "Choosing Among Classes When Purchasing shares" in the
prospectus. Also shown, by quarter, is the total return of 3-month U.S.
Treasury bills.
<TABLE>
<CAPTION>
1998 First Quarter
---- -------------
<S> <C> <C> <C> <C>
adjusted for Class A expenses 4.59%
adjusted for Class B expenses 4.41%
adjusted for Class C expenses 4.41%
adjusted for Class I expenses 4.67%
Performance of 3-month U.S. Treasury Bills. 1.30%
1997 First Quarter Second Quarter Third Quarter Fourth Quarter
---- ------------- -------------- ------------- --------------
adjusted for Class A expenses 0.78% 2.46% 6.84% -0.87%
adjusted for Class B expenses 0.61% 2.28% 6.65% -1.05%
adjusted for Class C expenses 0.61% 2.28% 6.65% -1.05%
adjusted for Class I expenses 0.86% 2.53% 6.91% -0.80%
Performance of 3-month U.S. Treasury Bills. 1.31% 1.31% 1.30% 1.31%
1996 First Quarter Second Quarter Third Quarter Fourth Quarter
---- ------------- -------------- ------------- --------------
adjusted for Class A expenses 0.83% 5.94% 0.01% 3.96%
adjusted for Class B expenses 0.65% 5.76% -0.16% 3.78%
adjusted for Class C expenses 0.65% 5.76% -0.16% 3.78%
adjusted for Class I expenses 0.90% 6..02% 0.09% 4.03%
Performance of 3-month U.S. Treasury Bills. 1.27% 1.30% 1.32% 1.29%
1995 First Quarter Second Quarter Third Quarter Fourth Quarter
---- ------------- -------------- ------------- --------------
adjusted for Class A expenses 0.59% 8.08% 5.83% -1.87%
adjusted for Class B expenses 0.41% 7.90% 5.64% -2.04%
adjusted for Class C expenses 0.41% 7.90% 5.64% -2.04%
adjusted for Class I expenses 0.66% 8.16% 5.90% -1.79%
Performance of 3-month U.S. Treasury Bills. 1.49% 1.45% 1.39% 1.36%
1994 First Quarter Second Quarter Third Quarter Fourth Quarter
---- ------------- -------------- ------------- --------------
adjusted for Class A expenses 1.46% -0.48% -4.21% 3.29%
adjusted for Class B expenses 1.28% -0.65% -4.38% 3.11%
adjusted for Class C expenses 1.28% -0.65% -4.38% 3.11%
adjusted for Class I expenses 1.54% -0.40% -4.13% 3.37%
Performance of 3-month U.S. Treasury Bills. 0.83% 1.04% 1.15% 1.36%
1993 First Quarter Second Quarter Third Quarter Fourth Quarter
---- ------------- -------------- ------------- --------------
adjusted for Class A expenses 8.10% 3.41% 4.75% -5.60%
adjusted for Class B expenses 7.92% 3.23% 4.57% -5.77%
adjusted for Class C expenses 7.92% 3.23% 4.57% -5.77%
adjusted for Class I expenses 8.18% 3.49% 4.83% -5.53%
Performance of 3-month U.S. Treasury Bills. 0.76% 0.76% 0.77% 0.79%
1992 First Quarter Second Quarter Third Quarter Fourth Quarter
---- ------------- -------------- ------------- --------------
adjusted for Class A expenses 2.49% 2.80% 0.32% 3.52%
adjusted for Class B expenses 2.32% 2.63% 0.15% 3.34%
adjusted for Class C expenses 2.32% 2.63% 0.15% 3.34%
adjusted for Class I expenses 2.57% 2.88% 0.40% 3.60%
Performance of 3-month U.S. Treasury Bills. 1.00% 0.94% 0.80% 0.79%
1991 First Quarter Second Quarter Third Quarter Fourth Quarter
---- ------------- -------------- ------------- --------------
adjusted for Class A expenses 1.24% 0.53% 3.53% 5.80%
adjusted for Class B expenses 1.06% 0.36% 3.35% 5.62%
adjusted for Class C expenses 1.06% 0.36% 3.35% 5.62%
adjusted for Class I expenses 1.31% 0.61% 3.61% 5.88%
Performance of 3-month U.S. Treasury Bills. 1.56% 1.44% 1.40% 1.17%
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
1990 First Quarter Second Quarter Third Quarter Fourth Quarter
---- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
adjusted for Class A expenses 0.91% 5.18% 14.57% 9.39%
adjusted for Class B expenses 0.73% 5.00% 14.38% 9.20%
adjusted for Class C expenses 0.73% 5.00% 14.38% 9.20%
adjusted for Class I expenses 0.98% 5.26% 14.65% 9.47%
Performance of 3-month U.S. Treasury Bills. 1.99% 2.01 1.94% 1.81%
</TABLE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Officers and Trustees of the Fund and officers of the Manager who are also
officers or directors of the Distributor or its affiliates receive indirect
benefits from the Fund as a result of its usual and customary brokerage
commissions which the Distributor or its affiliates may receive for acting as
broker to the Fund in the purchase and sale of portfolio securities. The
Management Agreement does not provide for a reduction of the advisory fee by any
portion of the brokerage fees generated by portfolio transactions of the Fund
which the Distributor may receive.
Allocation of transactions, including their frequency, to various dealers
is determined by the Manager in its best judgment and in a manner deemed fair
and reasonable to shareholders. The primary consideration is prompt and
efficient execution of orders in an effective manner at the most favorable
price. Subject to this consideration, dealers who provide supplemental
investment research, statistical or other services to the Manager may receive
orders for transactions by the Fund. Information so received will enable the
Manager to supplement its own research and analysis with the views and
information of other securities firms. Such information may be useful and of
value to the Manager and its affiliates in servicing other clients as well as
the Fund; in addition, information obtained by the Manager and its affiliates in
servicing other clients may be useful and of value to the Manager in servicing
the Fund. No principal transactions are effected with Zweig Securities Corp. or
any of its affiliated companies.
The Fund may from time to time allocate brokerage commissions to firms
that furnish research and statistical information to the Manager. The
supplementary research supplied by such firms is useful in varying degrees and
is of indeterminable value. Such research may, among other things, include
advice regarding economic factors and trends, advice as to occasional
transactions in specific securities and similar information relating to
securities. No formula has been established for the allocation of business to
such brokers. Consideration may be given to research provided and payment may be
made of a fee higher than that charged by another broker-dealer which does not
furnish research services or which furnishes research services deemed to be of
lesser value, so long as the criteria of Section 28(e) of the Securities
Exchange Act of 1934, as amended (the "1934 Act") are met. Section 28(e) of the
1934 Act specifies that a person with investment discretion shall not be "deemed
to have acted unlawfully or to have breached a fiduciary duty" solely because
such person has caused the account to pay a higher commission than the lowest
available under certain circumstances. To obtain the benefit of Section 28(e),
the person so exercising investment discretion must make a good faith
determination that the commissions paid are reasonable in relation to the value
of the brokerage and research services provided viewed in terms of either that
particular transaction or his overall responsibilities with respect to the
accounts as to which he exercises investment discretion.
Currently, it is not possible to determine the extent to which commissions
that reflect an element of value for research services might exceed commissions
that would be payable for execution alone, nor generally can the value of
research services be measured. Research services furnished might be useful and
of value to the Manager and its affiliates in serving other clients as well as
the Fund, but on the other hand, any research service obtained by the Manager or
the Distributor from the placement of portfolio brokerage of other clients might
be useful and of value to the Manager in carrying out its obligation to the
Fund.
There are no fixed limitations regarding the turnover rates of the Fund's
long and short portfolios. In computing the portfolio turnover rate, all
securities, including options, the maturities or expiration dates of which at
the time of acquisition are one year or less, are excluded. Subject to this
exclusion, the turnover rate is calculated by dividing (A) the lesser of
purchases or sales of securities in the Fund's long portfolio for the fiscal
year by (B) the monthly average of the value of portfolio securities owned by
such portfolio during the fiscal year.
The exercise of calls written by the fund may cause the Fund to sell
portfolio securities, thus increasing its turnover rate. The exercise of puts
also may cause a sale of securities and increase turnover; although such
exercise is within the Fund's control, holding a protective put might cause the
Fund to sell the underlying securities for reasons which would not exist in the
absence of the put. The fund will pay a brokerage commission each time it buys
or sells a security in connection with the exercise of a put or call. Some
commissions may be higher than
16
<PAGE>
those which would apply to direct purchases or sales of portfolio securities.
YIELD AND PERFORMANCE INFORMATION
The Fund will include performance data for Class A, Class B and Class C
Shares of the Fund in its advertisements, sales literature and other information
distributed to the public that includes performance data of the Fund. Such
performance information will be based on investment yields or total returns for
the Fund.
Yield. Yield may not be the same as the distribution rate or the income
reported in the Funds' financial statements. We compute yield by taking the
interest and dividend income the fund earns in a 30-day period, net of expenses,
and dividing that amount by the average number of shares entitled to receive
dividends.
Yield will be calculated, using a one-month base period, according to the
following formula:
Yield = 2 X [(a-b/cd) + 1]6 - 1
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period.
Average Annual Total Return. Total return represents the average annual
compounded rate of return on an investment of $1,000 at the maximum public
offering price (in the case of Class A Shares) or reflecting the deduction of
any applicable CDSC. All data are based on past investment results. Average
annual total return for a given period is computed by finding the average annual
compounded rate of return over the period that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
P(1 + T)n = ERV
Where:
P = a hypothetical initial investment in the Fund of $1,000
T = average annual total return
n = number of years in period
ERV = ending redeemable value, at the end of the period, of a hypothetical
$1,000 investment in the Fund made at the beginning of the period.
The investment results of Shares of the Fund will tend to fluctuate over
time, so that historical yields, current distributions and total returns should
not be considered representations of what an investment may earn in any future
period. Actual dividends will tend to reflect changes in market yields, and will
also depend upon the level of a Class's or the Fund's expenses, realized or
unrealized investment gains and losses, and the results of the Fund's investment
policies. Thus, at any point in time, investment yields, current distributions
or total returns may be either higher or lower than past results, and there is
no assurance that any historical performance record will continue.
The Fund also may include in its advertisements data from Age Wave, Inc.;
the American Association of Retired Persons; Barron's; Business Week;
CDA/Wiesenberger Investment Companies Service; Dalbar Surveys; Donoghue's Money
Fund Report; Financial Planning; Financial World; Forbes; Fortune; Fundscope,
Hulbert Financial Digest; Ibbotson Associates; Individual Investor; Investment
Advisor; Investors Business Daily; The Liscio Report; Lipper Analytical
Services, Inc.; Micropal Inc.; Money; Morningstar Mutual Funds; Mutual Fund
Forecaster; Mutual Funds Magazine; The National Center for Education Statistics;
The New York Times; The Philatelic Foundation; Smart Money; USA Today; U.S. News
& World Report; The Wall Street Journal; Worth and other industry publications.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not contain
all the information included in the Registration Statement filed with the
Commission under the 1933 Act with respect to the securities offered by the
Prospectus. The Registration Statement, including the exhibits filed therewith,
may be examined at the office of the Commission in Washington, D.C.
17
<PAGE>
Statements contained in this Statement of Additional Information and the
Prospectus as to the contents of any contract or other document are not complete
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement of which this
Statement of Additional Information and the Prospectus form a part, each such
statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
EUCLID MARKET NEUTRAL FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 22, 1998
ASSETS
Cash ....................................................... $100,000
Deferred organization expenses ............................. 50,000
--------
Total Assets ............................................... $150,000
LIABILITIES
Accrued organization expenses .............................. 50,000
--------
NET ASSETS ................................................. $100,000
========
- --------------------------------------------------------------------------------
Class A Shares
Net asset value ("NAV") and redemption price per share
($25,000/2,204.586 shares)................................ $11.34
======
Maximum public offering price per share - NAV/
(1-maximum sales charge)($11.34/.945) .................... $12.00
== ======= ==== ======
Class B Shares
Net asset value and offering price per share
($25,000/2,204.586 shares)................................ $11.34
======
Redemption price per share ................................. *
======
Class C Shares
Net asset value and offering price per share
($25,000/2,204.586 shares)................................ $11.34
======
Redemption price per share ................................. *
======
Class I Shares
Net asset value, offering and redemption price per share
($25,000/2,204.586 shares)................................ $11.34
======
- ----------
* Redemption price subject to sales charge.
NOTES
1. Euclid Mutual Funds (the "Trust"), organized as a Delaware business trust on
February 3, 1998 and has been inactive since that date except for matters
relating to its organization and registration under the Investment Company Act
of 1940 as a diversified, open-end management investment company and the sale of
$100,000 of shares of beneficial interest of Euclid Market Neutral Fund (the
"Fund"), a Series of the Trust, to Euclid Advisors LLC, the Fund's investment
manager (the "Manager"). The Fund offers Class A, Class B, Class C and Class I
Shares, and 2,204.586 shares of each Class were issued to the Manager as part
of the $100,000 sale.
2. The organization expenses of the Trust advanced by the Manager will be repaid
by the Fund after commencement of operations. Such costs will be amortized on a
straight-line basis over a five-year period from commencement of operations of
the Fund. In the event that any of the initial shares of the Fund are redeemed
during this period, the Fund will be reimbursed by the Manager for any
unamortized organization expenses in the same proportion as the number of shares
redeemed bears to the number of initial shares outstanding at the time of
redemption.
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of and Shareholder in
Euclid Mutual Funds
We have audited the accompanying statement of assets and liabilities of Euclid
Mutual Funds, comprised of Euclid Market Neutral Fund, as of April 22, 1998.
This financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of Euclid
Mutual Funds as April 22, 1998, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
New York, New York
April 22, 1998
19
