File No. 333-45959
ICA No. 811-08649
As filed with the Securities and Exchange Commission on August 2, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No.
Post-Effective Amendment No. 1 |_|
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 3
E.I.I. REALTY SECURITIES TRUST
(Exact Name of Registrant as Specified in Charter)
667 Madison Avenue, 16th Floor
New York, New York 10021
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 575-5500
Richard J. Adler
European Investors Incorporated
667 Madison Avenue, 16th Floor
New York, New York 10021
(Name and Address of Agent for Service)
Copies to:
Susan J. Penry-Williams, Esq.
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Approximate date of proposed public offering: As soon as practicable
after this registration statement becomes effective.
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It is proposed that this filing will become effective:
|_| Immediately upon filing |_| on _______, pursuant to
pursuant to paragraph (b) paragraph (b)
|X| 60 days after filing pursuant |_| on (date) pursuant to
to paragraph (a) (1) paragraph (a)(1)
|_| 75 days after filing pursuant |_| on (date) pursuant to
to paragraph (a)(2) paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
|_| This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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E.I.I. REALTY SECURITIES TRUST
CROSS-REFERENCE SHEET
(Showing location in the Prospectus of the responses to the Items in Part A and
location in each form of the Statement of Additional Information of the
responses to the Items in Part B of Form N-1A).
E.I.I. Realty Securities Fund
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Form N-1A,
Part A
Item Number Prospectus Caption
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1(a) Front Cover Page
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(b) Back Cover Page
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2(a) Risk/Return Summary: Investment Objective
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(b) Investment Strategies
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(c) Investment Risks; Risk/Return Bar Chart and
Performance Table
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3 Fund Expenses
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4(a) Investment Objective, Principal Strategies and
Related Risks; Investment Objectives
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(b) Principal Investment Strategies
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(c) Risk Factors
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5 Not Applicable
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6(a) The Investment Adviser and Advisory Agreement
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(b) Not Applicable
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7(a) Share Price
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(b) Investing with E.I.I.: How to Purchase Shares
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(c) How to Redeem Shares
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(d) Dividends, Distributions and Taxes
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(e) Important Information About Taxes
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(f) Not Applicable
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8(a) Not Applicable
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(b) Not Applicable
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(c) Not Applicable
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9 Financial Highlights
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Form N-1A,
Part B Statement of Additional
Item Number Information Caption
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10(a) Front Cover Page
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10(b) Table of Contents
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11 General Information
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12(a) General Information
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(b) Investment Policies and Risks
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(c) Investment Policies and Risks; Investment
Restrictions
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(d) Other Securities & Investment Practices
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(e) Portfolio Turnover
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13(a)-(d) Management of the Fund
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(e) Not Applicable
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14(a) Not Applicable
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14(b) Management
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14(c) Management
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15(a) The Investment Adviser and Investment Advisory
Agreement
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15(b) Principal Underwriter
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15(c) Administrative Services Agreeement
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15(d) Administrative Services Agreement
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15(e) Not Applicable
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15(f) Not Applicable
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15(g) Not Applicable
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15(h) Administrative Services Agreement
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16(a)-(c) Portfolio Transactions and Brokerage
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16(d) Not Applicable
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16(e) Not Applicable
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17(a) General Information
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17(b) Not Applicable
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18(a) Purchase and Redemption of Shares; Additional
Purchase and Redemption Information
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18(b) Not Applicable
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18(c) Computation of Net Asset Value
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18(d) Additional Purchase and Redemption Information
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19(a) Tax Matters
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19(b) Tax Matters
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20(a) Not Applicable
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20(b) Not Applicable
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20(c) Not Applicable
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21(a) Not Applicable
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21(b) Performance Calculation
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22(a) Financial Statements
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22(b) Financial Statements
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22(c) Financial Statements
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Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of the Registration Statement.
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[LOGO] E.I.I. REALTY
SECURITIES FUND
Institutional Shares
INVESTMENT PROSPECTUS & APPLICATION
September __ 1999
888-323-8912
AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THE FUND'S SECURITIES OR DETERMINED WHETHER THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING
A CRIME.
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E.I.I. REALTY SECURITIES FUND
Prospectus
September __, 1999
General Information (888) 323-8912
Table of Contents
Risk/Return Summary............................................................2
Fund Expenses..................................................................3
Investment Objectives, Principal Strategies and Related Risks..................4
Fund Description...............................................................6
Securities in Which the Fund Invests...........................................8
Risk Factors...................................................................9
Other Information About the Fund..............................................10
Investing with E.I.I..........................................................13
The Organization, Management, and Service Providers of the Fund...............16
Additional Information........................................................16
Other Securities and Investment Practices.....................................17
Financial Highlights..........................................................19
INTRODUCTION
This Prospectus sets forth information you should consider before investing in
the E.I.I. Realty Securities Fund (the "Fund"). The Fund is a non-diversified
series of the E.I.I. Realty Securities Trust, which is an open-end managed
investment company commonly known as a mutual fund.
RISK/RETURN SUMMARY
Investment Objective
The Fund's investment objective is to provide the diversification and total
return potential of investments in real estate.
Investment Strategies
The Fund seeks to achieve its investment objective by investing primarily in
companies whose business is to own, operate, develop and manage real estate. The
Fund intends to invest at least 80% of its assets in the securities of companies
in the real estate industry, with a primary emphasis on Real Estate Investment
Trusts ("REITs").
Investment Risks
The Fund is subject to the risks common to all mutual funds that invest in
equity securities, foreign securities, real estate securities and fixed-income
securities.
You may lose money by investing in this Fund if any of the following
occur:
o the stock markets or the real estate markets of the United States, Canada,
Western Europe, Hong Kong or Japan go down;
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o there are changes in the market for REITs, which are subject to more abrupt
or erratic price movements than equity securities markets;
o one or more stocks in the Fund's portfolio do not perform as well as
expected;
o there are changes in interest rates;
o there are increases in operating costs generally of real estate properties
or increases in competition, property taxes or capital expenditures
regarding real estate properties;
o there are increases in defaults relating to real estate properties,
including defaults by borrowers or tenants;
o certain economic, political or regulatory occurrences affecting the real
estate industry.
In addition, the Fund is non-diversified, which means that the Fund may devote a
larger portion of its assets to the securities of a single issuer. This could
make the Fund more susceptible to certain risks than a diversified fund. In
addition, the Fund will devote a larger portion of its assets to a single
industry.
As with any mutual fund, there is no guarantee that the Fund will earn income or
show a positive total return over time. The Fund's price, yield, and total
return will fluctuate. You may lose money if the Fund's investments do not
perform well.
Investor Profile
The Fund may be appropriate for investors who:
o seek to grow capital over the long term
o are willing to take on the increased risks of an investment concentrated in
securities of companies that operate within the same industry
o can withstand volatility in the value of their shares of the Fund
o wish to add to their personal investment portfolio a fund that invests
primarily in companies operating in the real estate industry.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program. An investment in the Fund
should be a long-term investment and the Fund is not intended to be used as a
trading vehicle.
FUND EXPENSES
The following tables describe the fees and expenses you may pay if you buy and
hold shares of the Fund:
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Shareholder Fees
(fees paid directly from your investment)
(as a percentage of the offering price)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Sales Charge (Load) Imposed on Reinvested None
Dividends
Maximum Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
Maximum Account Fee None
You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
(as a percentage of average daily net assets)
Institutional
Shares
Management Fees 0.75%
Administration Fees 0.25%*
Shareholder Servicing Fees 0.00%[change to "NONE" if no plan]
Rule 12b-1 Distribution Fees 0.00%
Other Expenses 0.10%
Total Fund Operating Expenses 1.00%
* Before fee waiver. Pursuant to a fee waiver, the Administration Fee has been
0.15%[check if waiver contractual or voluntary].
Example
This 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 $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions yours costs would be:
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1 Year 3 Years 5 Years 10 Years
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$ 10 $ 32 N/A N/A
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INVESTMENT OBJECTIVE, PRINCIPAL STRATEGIES AND RELATED RISKS
THE FUND
The Fund is a series of the E.I.I. Realty Securities Trust, a Delaware Business
Trust that was formed on December 22, 1997. The Fund's business affairs are
managed under the general supervision of the Board of Trustees. The Statement of
Additional Information contains the name and general business experience of each
Trustee. The Fund presently may offer three classes of shares: Institutional,
Adviser and Investor. The Fund began selling shares of the Institutional class
on June 11, 1998. As of June 30, 1999, the Adviser and Investor classes had not
yet commenced operations. The Fund's Board of Trustees has the ability to
establish new series of the Trust without shareholder approval.
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide the diversification and total
return potential of investments in real estate. The Fund also seeks to achieve a
total return that incudes a significant component of current income, which may
provide portfolio stability during periods of overall market fluctuation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to achieve its objectives by investing in companies that own,
operate, develop and manage real estate. Typically, an investment in commercial
real estate provides a significant current return, customarily in the form of
dividends, and additional appreciation potential, which means that the price of
the investment increases over time. As such, a critical objective of the Fund is
to achieve total returns which include a significant component of current
income, or dividends, which may serve to provide portfolio stability during
periods of overall market fluctuations. (Over the 10 year period ending
12/31/97, the National Association of Real Estate Investment Trusts ("NAREIT")
Equity Index achieved an annualized total return of 14.17%, which was comprised
of 8.15% in current income and 5.57% of capital appreciation.) To pursue capital
appreciation, the Fund will target companies with the highest risk-adjusted
total return potential. The Fund intends to invest at least 80% of its assets in
the securities of companies in the real estate industry, with a primary emphasis
on Real Estate Investment Trusts ("REITs"). In addition, the Fund may invest in
other securities as described in the section entitled "Other Investments."
The Fund may achieve its investment objective by investing all of its assets in
another investment company having substantially the same investment objective
and policies as the Fund instead of investing directing in the underlying
securities.
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Investment Philosophy
E.I.I.'s investment philosophy is to achieve attractive risk-adjusted total
returns by investing primarily in a diversified portfolio of real estate
securities of companies which it deems to be of the highest quality available in
the marketplace. In this regard, E.I.I. deems high-quality companies to be
candidates for the portfolio when a number of the following conditions are met:
o Experienced, dedicated management teams are in place which have
significant inside ownership of shares, have capital markets
expertise, and have a pro-shareholder orientation
o The companies have long-term strategies which position them for
sustainable cash flow growth
o The balance sheets of the individual companies are positioned to
enable significant growth
Investment Strategies:
E.I.I.'s investment process employs a combination of a "top-down," macro level
analysis by its Investment Committee, together with rigorous "bottom-up,"
fundamental securities and real estate research and analysis on individual
companies by its analyst team. E.I.I.'s Investment Committee is composed of its
three Portfolio Managers as well as analysts and strategists.
Investment Committee Decision Process:
E.I.I.'s Investment Committee analyzes national and regional economic trends and
the market for different types of real estate including residential, retail,
hotel, industrial, and office properties. In addition, the Investment Committee
makes assessments of the economic environment, securitization trends, etc., and
then derives an investment strategy formulated to take advantage of perceived
opportunities.
Analyst Team Decision Process:
E.I.I.'s analyst team tracks a universe of more than 125 individual companies
which are analyzed for potential investment. Companies are evaluated on both a
quantitative and a qualitative basis in order to determine which companies may
provide attractive risk-adjusted returns. E.I.I.'s analyst team evaluates and
analyzes companies based upon the following criteria:
Qualitative Analysis:
o Management strength
o Business strategy
o Financial strength
o Competitive advantages within the marketplace
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Quantitative Analysis:
o Cash flow and dividend growth prospects
o Risk-adjusted total return expectations using numerous methodologies
o Real estate analysis using capitalization rates, values on a square
footage basis, etc.
o Balance sheet strength and relative cost of capital
Integral parts of E.I.I.'s investment process include:
o performing individual property and market evaluations which are
important to understanding the company's portfolio
o verifying that the company's assets are consistent with management's
stated strategy
o finding and reviewing any problems relating to the company's
properties
o evaluating the company's properties and their position in the mar-
kets
o assessing the quality of property management
Investment Policies
The Fund also seeks to achieve total returns that include a significant
component of current income, to provide portfolio stability during periods of
overall market fluctuations. The Fund will also pursue capital appreciation by
targeting companies with the highest risk-adjusted total return potential.
The Fund will pursue its investment objective by investing at least 80% of its
total assets in the equity or convertible securities of U.S. companies (with a
primary emphasis on REITs) which are principally engaged in the ownership,
construction, management, financing, or sale of residential, commercial, or
industrial real estate. Principally engaged means at least 50% of a company's
revenues are derived from such real estate activities or at least 50% of the
fair market value of a company's assets are invested in real estate.
Under normal market conditions, the Fund will invest substantially all of its
assets in:
o Income producing real estate securities (including equity, mortgage,
and hybrid REITs)
o Real Estate Operating Companies ("REOCs")
o Securities convertible into common stocks (including convertible
preferred stocks, rights, warrants, etc.) of real estate companies
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o Real estate related fixed-income securities (such as convertible
debentures, unsecured debentures, mortgage backed securities, etc.)
The Fund also may invest:
o up to 20% of its total assets in securities of foreign real estate
companies, many of which have substantial holdings of U.S. real estate
securities
RISK FACTORS
The Fund is designed for long-term investors who can weather changes in the
value of their investment. The Fund is subject to the risks common to all mutual
funds and the risks common to mutual funds that invest in equity securities,
real estate securities, foreign securities, and fixed-income securities. In
addition, the Fund is subject to the risks related to direct investment in real
estate. By itself, the Fund does not constitute a complete investment plan.
This prospectus describes the principal risks that you may assume as an investor
in the Fund. Some limitations on the Fund's investments are described in the
section that follows. "Other Securities and Investment Practices" at the end of
this prospectus provides additional information on the securities in which the
Fund can invest.
The following risks are common to all mutual funds:
Market risk is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth less than the price the Fund
originally paid for it, or less than the security was worth at an earlier time.
Market risk may affect a single security, an industry, a sector of the economy,
or the entire market, and is common to all investments.
Manager risk is the risk that the Fund's investment adviser may use a strategy
that does not produce the intended result. Manager risk also refers to the
possibility that the Fund's investment adviser may fail to execute an investment
strategy effectively and thus fail to achieve its objective.
The following risk is common to mutual funds that invest in equity securities:
Equity risk is the risk that the value of a security will fluctuate in response
to changes in earnings or other conditions affecting the issuer's profitability.
Unlike debt securities, which have preference to a company's earnings and cash
flow, equity securities are entitled to the residual value after the company
meets its other obligations. For example, holders of debt
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securities have priority over holders of equity securities to a company's assets
in the event of bankruptcy.
The following risks are common to mutual funds that invest in real estate
securities:
Real estate risk is the risk that the value of a security will fluctuate because
of changes in property values, vacancies of rental properties, overbuilding,
changes in local laws, increased property taxes and operating expenses, and
other risks associated with real estate. While the Fund will not invest directly
in real estate, it may be subject to the risks associated with direct ownership.
Equity REITs may be affected by changes in property value, while mortgage REITs
may be affected by credit quality.
Regulatory risk is the risk that certain REITs may fail to qualify for
pass-through of income under federal tax law or to maintain their exemption from
the registration requirements under federal securities laws.
The following risks are common to mutual funds that invest in foreign
securities:
Foreign issuer risk is the risk that foreign issuers may not be subject to
uniform accounting, auditing and financial reporting standards and practices
used by domestic issuers. In addition, foreign securities markets may be less
liquid, more volatile, and less subject to governmental supervision than in the
U.S. Investments in foreign countries could be affected by factors not present
in the U.S., including expropriation, confiscation of property, and difficulties
in enforcing contracts.
Currency risk is the risk that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment. Adverse
changes in rates may erode or reverse gains produced by investments denominated
in foreign currencies.
The following risks are common to mutual funds that invest in fixed income
securities:
Interest rate risk. The value of a fixed income security typically changes in
the opposite direction from a change in interest rates. When interest rates go
up, the value of a fixed-rate security typically goes down. When interest rates
go down, the value of these securities typically goes up. Generally, the market
values of securities with longer maturities are more sensitive to changes in
interest rates.
Inflation risk is the risk that inflation will erode the purchasing power of the
cash flows generated by fixed income securities held by the Fund. Fixed-rate
debt securities are more susceptible to this risk than floating-rate debt
securities.
Reinvestment risk is the risk that when interest income is reinvested, interest
rates will have declined so that income must be reinvested at a lower interest
rate. Generally, interest rate risk and reinvestment risk have offsetting
effects.
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Credit (or default) risk is the risk that the issuer of a fixed income security
will be unable to make timely payments of interest or principal.
SECURITIES IN WHICH THE FUND INVESTS
A REIT is a corporation or a business trust that combines the capital of many
investors for investment primarily in income-producing real estate or real
estate-related loans or interests. The shares of a REIT are often freely traded
on a major stock exchange. A REIT must meet certain requirements contained in
the Internal Revenue Code of 1986, as amended (the "Code"), in which case it
generally does not pay federal corporate income tax. Generally, a REIT is
required to invest a substantial portion of its assets in interests in real
estate (including mortgages and other REITs) or cash and government securities,
derive most of its income from rents from real property or interest on loans
secured by mortgages on real property, and distribute to shareholders annually
substantially all of its otherwise taxable income. Most states honor this
federal income tax treatment and do not require REITs to pay state income tax.
As a result, nearly all of a REIT's income can be distributed to shareholders
without the imposition of a corporate level income tax. However, unlike a
partnership, a REIT cannot pass its tax losses through to its investors.
REITs are characterized as equity REITs, mortgage REITs, and hybrid REITs
The Fund will invest predominantly in equity REITs. Equity REITs, which may
include operating or finance companies, own real estate directly and the value
of, and income earned by, these REITs depends upon the income of the underlying
properties and the rental income they earn. Equity REITs also can realize
capital gains (or losses) by selling properties that have appreciated (or
depreciated) in value. Mortgage REITs can make construction, development, or
long-term mortgage loans and are sensitive to the credit quality of the
borrower. Mortgage REITs derive their income from interest payments on such
loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs, generally by holding both ownership interests and mortgage interests in
real estate. The value of securities issued by REITs are affected by tax and
regulatory requirements and by perceptions of management skill. REITs also are
subject to heavy cash flow dependency, defaults by borrowers or tenants,
self-liquidation, and the possibility of failing to qualify for tax-free status
under the Code or to maintain exemption from the Investment Company Act of 1940,
as amended (the "Investment Company Act").
PORTFOLIO MANAGEMENT AND FUND OPERATIONS
THE INVESTMENT ADVISER
The Fund has entered into an investment advisory agreement with E.I.I. Realty
Securities, Inc. ("E.I.I."), 667 Madison Avenue, New York, New York 10021.
E.I.I. was formed in 1993 and is registered with the SEC as an investment
adviser.
Advisory Services
E.I.I. provides the Fund with investment management and financial advisory
services, including purchasing and selling the securities in the Fund's
portfolio, at all times subject to
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the policies set forth by the Board of Trustees. E.I.I. identifies and analyzes
possible investments for the Fund, determines the amount and timing of such
investments, and determines the forms of investments. E.I.I. also monitors and
reviews the Fund's portfolio. Under the Fund's Investment Advisory Agreement
with E.I.I., as of June 30, 1999, the Fund paid a monthly advisory fee
calculated at an annual rate of 0.75% of the Fund's average weekly net assets.
Portfolio Management Personnel
RICHARD J. ADLER is a Managing Director of E.I.I. Mr. Adler serves as investment
strategist for E.I.I. and co-portfolio manager of the Fund, to which he provides
investment strategy as well as expertise in convertible and other securities.
Mr. Adler is a 1968 graduate of Yale University with a B.A. degree in Economics
and earned an M.B.A. from Harvard Business School with Honors in 1973. He has
served as an officer in the U.S. Navy and was a Vice President of Goldman, Sachs
& Co. in New York from 1973 to 1983, where he worked with foreign investors.
CYDNEY C. DONNELL is a Managing Director of E.I.I. Ms. Donnell serves as co-
portfolio manager of the Fund, jointly responsible for its day-to-day
operations. Ms. Donnell has served as a REIT analyst or portfolio manager for
E.I.I. since the inception of its real estate securities investment management
business in 1987. Prior to joining E.I.I., Ms. Donnell was a real estate lending
officer at Republic Bank Corporation from 1983 to 1986. Ms. Donnell graduated
magna cum laude from Texas A&M in 1981 with a degree in Finance and received an
M.B.A. from Southern Methodist University in 1982. She has served as a member of
the NAREIT Board of Governors.
DAVID P. O'CONNOR is a Managing Director of E.I.I. Mr. O'Connor serves as co-
portfolio manager of the Fund, jointly responsible for its day-to-day
operations. Mr. O'Connor has served as a REIT analyst or co-portfolio manager
for E.I.I. since February, 1994. Prior to joining E.I.I., Mr. O'Connor served as
an investment executive at Kidder, Peabody, and Co., Inc., where he specialized
in real estate securities. From 1987 to 1992, Mr. O'Connor was employed by a
management affiliate of Presidential Realty Corp. (an AMEX Listed REIT) and
subsequently served as a real estate analyst at Lane Webber Properties, a
private real estate development and investment firm. Mr. O'Connor is a 1986
graduate of the Boston College School of Management and received an M.S. in Real
Estate Development and Investment from New York University.
About the Investment Adviser
E.I.I. provides real estate securities portfolio management services to U.S.
tax-exempt institutions and other investors. E.I.I. is a wholly-owned subsidiary
of European Investors Incorporated, which is a registered investment adviser
providing both general securities and real estate securities portfolio
management services. E.I.I. and European Investors Incorpo- rated are owned by
management.
European Investors Incorporated was founded in 1983 to provide investment
services primarily to foreign investors (with a focus in Europe) in the United
States by managing securities portfolios as well as providing direct real estate
advisory services and corporate advisory services. From these combined efforts,
European Investors Incorporated determined
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that securitized real estate could serve as an alternative means of acquiring
real estate assets and developed a portfolio management service specifically in
this area, which now caters to both foreign and domestic investors. European
Investors Incorporated commenced research into real estate securities as a
separate portfolio product in 1986, began managing real estate securities
portfolios in 1987, and is a recognized leader in real estate securities
investment management.
E.I.I. and European Investors Incorporated collectively have a diversified
client base that includes investors in twelve countries, encompassing taxable
and tax-exempt investors, individuals, and institutions, including over 60
domestic institutional investors. As of December 31, 1997, the combined
companies have approximately $1.6 billion invested in real estate securities on
behalf of clients. They also manage several offshore real estate investment
funds with assets of approximately $300 million.
E.I.I. believes that investments in real estate offer a total return potential
which may serve as an effective portfolio diversifier for many investors. In
addition, E.I.I. believes that, for most investors, the most convenient and
effective way to invest in real estate is through the ownership of a diversified
portfolio of real estate securities. Real estate securities, and more
specifically, REITs, provide investors with many of the features particular to
both real estate investments and publicly-traded securities, providing investors
with a practical and efficient means to include professionally-managed real
estate in an investment portfolio.
Why Real Estate? Investments in real estate offer the following benefits over
investments in other asset classes:
o Relatively low historical correlation to the equity market
o Relatively high levels of potential current income from contractual
rental streams
o A potential hedge against inflation from rising asset values and the
possibility of passing through higher costs to tenants
Why Real Estate Securities? An investment in a portfolio of real estate
securities offers the following benefits in addition to those provided by direct
real estate investments:
o Diversification of risk of real estate investments
o Market pricing of publicly-traded shares (instead of appraisal-based
valuations)
o Enhanced liquidity, which aids in investment speed as well as
portfolio rebalancing
Why E.I.I.? E.I.I. and its parent company, European Investors Incorporated, have
been professionally managing real estate securities portfolios on behalf of
their clients for more than a decade and have consistently outperformed their
primary benchmark (the NAREIT Equity Index) by an average margin of more than
300 basis points on an annualized basis, before fees. The collective client base
of E.I.I. and European Investors Incorporated includes
- 12 -
<PAGE>
an array of investors ranging from foreign and domestic high net worth
individuals to U.S. foundations, endowments, and corporate pension plans. In
addition, European Investors Incorporated serves as the adviser or sub-adviser
for several offshore funds investing with substantially the same investment
objective as the Fund.
The chart below shows the historical performance of all of the real estate
accounts managed by E.I.I. and European Investors Incorporated, which have
substantially the same investment objective as the Fund. E.I.I. manages domestic
accounts and European Investors Incorporated manages offshore accounts using the
same personnel and philosophy. The data, calculated on an average annual total
return basis, is provided to illustrate E.I.I.'s past performance in managing
accounts in accordance with the same investment objective, policies, and
strategies as those of the Fund. These accounts consist of separate and distinct
portfolios and their performance is not indicative of past or future performance
of the Fund.
Past Performance of All Real Estate Securities Accounts of E.I.I. Realty
Securities (E.I.I.) & European Investors Incorporated
<TABLE>
<CAPTION>
Real Estate Securities Composite as of December 31, 1997 Annual Returns Through December 31,
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Standard
Deviation
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
E.I.I. Composite* 13.06% 12.09% -11.69% 34.39% 19.34% 19.60% 6.53% 17.06% 35.80% 22.15% 13.61%
Wilshire Real Estate 24.18% 2.37% -33.46% 20.03% 7.40% 15.23% 1.64% 13.65% 36.87% 19.80% 18.79%
Securities Index
NAREIT Equity Index 13.49% 8.84% -15.35% 35.70% 14.59% 19.65% 3.17% 15.27% 35.27% 20.26% 14.87%
Cumulative Returns 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
E.I.I. Composite* 13.06% 26.73% 11.92% 50.41% 79.50% 114.68% 128.70% 167.71% 263.53% 344.04%
Wilshire Real Estate 24.18% 27.12% -15.41% 1.54% 9.05% 25.66% 27.73% 45.16% 98.68% 138.01%
Securities Index
NAREIT Equity Index 13.49% 23.52% 4.56% 41.88% 62.58% 94.54% 100.70% 131.34% 212.93% 276.33%
</TABLE>
Cumulative Summary
1 3 5 Year 10 Year
Year Year
E.I.I. Composite* 22.15 94.20 147.40 344.00
% % % %
Wilshire Real Estate 19.80 86.35 137.17 138.01
Securities Index % % % %
NAREIT Equity Index 20.26 87.51 131.84 276.33
% % % %
*The above performance is calculated on a time weighted basis by geometrically
linking each quarter in the year and is shown net of fees. This method of
calculation differs from the SEC method. These accounts were not subject to the
restrictions and diversification requirements of the Investment Company Act of
1940, as amended, or the restrictions and diversification
- 13 -
<PAGE>
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended.
However, these accounts historically have been run in a manner that would have
been in compliance with these restrictions and requirements but for the fact
that income was predominantly reinvested rather than distributed as required by
Subchapter M. If the accounts had been subject to these restrictions and
requirements, the returns might have been adversely affected.
[Mountain chart and key]
Performance is shown net of a 1% management fee, as well as all brokerage and
trading expenses. The Composite includes all of the real estate securities
accounts of E.I.I. and European Investors Incorporated except for: (i) foreign
funds where the performance is stated net of fees and withholding taxes and is
therefore not comparable and (ii) new accounts where the cash position is not
yet comparable to other portfolios and certain accounts with unique objectives
and restrictions. As these accounts become fully invested they are added to the
Composite.
SHARE PRICE
Shares are purchased and redeemed at the Fund's daily share price, called its
net asset value (the "NAV"). The NAV is useful to you as a shareholder because
the NAV, multiplied by the number of Fund shares you own, gives you the dollar
amount and value of your investment. The Fund's NAV is calculated each business
day as of the close of the New York Stock Exchange (normally at 4:00 p.m.
Eastern time). Shares are purchased at the next share price calculated after
your investment instructions are received and accepted. A business day is a day
on which the New York Stock Exchange is open for trading or any day in which
enough trading has occurred in the securities held by the Fund to affect the NAV
materially.
The NAV is calculated by adding up the total value of the Fund's investments and
other assets, subtracting its liabilities, and then dividing that figure by the
number of outstanding shares of the Fund.
INVESTING IN THE FUND
INVESTING WITH E.I.I.
The following sections describe how to open an account, how to access
information on your account, and how to purchase and redeem shares of the Fund.
The minimum investment for Institutional Shares is $1,000,000. This minimum may
be reduced to certain institutional clients of E.I.I. in E.I.I.'s sole
discretion. Employees and officers of E.I.I. and its affiliates and immediate
family members can purchase Institutional Shares without being subject to the
minimum investment.
- 14 -
<PAGE>
HOW TO PURCHASE SHARES
Shares can be purchased in a number of different ways. You can send in your
investment by check or wire transfer. All you need to do to get started is to
fill out an application.
All purchases must be made in U.S. Dollars and drawn on U.S. banks. The Transfer
Agent may reject any purchase order in its sole discretion. If your check is
returned for any reason, you may be charged for any resulting fees and/or
losses. Third party checks will not be accepted. You may only invest in fund
shares legally available in your state. If your account falls below the minimum
initial investment as a result of redemptions by you, we may ask you to
re-establish the minimum investment. If you do not do so within 60 days, we may
close your account and send you the value of your account. If you would like to
make additional investments after your account is already established, use the
Investment Stub attached to your statement and send it with your check to the
address indicated.
Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank account information and the amount
and frequency of your investment. You can select monthly, quarterly,
semi-annual, or annual investments. You should attach a voided personal check so
the proper information can be obtained. You must first meet the minimum
investment requirement, then we will make automatic withdrawals of the amount
you indicate ($25 or more) from your bank account and invest it into shares of
the Fund.
Systematic Withdrawal Plan
To enroll in the Systematic Withdrawal Plan, you should check this box on the
Account Application. This option permits investors to request withdrawal of a
specified dollar amount (minimum of $500) on either a monthly, quarterly, or
annual basis. We will need your bank account information and the amount and
frequency of your withdrawal. You should attach a voided personal check or
savings account deposit slip so the proper information can be obtained.
Retirement Plans
You can use the Fund as part of your retirement portfolio. Please contact the
Fund for details regarding an IRA or other retirement plan that works best for
your financial situation.
HOW TO REDEEM SHARES
If we receive your request by 4:00 p.m. Eastern time, your redemption will be
processed the same day at the NAV determined as of the close of the New York
Stock Exchange on that day. Shares can be redeemed in one of the following ways:
o By Telephone The easiest way to redeem shares is by calling (888) 323-8912.
When you fill out your original application, be sure to check the box
marked "Telephone
- 15 -
<PAGE>
Authorization." Then when you are ready to redeem, call us and tell us
which one of the following options you would like to use:
o Mail a check to the address of record;
o Wire funds to a domestic financial institution;
o Mail to a previously designated alternate address; or
o Electronically transfer the funds via Automatic Clearing House
("ACH").
All telephone calls are recorded for your protection and measures are taken to
verify the identity of the caller. If we properly act on telephone instructions
and follow reasonable procedures to ensure against unauthorized transactions,
neither E.I.I., nor its servicing agents nor the Transfer Agent will be
responsible for any losses. If these procedures are not followed, the Transfer
Agent may be liable to you for losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.
o By Mail Use the Regular U.S. Mail or Overnight Mail Address to redeem
shares. Send us a letter of instruction indicating your Fund account
number, amount of redemption, and where to send the proceeds. All account
owners must sign. A signature guarantee is required for the following
redemption requests:
o Redemptions over $10,000;
o Your account registration has changed within the last 15 days;
o The check is not being mailed to the address on your account; or
o The check is not being made payable to the owner of the account.
A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
There are a number of convenient ways to redeem shares of the Fund. You can use
the same mailing addresses listed for purchases. You will earn dividends up to
the date your redemption request is processed.
o By Wire If you want to redeem funds by wire, you must establish a Fund
account which will accommodate wire transactions. If you call by 4:00 p.m.
Eastern time, your funds will be wired on the next business day.
o By ACH A redemption will be transferred by ACH as long as the transfer is
to a domestic bank.
Under certain emergency circumstances, the right of redemption may be suspended.
Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase
- 16 -
<PAGE>
check has cleared. If you request a complete redemption, any dividends declared
will be included with the redemption proceeds.
Keep the following addresses handy for purchases, exchanges, or redemptions.
o Regular U.S. Mail Address
Send completed Account Application with your check, bank draft, or money order
to:
E.I.I. Realty Securities Fund
c/o PFPC
P.O. Box 8910
Wilmington, DE 19899-8910
o Overnight Mail Address
Use the following address ONLY for overnight packages:
E.I.I. Realty Securities Fund
c/o PFPC
400 Bellevue Parkway, Suite 108
Wilmington, DE 19809-3710
Wiring Instructions. The Transfer Agent does not charge a wire fee, but your
originating bank may charge a fee. Always call the Transfer Agent at (888)
323-8912 BEFORE wiring funds to obtain a control number.
PNC Bank, N.A.
Philadelphia, PA
ABA # 0310-0005-3
Credit DDA # 86-0195-6004
For credit to E.I.I. Realty Securities Fund
Shareholder Name ___________________
Account No. _______________________
o ACH After your account is set up, your purchase amount can be transferred
by ACH. Only domestic members banks may be used. It takes about 15 days to
set up the ACH feature. Currently, there is no fee for ACH transfers.
- 17 -
<PAGE>
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DIVIDENDS AND DISTRIBUTIONS
As a shareholder, you are entitled to your share of net income and capital gains
on the Fund's investments. The Fund passes its earnings along to investors in
the form of dividends. Dividend distributions are the net dividends or interest
earned on investments after expenses. As with any investment, you should
consider the tax consequences of an investment in the Fund.
Ordinarily, the Fund declares and pays dividends from its net investment income
quarterly. The Fund pays any net capital gains realized as capital gain
distributions at least annually. Both dividend and capital gain distributions
can be received in one of the following ways:
Reinvestment Option: You can have distributions automatically reinvested in
additional shares of the Fund. If you do not indicate another choice on your
Account Application, this option will be assigned to you automatically.
Cash Option: You can have distributions paid to you in cash. A check will be
mailed to you no later than 7 days after the pay date.
Income Earned Option: Dividends can be reinvested automatically in the Fund and
your capital gains can be paid in cash, or capital gains can be reinvested and
dividends paid in cash.
Directed Bank Account Option: In most cases, you can have distributions
automatically transferred to your bank checking or savings account. Under normal
circumstances, a distribution will be transferred within 7 days of the payment
date. The bank account must have a registration identical to that of your Fund
account.
Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
the Transfer Agent at (888) 323- 8912.
You should check the Fund's distribution schedule before you invest. If you buy
shares of the Fund shortly before it makes a distribution, some of your
investment may come back to you as a taxable distribution.
IMPORTANT INFORMATION ABOUT TAXES
o The Fund intends to qualify as a regulated investment company, in which
case it will pay no federal income tax on the earnings or capital gains it
distributes to its shareholders.
o Ordinary dividends from the Fund are taxable as ordinary income; dividends
from the Fund's long-term capital gains are taxable as capital gain.
- 18 -
<PAGE>
o Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. It is likely that
they will also be subject to state and local taxes.
o Dividends from interest on certain U.S. Government obligations held by the
Fund may be exempt from some state and local taxes. You will receive a
statement at the end of each year showing which dividends are exempt. The
Fund, however, expects dividends of this kind to be minimal.
o Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
o Generally, any gain or loss from a sale (redemption) of shares of the Fund
must be recognized for tax purposes. This gain or loss generally will be
long-term capital gain or loss if you held your shares of the Fund for more
than one year. If you are an individual, your long-term capital gain will
be taxed at the lowest rate applicable to capital gains if you held your
shares for more than 18 months at the time of the sale or redemption.
o Tax statements will be mailed from the Fund every January showing the
amounts and tax status of distributions made to you.
o Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
o You should review the more detailed discussion of federal income tax
considerations in the SAI.
THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION. YOU
SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN INVESTMENT
IN THE FUND.
Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. Share certificates are not issued.
Twice a year, you will receive the financial reports of the Fund. By January 31
of each year, you will be mailed an IRS form reporting distributions for the
previous year, which also will be filed with the IRS.
Additional Information
Some additional information you should know about the Fund appears in the SAI.
If you would like to receive additional copies of any materials, please call the
Fund at (888) 323- 8912.
- 19 -
<PAGE>
Shareholder Communications
You will receive unaudited Semi-Annual Reports and audited Annual Reports on a
regular basis from the Fund. In addition, you also will receive updated
prospectuses or supplements to this prospectus. The securities described in this
prospectus and the SAI are not offered in any state in which they may not be
sold lawfully. No sales representative, dealer, or other person is authorized to
give any information or make any representation other than those contained in
this prospectus and the SAI.
OTHER INFORMATION ABOUT THE FUND:
SHARE CLASSES
The Fund currently offer only the class of shares described in this Prospectus.
At some future date, the fund may offer additional classes of shares through a
separate prospectus.
CODE OF ETHICS
E.I.I. and the Fund have each adopted a Code of Ethics to which all investment
personnel and all other access persons to the Fund must conform. Investment
personnel must refrain from certain trading practices and are required to report
certain personal investment activities. Violations of the Code of Ethics can
result in penalties, suspension, or termination of employment.
DIVERSIFICATION REQUIREMENTS
The SEC and IRS have certain requirements with which all mutual funds must
comply. The Fund monitors these limitations on an ongoing basis. These
diversification provisions and requirements are discussed further in the SAI.
o SEC Requirement: The Fund is not "diversified" according to certain federal
securities provisions regarding diversification of its assets. As a
non-diversified investment company, the Fund may devote a larger portion of
its assets to the securities of a single issuer than if it were
diversified.
o IRS Requirement: The Fund intends to comply with certain federal tax
requirements regarding the diversification of its assets. Generally, under
those requirements, the Fund must invest at least 50% of its total assets
so that no more than 5% of its total assets are invested in the securities
of any one issuer (excluding U.S. Government securities).
PORTFOLIO TURNOVER
The Fund anticipates that its portfolio turnover rate for any one year will not
exceed 60%, which is lower than the turnover rate for many comparable real
estate securities funds. A lower portfolio turnover rate will result in a lower
rate of net realized capital gains to the
- 20 -
<PAGE>
Fund and will decrease the portion of the Fund's distributions constituting
taxable capital gains.
INVESTMENT PERFORMANCE
The performance of the Fund may be advertised by comparing it to other mutual
funds with similar objectives and policies. Performance information also may
appear in various publica- tions. Performance information is contained in the
annual and semi-annual reports. You may obtain a copy of the annual and
semi-annual reports free of charge by calling (888) 323- 8912.
YEAR 2000 ISSUES
Like all mutual funds, the Fund could be adversely affected if the computer
systems used by its service providers, including shareholder servicing agents,
are unable to recognize dates after 1999. The risk of such a computer failure
may be greater as it relates to investments in foreign countries. The Fund's
service providers have been actively updating their computer systems to be able
to process Year 2000 data. However, there can be no assurance that the steps
taken will be adequate to avoid a temporary service disruption or other adverse
impact on the Funds. In addition, an issuer's failure to process accurately Year
2000 data may cause that issuer's securities to decline in value or delay the
payment of interest to the Fund.
OTHER SECURITIES AND INVESTMENT PRACTICES
The following are some of the types of securities the Fund may purchase under
normal market conditions. The majority of the Fund's portfolio is made up of
equity securities. For cash-management or temporary defensive purposes in
response to market conditions, the Fund may hold all of its assets in cash or
short-term money market instruments. This may reduce the benefit from any
upswing in the market and may cause the Fund to fail to meet its investment
objective(s). For more information and a more complete description, see the SAI.
ASSET-BACKED SECURITIES--a form of complex security, similar to mortgage-related
securities, but with a less effective security interest in the related
collateral.
CONVERTIBLE SECURITIES--including bonds, debentures, notes, preferred stocks, or
other securities that may be converted into or exchanged for a prescribed amount
of common stock of the same or a different issuer within a particular period of
time at a specified price or formula.
CORPORATE DEBT SECURITIES-- including corporate bonds, debentures, notes, and
other similar instruments and convertible securities, and some forms of
preferred or preferenced stock.
MONEY MARKET INSTRUMENTS--The Fund may invest in the following types of money
market instruments:
- 21 -
<PAGE>
o U.S. Government Securities. Securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. Some are direct
obligations of the U.S. Treasury; others are obligations only of the U.S.
agency.
o Bank Obligations. Certificates of deposit, time deposits, bankers'
acceptances and other short-term obligations issued by domestic banks,
foreign subsidiaries or foreign branches of domestic banks, domestic and
foreign branches of foreign banks, domestic savings and loan associations,
and other banking institutions.
o Commercial Paper. Short-term, unsecured promissory notes issued to finance
short- term credit needs.
MORTGAGE-RELATED SECURITIES--securities backed by a mortgage or a pool of
mortgages. These securities are derivative instruments, because their value is
linked to or derived from another security, instrument or index.
o Commercial Mortgage-Related Securities. Generally multi-class debt or
pass-through certificates secured by mortgage loans on commercial
properties.
o Residential Mortgage-Related Securities. Securities representing
participation interests in pools of one- to four-family residential
mortgage loans issued or guaranteed by governmental agencies or
instrumentalities or issued by private entities.
o Collateral Mortgage Obligations and Multi-Class Pass-Through Securities.
Multiclass bonds backed by pools of mortgage pass-through certificates or
mortgage loans.
ZERO COUPON SECURITIES--securities purchased as a discount from face value. The
face value of the security is received at its maturity, with no periodic
interest payments before maturity. These securities may be subject to greater
risks of price fluctuation than securities that periodically pay interest.
ILLIQUID SECURITIES--securities that are not readily marketable. The Fund will
not invest more than 10% of its net assets in illiquid securities, not including
restricted securities sold pursuant to Rule 144A, as described below.
RESTRICTED SECURITIES--unregistered securities that are subject to restrictions
on resale, sometimes referred to as private placements. Although securities
which may be resold only to "qualified institutional buyers" in accordance with
the provisions of Rule 144A under the 1933 Act are technically considered
"restricted securities," the Fund may purchase Rule 144A securities without
regard to the limitation on investments in illiquid securities described above,
provided that a determination is made that such securities have a readily
available trading market.
INVESTMENT COMPANIES--securities issued by other investment companies. Under the
Investment Company Act, the Fund's investment in such securities, subject to
certain exceptions, currently is limited to (i) 3% of the total voting stock of
any one investment
- 22 -
<PAGE>
company, (ii) 5% of the Fund's total assets with respect to any one investment
company, (iii) 10% of the Fund's total assets in the aggregate, and (iv) 100% of
the Fund's total assets in another investment company with a similar investment
objective.
INVESTMENT TECHNIQUES
FORWARD COMMITMENTS--delivery and payment for securities takes place a number of
days after the date of the commitment to purchase or sell the securities at a
predetermined price and/or yield. At no time will the Fund have more than 15% of
its assets committed to purchase securities on a forward commitment basis.
LENDING PORTFOLIO SECURITIES--generating interest income by lending securities
from its portfolio to brokers, dealers, and other financial institutions needing
to borrow securities to complete certain transactions. Loans of portfolio
securities may not exceed 331/3% of the value of the Fund's total assets.
LEVERAGE--exaggerates the effect on net asset value of any increase or decrease
in the market value of the Fund's portfolio. The Fund may borrow on a short term
basis in order to meet redemptions. Money borrowed for such purposes is limited
to 331/3% of the value of the Fund's total assets. Typically, the Fund borrows
by entering into reverse repurchase agreements with banks, brokers, or dealers.
USE OF COMPLEX SECURITIES--investing for hedging purposes in derivative
securities, such as futures and options. Complex Securities can be volatile and
involve various types and degrees of risk, depending upon the characteristics of
the particular security and the portfolio as a whole.
These instruments and investment techniques and certain related risks are
described more specifically under "Other Securities and Investment Practices" in
the Statement of Additional Information.
FINANCIAL HIGHLIGHTS
This financial highlights table is intended to help you understand the Fund's
financial performance since it inception on June 11, 1998. Certain information
reflects financial results for a single Institutional share of the Fund. The
total returns in the table represents the rate that an investor would have
earned (or lost) on an investment in the Fund assuming reinvestment of all
dividends and distributions. This financial information has been audited by the
Fund's independent auditors, Ernst & Young LLP. A more complete statement is
available in the Fund's annual report which is available upon request.
- 23 -
<PAGE>
For a capital share outstanding throughout the period:
- --------------------------------------------------------------------------------
July 1, 1998 to June 12, 1998 to
June 30, 1999 June 30, 1998
------------- -------------
- --------------------------------------------------------------------------------
Net asset value, beginning of period $10.00
- --------------------------------------------------------------------------------
Income (loss) from investment operations:
- --------------------------------------------------------------------------------
Net investment income 0.05
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 0.21
- --------------------------------------------------------------------------------
Total from investment operations 0.26
- --------------------------------------------------------------------------------
Less distributions
- --------------------------------------------------------------------------------
Dividends from net investment income 0.00
- --------------------------------------------------------------------------------
Distributions from net capital gains 0.00
- --------------------------------------------------------------------------------
Total distributions: 0.00
- --------------------------------------------------------------------------------
Net asset value, end of period $10.26
- --------------------------------------------------------------------------------
Total return 2.60%#
- --------------------------------------------------------------------------------
Net assets, end of period 513,856
- --------------------------------------------------------------------------------
Ratios/Supplemental Data:
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets A* 1.00 A*
- --------------------------------------------------------------------------------
Ratio of net investment income to aver- A* 10.50% A*
age net assets
- --------------------------------------------------------------------------------
Portfolio turnover rate 22.23%
- --------------------------------------------------------------------------------
# Not annualized.
* Annualized
A Had certain waivers and reimbursements not been in effect, the ratio of
expenses to average net assets would have been 37.75% and the ratio of net
investment income to average net assets would have been (26.25)%.
- 24 -
<PAGE>
INVESTMENT ADVISER OFFICERS & TRUSTEES
- ------------------ -------------------
E.I.I. Realty Securities, Inc.
667 Madison Avenue Richard J. Adler, Chairman,
16th Floor Chief Executive Officer & Trustee
New York, NY 10021 David P. O'Connor,
President, Treasurer & Trustee
Cydney C. Donnell, Vice President
TRANSFER AGENT Peter J. Gavey, Secretary
PFPC, Inc. Warren K. Greene, Independent Trustee
Bellevue Corporate Center Richard W. Hutson, Independent Trustee
400 Bellevue Parkway Samuel R. Karetsky, Independent Trustee
Wilmington, DE 19809-3710 Joseph Gyourko, Independent Trustee
CUSTODIAN
PNC Bank, N.A.
Airport Business Center
200 Stevens Drive
Lester, PA 19113
Statement of Additional Information. The Statement of Additional Information
("SAI") provides a more complete discussion about the Fund and is incorporated
by reference into this Prospectus, which means that it is considered a part of
this Prospectus.
Annual and Semi-Annual Reports. The annual and semi-annual reports to
shareholders contain additional information about the Fund's investments,
including a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
To Review or Obtain This Information. The SAI and annual and semi-annual reports
are available without charge upon your request by calling the E.I.I. Realty
Securities Fund toll-free at (888) 323-8912 or by calling or writing a
broker-dealer or other financial intermediary that sells the Fund. This
information may be reviewed at the Public Reference Room of the Securities and
Exchange Commission or by visiting the SEC's World Wide Web site at
http://www.sec.gov. In addition, this information may be obtained for a fee by
writing or calling the Public Reference Room of the Securities and Exchange
commission, Washington, D.C. 20549-6009, telephone (800) SEC-0330
E.I.I. REALTY
SECURITIES FUND
File No.: 811-08649
- 25 -
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
September __, 1999
E.I.I. REALTY SECURITIES FUND
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information is incorporated by reference in its entirety into the
Prospectus and should be read in conjunction with the Trust's current
Prospectus, copies of which may be obtained by writing E.I.I. Realty Securities
Fund c/o PFPC Inc., P.O. Box 8910, Wilmington, DE 19899-8910 or calling
toll-free (888) 323-8912.
This Statement of Additional Information relates to the E.I.I. Realty Securities
Fund Prospectus which is dated September __ 1999.
TABLE OF CONTENTS Page
- ----------------- ----
INVESTMENT POLICIES AND RISKS 2
INVESTMENT RESTRICTIONS 3
MANAGEMENT 4
INVESTMENT ADVISER AND INVESTMENT ADVISORY AGREEMENTS 5
DISTRIBUTION PLAN 6
SHAREHOLDER SERVICING PLAN 7
ADMINISTRATIVE SERVICES AGREEMENT 7
PORTFOLIO TRANSACTIONS AND BROKERAGE 8
ALLOCATION OF INVESTMENTS 8
COMPUTATION OF NET ASSET VALUE 9
PURCHASE AND REDEMPTION OF SHARES 9
TAX MATTERS 9
PERFORMANCE CALCULATION 14
GENERAL INFORMATION 15
REPORTS 16
<PAGE>
E.I.I. Realty Securities Fund (the "Fund") is a non-diversified series of the
E.I.I. Realty Securities Trust, a Delaware business trust (the "Trust"), which
is an open-end managed investment company commonly known as a mutual fund. The
Fund's investment objective is to provide the diversification and total return
potential of investments in real estate. The Fund seeks to achieve this
objective by buying the shares of companies whose business it is to own,
operate, develop, and manage real estate. Much of the information contained in
this Statement of Additional Information expands on subjects discussed in the
Prospectus. Capitalized terms not defined herein are used as defined in the
Prospectus. No investment in shares of the Fund should be made without first
reading the Fund's Prospectus.
INVESTMENT POLICIES AND RISKS
The following descriptions supplement the investment policies of the Fund set
forth in the Prospectus. The Fund's investments in the following securities and
other financial instruments are subject to the investment policies and
limitations described in the Prospectus and this Statement of Additional
Information.
1. Borrowing
The Fund may, from time to time, borrow money to the maximum extent permitted by
the Investment Company Act of 1940, as amended (the "Investment Company Act"),
from banks at prevailing interest rates for temporary or emergency purposes and
investing in additional securities. The Fund's borrowings are limited so that
immediately after such borrowings the value of assets (including borrowings)
less liabilities (not including borrowings) is at least three times the amount
of the borrowings. Should the Fund, for any reason, have borrowings that do not
meet the above test, within three business days, then the Fund must reduce such
borrowings so as to meet the necessary test. Under such a circumstance, the Fund
may have to liquidate portfolio securities at a time when it is disadvantageous
to do so. Gains made with additional funds borrowed generally will cause the net
asset value of the Fund's shares to rise faster than could be the case without
borrowings. Conversely, if investment results fail to cover the cost of
borrowings, the net asset value of the Fund could decrease faster than if there
had been no borrowings.
2. Repurchase Agreements
The Fund may enter into repurchase agreements subject to resale to a bank or
dealer at an agreed upon price which reflects a net interest gain for the Fund.
The Fund will receive interest from the institution until the time when the
repurchase is to occur.
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The Fund will always receive as collateral U.S. Government or short-term money
market securities whose market value is equal to at least 100% of the amount
invested by the Fund, and the Fund will make payment for such securities only
upon the physical delivery or evidence by book entry transfer to the account of
its custodian. If the seller institution defaults, the Fund might incur a loss
or delay in the realization of proceeds if the value of the collateral securing
the repurchase agreement declines and it might incur disposition costs in
liquidating the collateral. The Fund will attempt to minimize such risks by
entering into such transactions only with well-capitalized financial
institutions and specifying the required value of the underlying collateral.
Unlike the fundamental investment objective of the Fund set forth above and the
investment restrictions set forth below which may not be changed without
shareholder approval, the Fund has the right to modify the investment policies
described above without shareholder approval.
The Fund's Investment Strategies are also discussed in the Prospectus.
INVESTMENT RESTRICTIONS
The following fundamental policies and investment restrictions
have been adopted by the Fund and, except as noted, such policies and
restrictions cannot be changed without approval by the vote of a majority of the
outstanding voting shares of the Fund which, as defined by the Investment
Company Act, means the affirmative vote of the lesser of (a) 67% or more of the
shares of the Fund present at a meeting at which the holders of more than 50% of
the outstanding shares of the Fund are represented in person or by proxy or (b)
more than 50% of the outstanding shares of the Fund.
The Fund may not:
(1) issue senior securities;
(2) concentrate its investments in particular industries other
than the real estate industry. No more than 25% of the value
of a Fund's assets will be invested in any one industry other
than the real estate industry. The Fund will concentrate its
investments in the real estate industry;
(3) make loans of money or securities other than (a) through the
purchase of publicly distributed bonds, debentures, or other
corporate or governmental obligations, (b) by investing in
repurchase agreements, and (c) by lending its portfolio
securities, provided the value of such loaned securities does
not exceed 33-1/3% of its total assets;
(4) borrow money in excess of 33-1/3% of the value of a Fund's
total assets from banks;
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(5) buy or sell commodities or commodity contracts, except the
Fund may purchase or sell futures or options on futures; and
(6) underwrite securities.
The following restrictions are non-fundamental and may be
changed by the Fund's Board of Trustees. Pursuant to such restrictions, the Fund
will not:
(1) make short sales of securities, other than short sales
"against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio
transactions, provided that this restriction will not be
applied to limit the use of options, futures contracts, and
related options, in the manner otherwise permitted by the
investment restrictions, policies, and investment program of
the Fund;
(2) purchase the securities of any other investment company, if
the Fund, immediately after such purchase or acquisition, owns
in the aggregate, (i) more than 3% of the total outstanding
voting stock of such investment company, (ii) securities
issued by such investment company having an aggregate value in
excess of 5% of the value of the total assets of the Fund,
(iii) securities issued by such investment company and all
other investment companies having an aggregate value in excess
of 10% of the value of the total assets of the Fund, or (iv)
unless the 100% of the total assets of the fund are invested
in the securities of another investment company with the same
investment objective;
(3) invest more than 10% of its net assets in illiquid securities.
Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days
and in the usual course of business without taking a
materially reduced price. Such securities include, but are not
limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be
resold under Rule 144A or securities offered pursuant to
Section 4(2) of the Securities Act of 1933, as amended, shall
not be deemed illiquid solely by reason of being unregistered.
The Investment Adviser shall determine whether a particular
security is deemed to be liquid based on the trading markets
for the specific security and other factors;
(4) invest more than 20% of its total assets in securities of
foreign issuers and ADRs are not considered to be foreign
securities for this purpose.
MANAGEMENT
The overall management of the business and affairs of the Fund
is vested with the Board of Trustees. The Board of Trustees approves all
significant agreements between the Trust or the Fund and persons or companies
furnishing services to the Fund, including the Fund's agreement with an
investment adviser, custodian, and transfer agent. The day-to-
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day operations of the Fund are delegated to the Fund's officers subject always
to the investment objectives and policies of each Fund and to general
supervision by the Trust's Board of Trustees.
The Trustees and officers and their principal occupations are
noted below. Unless otherwise indicated the address of each Trustee and
executive officer is 667 Madison Avenue, New York, New York 10021.
Position(s) held Principal Occupation
Name, Address, and Age with the Fund During Past 5 Years
- ---------------------- ------------- -------------------
Richard J. Adler, 52 Chairman of the Managing Director, E.I.I.
667 Madison Avenue Board of Trustees, Realty Securities, Inc.,
New York, NY 10021 Chief Executive June, 1993 to present;
Officer Managing Director,
European Investors
Incorporated and Vice
President, European
Investors Corporate
Finance, Inc., April,
1983 to present.
David P. O'Connor, 35 Trustee, President, Managing Director, E.I.I.
667 Madison Avenue Treasurer Realty Securities, Inc.
New York, NY 10021 and Vice President,
European Investors
Incorporated, February,
1994 to present;
Investment Executive,
Kidder, Peabody, and Co.,
Inc., 1992 to January,
1994
Warren K. Greene, 63 Trustee Senior Vice President,
One Fawcett Place, Suite TrendLogic Associates,
220 Inc. January, 1995 to
Greenwich, CT 06830 present; President, Baker
Weeks & Co., October,
1993 to June, 1994.
Richard W. Hutson, 60 Trustee Retired/Part-time
615 Innsbruck Court consultant to Hewitt
Libertyville, IL 60048 Associates; November,
1996 to present; Senior
Principal, Hewitt
Associates, December,
1964 to October, 1996.
Samuel R. Karetsky, 54 Trustee Managing Member, Samuel
180 East 79th Street R. Karetsky LLC, March,
New York, NY 10021 1997 to present;
Managing Director, Morgan
Stanley & Co., June, 1995
to March, 1997; Managing
Director, OFFITBANK,
January, 1993 to June,
1995.
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Joseph Gyourko, 43 Trustee Associate Professor,
256 South 37th Street 1994-96 and Professor,
The Zell/Lurie Real Estate 1996-, The Wharton
Center School, University of
The Wharton School Pennsylvania; Director,
Philadelphia, PA 19104- The Zell/Lurie Real
6330 Estate Center at The
Wharton School; Non-
resident Fellow, the
Brookings Institution;
Fellow, The Urban Land
Institute.
Cydney C. Donnell, 40 Vice President Managing Director, E.I.I.
667 Madison Avenue Realty Securities, Inc.,
New York, NY 10021 June, 1993 to present;
Vice President, European
Investors Incorporated,
and Vice President, EII
Realty Corp., September,
1986 to present.
Peter J. Gavey, 32 Secretary Director of Business
667 Madison Avenue Development, E.I.I.
New York, NY 10021 Realty Securities, Inc.
February, 1998 to
present; Director Rog-
ers, Casey Alternative
Investments, May, 1993 to
February, 1998.
The Fund may indemnify any person who was or is a Trustee,
officer, or employee of the Fund to the maximum extent permitted by the Delaware
business trust law; provided, however, that any such indemnification (unless
ordered by a court) shall be made by the Fund only as authorized in the specific
case upon a determination that indemnification of such persons is proper in the
circumstances. Such determination shall be made (i) by the Board of Trustees, by
a majority vote of a quorum which consists of Trustees who are neither
"interested persons" of the Trust, as defined in Section 2(a)(19) of the
Investment Company Act, nor parties to the proceeding, or (ii) if the required
quorum is not obtained or if a quorum of such Trustees so directs, by
independent legal counsel in a written opinion. No indemnification will be
provided by the Fund to any Trustee or officer of the Fund for any liability to
the Fund or it shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of duty.
As of June 5, 1998, the Trustees and officers as a group did
not own beneficially any of the Fund's outstanding shares. Each disinterested
Trustee will receive $4,000 per annum and $1,500 per meeting, plus expenses of
attendance at Trustees meetings. "Interested" Trustees do not receive Trustees'
fees.
<PAGE>
INVESTMENT ADVISER AND INVESTMENT ADVISORY AGREEMENT
E.I.I. Realty Securities, Inc. (the "Investment Adviser" or
"E.I.I."), 667 Madison Avenue, New York, New York 10021, acts as the Investment
Adviser to the Fund under an investment advisory agreement (the "Agreement").
The Agreement provides that the Investment Adviser identify and analyze possible
investments for the Fund, determine the amount and timing of such investments,
and the form of investment. The Investment Adviser has the responsibility of
monitoring and reviewing the Fund's portfolio, and, on a regular basis, to
recommend the ultimate disposition of such investments. It is the Investment
Adviser's responsibility to cause the purchase and sale of securities in the
Fund's portfolio, subject at all times to the policies set forth by the Trust's
Board of Trustees. In addition, the Investment Adviser provides certain
administrative and managerial services to the Fund.
The Investment Adviser receives a fee from the Fund calculated
daily and payable monthly, for the performance of its services at an annual rate
of .75% of the average daily net assets of the Fund. The fee is accrued daily
for the purposes of determining the offering and redemption price of the Fund's
shares.
Under the terms of the Agreement, the Fund pays all of its
expenses (other than those expenses specifically assumed by the Investment
Adviser and the Fund's distributor) including the costs incurred in connection
with the maintenance of its registration under the Securities Act of 1933, as
amended, and the Investment Company Act, printing of prospectuses distributed to
shareholders, taxes or governmental fees, brokerage commissions, custodial,
transfer and shareholder servicing agents, expenses of outside counsel and
independent accountants, preparation of shareholder reports, and expenses of
Trustee and shareholder meetings.
The Agreement may be terminated without penalty on 60 days'
written notice by a vote of the majority of the Trust's Board of Trustees or by
the Investment Adviser, or by holders of a majority of the Fund's outstanding
shares. The Fund's Agreement will continue for two years from its effective date
and from year-to-year thereafter provided it is approved, at least annually, in
the manner described in the Investment Company Act. This requires that the
Agreement and any renewal thereof be approved by a vote of the majority of the
Fund's Trustees who are not parties thereto or interested persons of any such
party, cast in person at a meeting specifically called for the purpose of voting
on such approval.
PRINCIPAL UNDERWRITER
E.I.I. Realty Securities Inc., 667 Madison Avenue, 16th Floor,
New York, New York 10021 is also the Fund's principal underwriter. The following
persons who are affiliated persons of the Fund are also affiliated persons of
the underwriter: Richard J. Adler, david P. O'Connor and Cydney C. Donnell.
<PAGE>
DISTRIBUTION PLAN
The Fund has adopted a distribution plan pursuant to Rule
12b-1 of the Investment Company Act (the "Plan") with respect to the Investor
shares of the Fund. The Plan provides that the Fund's Investor shares may incur
distribution expenses related to the sale of shares of up to .75% per annum of
the average daily net assets of the Fund's Investor shares.
The Plan provides that the Fund's Investor shares may finance
activities which are primarily intended to result in the sale of the Fund's
Investor shares, including, but not limited to, advertising, printing of
prospectuses and reports for other than existing shareholders, preparation and
distribution of advertising material and sales literature, and payments to
dealers and shareholder servicing agents including any affiliates who enter into
agreements with the Fund or its distributor.
In approving the Plan in accordance with the requirements of
Rule 12b-1 under the Investment Company Act, the Trustees (including the
"disinterested" Trustees, as defined in the Investment Company Act) considered
various factors and determined that there is a reasonable likelihood that the
Plan will benefit the Fund and its shareholders. The Plan will continue in
effect from year to year if specifically approved annually (a) by the majority
of the Fund's outstanding Investor shares or by the Board of Trustees and (b) by
the vote of a majority of the disinterested Trustees. While the Plan remains in
effect, the Fund's Principal Financial Officer shall prepare and furnish to the
Board of Trustees a written report setting forth the amounts spent by the Fund
under the Plan and the purposes for which such expenditures were made. The Plan
may not be amended to increase materially the amount to be spent for
distribution without shareholder approval and all material amendments to the
Plan must be approved by the Board of Trustees and by the disinterested Trustees
cast in person at a meeting called specifically for that purpose. While the Plan
is in effect, the selection and nomination of the disinterested Trustees shall
be made by those disinterested Trustees then in office.
SHAREHOLDER SERVICING PLAN
The Fund has adopted a Shareholder Servicing Plan on behalf of
its Advisor Shares and Investor Shares. The Plan provides that the Fund may pay
financial institutions or other persons who provide certain services to the
Shares of the Fund (each, a "Service Provider") a shareholder services fee at
the annual rate of 0.25% of the average daily net assets of such Shares for
which the Service Provider provides services. Under the Plan, Service Providers
may make payments to financial institutions and other persons who provide
administrative services to their customers who may own Advisor or Investor
Shares of the Fund, which services may include, but are not limited to: (i)
establishing and maintaining accounts and records relating to shareholders; (ii)
processing dividend and distribution payments from the Fund on behalf of
shareholders; and (iii) responding to shareholder inquiries.
<PAGE>
The Plan must be approved by a majority vote of the Board of
Trustees cast in person at a meeting called for the purpose of voting on the
Plan. The Plan will continue for two years from its effective date and from
year-to-year thereafter provided it is approved at least annually by the
Trustees of the Fund.
ADMINISTRATIVE SERVICES AGREEMENT
E.I.I. will also serve as the Fund's Administrator and has
retained PFPC, Inc. as the Sub-Administrator.
Administrator supervises administration of the Fund pursuant
to an Administrative Services Agreement with the Fund. Under the Administrative
Services Agreement, the Administrator supervises the administration of all
aspects of the Fund's operations, including the Fund's receipt of services for
which the Fund is obligated to pay, provides the Fund with general office
facilities, and provides, at the Fund's expense, the services of persons
necessary to perform such supervisory, administrative, and clerical functions as
are needed to operate the Fund effectively. Those persons, as well as certain
employees and Trustees of the Fund, may be directors, officers, or employees of
(and persons providing services to the Fund may include) E.I.I. and its
affiliates. For these services and facilities, E.I.I. receives with respect to
the Fund a fee computed and paid monthly at an annual rate of 0.25% of the
average daily net assets of the Fund, out of which E.I.I., and not the Fund,
pays the Sub-Administrator.
E.I.I. may subcontract some of its administrative duties to
other service providers. E.I.I. has entered into a sub-administration contract
with PFPC Inc. under which E.I.I. pays PFPC Inc. to provide certain
administrative services to E.I.I.
The Sub-Administrator, Transfer Agent, and Custodian
PFPC Inc., a subsidiary of PNC Bank, N.A., is the Fund's sub-administrator and
transfer agent. PNC Bank, N.A. is the Fund's custodian.
Independent Auditors
Ernst & Young LLP serves as independent auditors to the Fund.
Legal Counsel
Kramer Levin Naftalis & Frankel LLP serves as legal counsel to the Fund.
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees, decisions
to buy and sell securities for the Fund are made by the Investment Adviser. The
Investment Adviser is authorized to allocate the orders placed by it on behalf
of the Fund to such unaffiliated brokers who also provide research or
statistical material or other services to the Fund or the Investment Adviser for
the Fund's use. Such allocation shall be in such amounts and proportions as the
Investment Adviser shall determine and the Investment Adviser will report on
said allocations regularly to the Board of Trustees indicating the unaffiliated
brokers to whom such allocations have been made and the basis therefor. In
addition, the Investment Adviser may consider sales of shares of the Fund and of
any other funds advised or managed by the Investment Adviser as a factor in the
selection of unaffiliated brokers to execute portfolio transactions for the
Fund, subject to the requirements of best execution. At times, the Fund also may
purchase portfolio securities directly from dealers acting as principals,
underwriters, or market makers. As these transactions are usually conducted on a
net basis, no brokerage commissions are paid by the Fund.
In selecting a broker to execute each particular transaction,
the Investment Adviser will take the following into consideration: the best net
price available; the reliability, integrity, and financial condition of the
broker; the size and difficulty in executing the order; and the value of the
expected contribution of the broker to the investment performance of the Fund on
a continuing basis. Accordingly, the cost of the brokerage commissions to the
Fund in any transaction may be greater than that available from other brokers if
the difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies and procedures as the Board
of Trustees may determine, the Investment Adviser shall not be deemed to have
acted unlawfully or to have breached any duty solely by reason of its having
caused the Fund to pay an unaffiliated broker that provides research services to
the Investment Adviser for the Fund's use an amount of commission for effecting
a portfolio investment transaction in excess of the amount of commission another
broker would have charged for effecting the transaction, if the Investment
Adviser determines in good faith that such amount of commission was reasonable
in relation to the value of the research service provided by such broker viewed
in terms of either that particular transaction of the Investment Adviser's
ongoing responsibilities with respect to the Fund.
PORTFOLIO TURNOVER
The Fund anticipates that its portfolio turnover rate for any one year will not
exceed 60%, which is lower than the turnover rate for many comparable real
estate securities funds. A lower portfolio turnover rate will result in a lower
rate of net realized capital gains to the Fund and will decrease the portion of
the Fund's distributions constituting taxable capital gains.
<PAGE>
ALLOCATION OF INVESTMENTS
The Investment Adviser has other advisory clients, some of
which have similar investment objectives to the Fund. As such, there will be
times when the Investment Adviser may recommend purchases and/or sales of the
same portfolio securities for the Fund and its other clients. In such
circumstances, it will be the policy of the Investment Adviser to allocate
purchases and sales among the Fund and its other clients in a manner which the
Investment Adviser deems equitable, taking into consideration such factors as
size of account, concentration of holdings, investment objectives, tax status,
cash availability, purchase cost, holding period, and other pertinent factors
relative to each account. Simultaneous transactions may have an adverse effect
upon the price or volume of a security purchased by the Fund.
COMPUTATION OF NET ASSET VALUE
The Fund will determine the net asset value of its shares once
daily as of the close of trading on the New York Stock Exchange (the "Exchange")
on each day that the Exchange is open. It is expected that the Exchange will be
closed on Saturdays and Sundays and on New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. The Fund may make or cause to be made a more frequent
determination of the net asset value and offering price, which determination
shall reasonably reflect any material changes in the value of securities and
other assets held by the Fund from the immediately preceding determination of
net asset value. The net asset value is determined by dividing the market value
of the Fund's investments as of the close of trading plus any cash or other
assets (including dividends receivable and accrued interest) less all
liabilities (including accrued expenses) by the number of the Fund's shares
outstanding. Securities traded on the New York Stock Exchange or the American
Stock Exchange will be valued at the last sale price, or if no sale, at the mean
between the latest bid and asked price. Securities traded in any other U.S. or
foreign market shall be valued in a manner as similar as possible to the above,
or if not so traded, on the basis of the latest available price. Securities sold
short "against the box" will be valued at market as determined above; however,
in instances where the Fund has sold securities short against a long position in
the issuer's convertible securities, for the purpose of valuation, the
securities in the short position will be valued at the "asked" price rather than
the mean of the last "bid" and "asked" prices. Where there are no readily
available quotations for securities they will be valued at a fair value as
determined by the Board of Trustees acting in good faith.
PURCHASE AND REDEMPTION OF SHARES
A complete description of the manner by a which the Fund's
shares may be purchased and redeemed appears in the Prospectus under the
headings "Purchase of Shares" and "Redemption of Shares" respectively.
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund has elected to be governed by Rule 18f-1 of the 1940 Act, under which a
fund is obligated to redeem the shares of any shareholders solely in cash up to
the lesser of 1% of the net asset value of the fund or $250,000 during any 90
day period. Pursuant to the operating agreement between Charles Schwab & Co.
Inc. ("Schwab") and the Fund, the Fund agrees that it will treat as a
"shareholder" each shareholder that holds Fund shares through the Schwab omnibus
account (the "Account"), provided that Schwab provides to the Fund, upon
request, the name or account number, number of Fund shares and other relevant
information for each such shareholder. The Fund acknowledges that treatment of
Schwab as the sole shareholder of Fund shares held in the Account for purposes
of applying the limits in Rule 18f-1 under the 1940 Act would be inconsistent
with the intent of Rule 18f-1 and the Fund's election on Form N-18F-1 and could
unfairly prejudice shareholders that hold Fund shares through the Account.
Should any shareholder's redemption exceed the limitation described in the
paragraph above, the Fund can, at its sole option, redeem the excess in cash or
in readily marketable portfolio securities. Such securities would be selected
solely by the Fund and valued as in computing net asset value. In these
circumstances, a shareholder selling such securities would probably incur a
brokerage charge and there can be no assurance that the price realized by a
shareholder upon the sale of such securities will not be less than the value
used in computing net asset value for the purpose of such redemption.
OTHER SECURITIES AND INVESTMENT PRACTICES
ASSET-BACKED SECURITIES--Asset-backed securities are a form of complex security.
The securitization techniques used for asset-backed securities are similar to
those used for mortgage-related securities. Asset-backed securities present
certain risks that are not presented by mortgage-backed securities. Primarily,
these securities may provide the Fund with a less effective security interest in
the related collateral than do mortgage-backed securities. Therefore, there is
the possibility that recoveries on the underlying collateral may not, in some
cases, be available to support payments on these securities.
CONVERTIBLE SECURITIES--Convertible securities have characteristics similar to
both fixed-income and equity securities. Convertible securities include bonds,
debentures, notes, preferred stocks, or other securities that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest
generally paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted, or exchanged.
CORPORATE DEBT SECURITIES--Corporate debt securities include corporate bonds,
debentures, notes, and other similar instruments, including convertible
securities. Debt securities may be acquired with warrants attached. Corporate
income-producing securities also may include forms of preferred or preference
stock.
<PAGE>
ILLIQUID SECURITIES--The Fund will not invest more than 10% of its net assets in
illiquid securities, not including restricted securities sold pursuant to Rule
144A, as described below.
INVESTMENT COMPANIES--The Fund may invest in securities issued by other
investment companies. Under the Investment Company Act, the Fund's investment in
such securities, subject to certain exceptions, currently is limited to (i) 3%
of the total voting stock of any one investment company, (ii) 5% of the Fund's
total assets with respect to any one investment company, (iii) 10% of the Fund's
total assets in the aggregate, and (iv) 100% of the Fund's total assets in
another investment company with a similar investment objective. Investments in
the securities of other investment companies may involve duplication of advisory
fees and certain other expenses.
MONEY MARKET INSTRUMENTS--The Fund may invest in the following types of money
market instruments:
o U.S. Government Securities. Securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities include U.S. Treasury
securities that differ in their interest rates, maturities and times of
issuance. Some obligations issued or guaranteed by U.S. Government agencies
and instrumentalities are supported by the full faith and credit of the
U.S. Treasury; others by the right of the issuer to borrow from the
Treasury; others by discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality; and others
only by the credit of the agency or instrumentality.
o Bank Obligations. The Fund may purchase certificates of deposit, time
deposits, bankers' acceptances and other short-term obligations issued by
domestic banks, foreign subsidiaries or foreign branches of domestic banks,
domestic and foreign branches of foreign banks, domestic savings and loan
associations, and other banking institutions.
o Commercial Paper. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs.
MORTGAGE-RELATED SECURITIES--Mortgage-related securities are secured, directly
or indirectly, by pools of mortgage loans, including mortgage loans made by
savings and loan institutions, mortgage bankers, commercial banks and others,
assembled as securities for sale to investors by various governmental,
government-related and private organizations. The mortgage-related securities in
which the Fund may invest include the following:
o Commercial Mortgage-Related Securities. The Fund may invest in commercial
mortgage-related securities, which generally are multi-class debt or
pass-through certificates secured by mortgage loans on commercial
properties.
o Residential Mortgage-Related Securities. The Fund may invest in
mortgage-related securities representing participation interests in pools
of one- to four-family residential
<PAGE>
mortgage loans issued or guaranteed by governmental agencies or
instrumentalities, such as the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA"), and the
Federal Home Loan Mortgage Corporation ("FHLMC"), or issued by private
entities.
o Collateral Mortgage Obligations and Multi-Class Pass-Through Securities.
Collateral- ized mortgage obligations or "CMOs" are multiclass bonds backed
by pools of mortgage pass-through certificates or mortgage loans.
RESTRICTED SECURITIES--The Fund may invest in securities that are subject to
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"). These securities are
sometimes referred to as private placements. Although securities which may be
resold only to "qualified institutional buyers" in accordance with the
provisions of Rule 144A under the 1933 Act are technically considered
"restricted securities," the Fund may purchase Rule 144A securities without
regard to the limitation on investments in illiquid securities described above,
provided that a determination is made that such securities have a readily
available trading market. E.I.I. will determine the liquidity of Rule 144A
securities under the supervision of the Fund's Board of Trustees. The liquidity
of Rule 144A securities will be monitored by E.I.I., and if as a result of
changed conditions, it is determined that a Rule 144A security is no longer
liquid, the Fund's holdings of illiquid securities will be reviewed to determine
what, if any, action is required to assure that the Fund does not exceed the
applicable percentage limitation for investments in illiquid securities.
ZERO COUPON SECURITIES--The market prices of zero coupon securities generally
are more volatile than the market prices of securities that pay interest
periodically and are likely to respond to a greater degree to changes in
interest rates than non-zero coupon securities having similar maturities and
credit qualities.
INVESTMENT TECHNIQUES
FORWARD COMMITMENTS--The Fund may purchase or sell securities on a forward
commitment, when-issued, or delayed delivery basis, which means delivery and
payment take place a number of days after the date of the commitment to purchase
or sell the securities at a predetermined price and/or yield. The Fund intends
to engage in forward commitments to increase its portfolio's financial exposure
to the types of securities in which it invests. Leveraging the portfolio in this
manner will increase the Fund's exposure to changes in interest rates and will
increase the volatility of its returns. At no time will the Fund have more than
15% of its assets committed to purchase securities on a forward commitment
basis.
LENDING PORTFOLIO SECURITIES--The Fund may lend securities from its
portfolio to brokers, dealers, and other financial institutions needing to
borrow securities to complete certain transactions. Loans of portfolio
securities may not exceed 33% of the value of the Fund's total assets.
<PAGE>
LEVERAGE--Leveraging exaggerates the effect on net asset value of any increase
or decrease in the market value of the Fund's portfolio. The Fund may borrow on
a short term basis in order to meet redemptions. Money borrowed for such
purposes is limited to 33?% of the value of the Fund's total assets. Typically,
the Fund borrows by entering into reverse repurchase agreements with banks,
brokers, or dealers.
USE OF COMPLEX SECURITIES--The Fund may invest for hedging purposes in
derivative securities, such as futures and options. Complex Securities can be
volatile and involve various types and degrees of risk, depending upon the
characteristics of the particular security and the portfolio as a whole. Such
investments permit the Fund to increase or decrease the level of risk, or change
the character of the risk, to which its portfolio is exposed in much the same
way as the Fund can increase or decrease the level of risk, or change the
character of the risk, of its portfolio by making investments in specific
securities.
TAX MATTERS
The following is only a summary of certain additional federal income tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
The Fund will elect to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, the Fund will not be subject to federal income tax
on the portion of its net investment income (i.e., taxable interest, dividends,
and other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) for a taxable year that
it distributes to shareholders, provided that it distributes at least 90% of its
investment company taxable income (i.e., net investment income and the excess of
net short-term capital gain over net long-term capital loss) for the taxable
year (the "Distribution Requirement") and satisfies certain other requirements
of the Code that are described below. Distributions by the Fund made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and will, therefore, count towards satisfaction of the
Distribution Requirement.
In addition to satisfying the Distribution Requirement, a
regulated investment company must derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities),
and other income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies.
<PAGE>
The Fund also must satisfy an asset diversification test in
order to qualify as a regulated investment company. Under this test, at the
close of each quarter of the Fund's taxable year, at least 50% of the value of
the Fund's assets must consist of cash and cash items, U.S. Government
securities, securities of other regulated investment companies, and securities
of other issuers (limited, for this purpose, in respect of any one issuer to no
more than 5% of the value of the Fund's total assets and to no more than 10% of
the outstanding voting securities of such issuer) and no more than 25% of the
value of its total assets may be invested in the securities (other than U.S.
Government securities and securities of other regulated investment companies) of
any one issuer or of two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses. Generally, an option with
respect to a security is treated as issued by the issuer of the security rather
than the issuer of the option.
If for any taxable year the Fund does not qualify as a
regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. Such distributions generally will
be eligible for the dividends-received deduction in the case of corporate
shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated
investment company to the extent that it fails to distribute in each calendar
year an amount equal to 98% of its ordinary income for such calendar year and
98% of its capital gain net income for the one-year period ended on October 31
of such calendar year (or, at the election of a regulated investment company
having a taxable year ending November 30 or December 31, for its taxable year (a
"taxable year election")). The balance of such income must be distributed during
the next calendar year. For the foregoing purposes, a regulated investment
company is treated as having distributed any amount on which it is subject to
income tax for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company
shall: (1) reduce its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year and (2)
exclude foreign currency gains and losses incurred after October 31 of any year
(or after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
<PAGE>
Fund Distributions
Distributions by the Fund from net investment income and net
short-term capital gains are taxable to shareholders as ordinary income. To the
extent attributable to qualifying dividends received by the Fund, ordinary
income dividends may qualify for the 70% dividends-received deduction generally
available to corporations (other than corporations, such as S corporations,
which are not eligible for the deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax). However, because
distributions received by the Fund from real estate investment trusts ("REITs")
are not qualifying dividends, distributions by the Fund generally will not be
eligible for the dividends-received deduction. In addition, a dividend received
by the Fund will not be treated as a qualifying dividend (1) if it has been
received with respect to any share of stock that the Fund has held for less than
46 days (91 days in the case of certain preferred stock), excluding for this
purpose under the rules of Code section 246(c)(3) and (4) any period during
which the Fund has an option to sell, is under a contractual obligation to sell,
has made and not closed a short sale of, is the grantor of a deep-in-the-money
or otherwise nonqualified option to buy, or has otherwise diminished its risk of
loss by holding other positions with respect to such (or substantially
identical) stock; (2) to the extent that the Fund is under an obligation
(pursuant to a short sale or otherwise) to make related payments with respect to
positions in substantially similar or related property; or (3) to the extent
that the stock on which the dividend is paid is treated as debt-financed under
the rules of Code section 246A. The 46-day holding period must be satisfied
during the 90-day period beginning 45 days prior to each applicable ex-dividend
date; the 91-day holding period must be satisfied during the 180-day period
beginning 90 days before each applicable ex-dividend date. Moreover, the
dividends-received deduction for a corporate shareholder may be disallowed or
reduced (1) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of the Fund or (2) by application of
Code section 246(b) which in general limits the dividends-received deduction to
70% of the shareholder's taxable income (determined without regard to the
dividends-received deduction and certain other items).
Alternative minimum tax ("AMT") is imposed in addition to, but
only to the extent that it exceeds, the regular tax and is computed at a maximum
marginal rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers
on the excess of the taxpayer's alternative minimum taxable income ("AMTI") over
an exemption amount. For purposes of the corporate AMT, the corporate
dividends-received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, a corporate shareholder generally will be required
to take the full amount of any dividend received from the Fund into account
(without a divi-dends-received deduction) in determining its adjusted current
earnings, which are used in computing an additional corporate preference item
(i.e., 75% of the excess of a corporate taxpayer's adjusted current earnings
over its AMTI (determined without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.
Distributions by the Fund from net long-term capital gains are
taxable to a shareholder as long-term capital gains regardless of the length of
time the shares on which
<PAGE>
such distributions are paid have been held by the shareholder. However,
shareholders should note that any loss realized upon the sale or redemption of
shares held for six months or less will be treated as a long-term capital loss
to the extent of any distribution of long-term capital gain to the shareholder
with respect to such shares.
If the Fund elects to retain its net capital gain, the Fund
will be taxed thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Distributions by the Fund that do not constitute ordinary
income dividends or capital gain dividends will be treated as a return of
capital to the extent of (and in reduction of) the shareholder's tax basis in
his shares; any excess will be treated as gain from the sale of his shares, as
discussed below.
Distributions by the Fund will be treated in the manner
described above regardless of whether such distributions are paid in cash or
reinvested in additional shares of the Fund. Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the Fund reflects undistributed net
investment income or recognized capital gain net income or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by
the Fund into account in the year in which the distributions are made. However,
dividends declared in October, November, or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
Backup Withholding
The Fund will be required in certain cases to withhold and
remit to the Internal Revenue Service 31% of ordinary income dividends and
capital gain dividends and the proceeds of redemption of shares paid to any
shareholder (1) who failed to provide to the Fund a correct taxpayer
identification number, (2) who is subject to backup withholding for failure to
report properly the receipt of interest or dividend income, or (3) who has
failed to
<PAGE>
certify to the Fund that it is not subject to backup withholding or that it is a
corporation or other "exempt recipient."
Redemption of Shares
A shareholder will recognize gain or loss on the redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the redemption and the shareholder's adjusted tax basis in the shares redeemed.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the
redemption. In general, any gain or loss arising from (or treated as arising
from) the redemption of shares of the Fund will be considered capital gain or
loss and will be long-term capital gain or loss if the shares were held for
longer than one year. Long-term capital gain recognized by an individual
shareholder will be taxed at the lowest rates applicable to capital gains if the
holder has held such shares for more than 18 months at the time of the
redemption. Any capital loss arising from the redemption of shares held for six
months or less will be treated as a long-term capital loss to the extent of the
amount of capital gain dividends received on such shares. For this purpose, the
special holding period rules of Code section 246(c)(3) and (4) (discussed above
in connection with the dividends-received deduction for corporations) generally
will apply in determining the holding period of shares. Capital losses in any
year are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
Taxation of Certain Mortgage REITs
The Fund may invest in REITs that hold residual interests in
real estate mortgage investment conduits ("REMICs"). Under Treasury Regulations
that have not yet been issued, but may apply retroactively, the portion of the
Fund's income from a REIT that is attributable to the REIT's residual interest
in a REMIC (referred to in the Code as an "excess inclusion") will be allocated
to shareholders of the Fund in proportion to the dividends received by them with
the same consequences as if the shareholders held their proportionate share of
the REMIC residual interest directly. In general, excess inclusion income
allocated to shareholders (1) cannot be offset by net operating losses (subject
to a limited exception for certain thrift institutions) and (2) will constitute
unrelated business taxable income to entities that are subject to tax on
unrelated business income (including a qualified pension plan, an individual
retirement account, a 401(k) plan, a Keogh plan, or other tax-exempt entity),
thereby potentially requiring such entity to file a federal income tax return
and remit tax on its excess inclusion income. In addition, if at any time during
any taxable year a "disqualified organization" (as defined in the Code) is a
record holder of a share in the Fund, then the Fund will be subject to tax, at
the highest federal income tax rate imposed on corporations, on that portion of
its excess inclusion income for the taxable year that is allocable to the
disqualified organization.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign
<PAGE>
shareholder"), depends on whether the income from the Fund is "effectively
connected" with a U.S. trade or business carried on by such shareholder.
If the income from the Fund is not effectively connected with
a U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends paid to such foreign shareholder will be subject to U.S. withholding
tax at the rate of 30% (or lower applicable treaty rate) upon the gross amount
of the dividend. Such foreign shareholder generally would be exempt from U.S.
federal income tax on gains realized on the sale of shares of the Fund, capital
gain dividends, and amounts retained by the Fund that are designated as
undistributed capital gains.
If the income from the Fund is (or is treated as) effectively
connected with a U.S. trade or business carried on by a foreign shareholder,
then ordinary income dividends, capital gain dividends, and any gains realized
upon the sale of shares of the Fund will be subject to U.S. federal income tax
at the rates applicable to U.S. citizens or domestic corporations. If at least
50% of the value of the Fund is represented by shares of REITs that are
"domestically controlled" within the meaning of section 897(h) of the Code or is
represented by shares of classes of REIT stock that (1) constitute not more than
5% of such classes and (2) are "regularly traded on an established securities
market" within the meaning of section 897(c)(3) of the Code, a foreign
shareholder should not be subject to withholding tax under the Foreign
Investment in Real Property Tax Act ("FIRPTA") with respect to gain arising from
the sale or redemption of shares. In addition, foreign shareholders should not
be subject to withholding under FIRPTA on distributions of the Fund's net
capital gain (designated as capital gain by the Fund).
In the case of foreign shareholders other than corporations,
the Fund may be required to withhold U.S. federal income tax at a rate of 31% on
distributions and the proceeds of redemptions that are otherwise exempt from
withholding tax (or taxable at a reduced treaty rate) unless such shareholders
furnish the Fund with proper notification of their foreign status.
The tax consequences to a foreign shareholder entitled to
claim the benefits of an applicable tax treaty may be different from those
described herein. Foreign shareholders are urged to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Fund, including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect.
Rules of state and local taxation of ordinary income dividends
and capital gain dividends from regulated investment companies may differ from
the rules for U.S. federal
<PAGE>
income taxation described above. Shareholders are urged to consult their tax
advisers as to the consequences of these and other state and local tax rules
affecting investment in a Fund.
PERFORMANCE CALCULATION
For purposes of quoting and comparing the performance of the
Fund to that of other mutual funds and to other relevant market indices in
advertisements or in reports to shareholders, performance may be stated in terms
of total return. Under rules promulgated by the Securities and Exchange
Commission ("SEC"), a fund's advertising performance must include total return
quotations calculated according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return n =
number of years (1, 5, or 10)
ERV = ending redeemable value of a
hypothetical $1,000 payment, made at
the beginning of the 1, 5, or 10
year period, at the end of such
period (or fractional portion
thereof.)
Under the foregoing formula, the time periods used in
advertising will be based on rolling calendar quarters, updated to the last day
of the most recent quarter prior to submission of the advertising for
publication, and will cover 1, 5, and 10 year periods of the Fund's existence or
such shorter period dating from the effectiveness of the Fund's Registration
Statement. In calculating the ending redeemable value, all dividends and
distributions by the Fund are assumed to have been reinvested at net asset value
as described in the Prospectus on the reinvestment dates during the period.
Total return, or "T" in the formula above, is computed by finding the average
annual compounded rates of return over the 1, 5, and 10 year periods (or
fractional portion thereof) that would equate the initial amount invested to the
ending redeemable value. Any recurring account charges that might in the future
be imposed by the Fund would be included at that time.
In addition to the total return quotations discussed above,
the Fund may advertise its yield based on a 30-day (or one month) period ended
on the date of the most recent balance sheet included in the Fund's
Post-Effective Amendment to its Registration Statement, computed by dividing the
net investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:
a-b
YIELD = 2[( ----- +1)6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
<PAGE>
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.
Under this formula, interest earned on debt obligations for
purposes of "a" above, is calculated by (1) computing the yield to maturity of
each obligation held by the Fund based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (pl us actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the Fund's portfolio (assuming a month of 30 days), and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the Fund's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Undeclared earned income, computed in accordance with
generally accepted accounting principles, may be subtracted from the maximum
offering price calculation required pursuant to "d" above.
30-day Yield
The "30-day yield" is an "annualized" figure--the amount you would earn if you
stayed in the Fund for a year and the Fund continued to earn the same net
interest income throughout that year. To calculate 30-day yield, the Fund's net
investment income per share for the most recent 30 days is divided by the
maximum offering price per share. To calculate "total return," the Fund starts
with the total number of shares that you can buy for $1,000 at the beginning of
the period. Then the Fund adds all dividends and distributions paid as if they
were reinvested in additional shares. This takes into account the Fund's
dividend distributions, if any. The total number of shares is multiplied by the
net asset value on the last day of the period and the result is divided by the
initial $1,000 investment to determine the percentage gain or loss. For periods
of more than one year, the cumulative total return is adjusted to get an average
annual total return. Yield is a measure of net dividend income. Average annual
total return is a hypothetical measure of past dividend income plus capital
appreciation. It is the sum of all parts of the Fund's investment return for
periods greater than one year. Total return is the sum of all parts of the
Fund's investment return. Whenever you see information on a Fund's performance,
do not consider the past performance to be an indication of the performance you
could expect by making an investment in the Fund today.
Any quotation of performance stated in terms of yield will be
given no greater prominence than the information prescribed under the SEC's
rules. In addition, all advertisements containing performance data of any kind
will include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
<PAGE>
GENERAL INFORMATION
Organization And Description Of Shares Of the Fund
The Trust was organized as a Delaware business trust under the
laws of the state of Delaware. The Trust's Certificate of Trust was filed
December 22, 1997. The Trust's Declaration of Trust, dated as of December 22,
1997, permits the Trustees to issue an unlimited number of shares of beneficial
interest with a par value of $0.01 per share in the Trust in an unlimited number
of series of shares. The Trust consists of one series, E.I.I. Realty Securities
Fund. Each share of beneficial interest has one vote and shares equally in
dividends and distributions when and if declared by the Fund and in the Fund's
net assets upon liquidation. All shares, when issued, are fully paid and
nonassessable. There are no preemptive, conversion, or exchange rights. Fund
shares do not have cumulative voting rights and, as such, holders of at least
50% of the shares voting for Trustees can elect all Trustees and the remaining
shareholders would not be able to elect any Trustees. The Board of Trustees may
classify or reclassify any unissued shares of the Trust into shares of any
series by setting or changing in any one or more respects, from time to time,
prior to the issuance of such shares, the preference, conversion, or other
rights, voting powers, restrictions, limitations as to dividends, or
qualifications of such shares. Any such classification or reclassification will
comply with the provisions of the Investment Company Act. Shareholders of each
series as created will vote as a series to change, among other things, a
fundamental policy of the Fund and to approve the Investment Advisory Agreement
and Distribution Plan.
The Trust is not required to hold annual meetings of
shareholders but will hold special meetings of shareholders when, in the
judgment of the Trustees, it is necessary or desirable to submit matters for a
shareholder vote. Shareholders have, under certain circumstances, the right to
communicate with other shareholders in connection with requesting a meeting of
shareholders for the purpose of removing one or more Trustees. Shareholders also
have, in certain circumstances, the right to remove one or more Trustees without
a meeting.
REPORTS
Shareholders receive reports at least semi-annually showing
the Fund's holdings and other information. In addition, shareholders receive
annual financial statements that have been audited by the Fund's independent
auditors.
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. Exhibits
(a)(1) Corrected Certificate of Trust as of December 22, 1997. (2)
(a)(2) Trust Instrument.(1)
(b) By-Laws.(2)
(c) None.
(d) Investment Advisory Agreement between Registrant and E.I.I.
Realty Securities, Inc.(3)
(e) None.
(f) None.
(g) Custodian Services Agreement between PNC Bank, National
Association and Registrant.(3)
(h)(1) Administration Agreement between Registrant and E.I.I. Realty
Securities, Inc.(3)
(h)(2) Sub-Administration Agreement and Accounting Services Agreement
between European Investors Incorporated, the Registrant and
PFPC INC.(3)
(h)(3) Transfer Agency Services Agreement between PFPC INC. and
Registrant.(3)
(h)(4) Shareholder Servicing Plan, with Form of Shareholder Servicing
Agreement, for the Investor Shares and Adviser Shares of the
Registrant.(3)
(i) Opinion of Kramer Levin Naftalis & Frankel LLP.(3)
(j)(1) Consent of Kramer Levin Naftalis & Frankel LLP, Counsel for
the Registrant.(4)
(j)(2) Consent of Ernst & Young LLP, independent auditors for the
Registrant.(4)
(k) Not Applicable.
(l) Investment letter re: initial $100,000 capital.(3)
(m) Distribution Plan pursuant to Rule 12b-1, with Form of
Shareholder Servicing Agreement and Form of Selected Dealer
Agreement, for the Investor Shares of Registrant.(3)
<PAGE>
(n) Financial Data Schedule.(4)
(o) Rule 18f-3 Multiple Class Plan.(3)
Powers of Attorney of Warren K. Greene, Richard W. Hutson, and
Samuel R. Karetsky.(2)
- ------------------------------
(1) Filed as an Exhibit to Registrant's Registration Statement on Form
N-1A on February 10, 1998, accession number 0000922423- 98-000122.
(2) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A on May 6, 1998, accession number
0000922423-98-000453.
(3) Filed as an Exhibit to Registrant's Registration Statement on Form
N-1A on June 5, 1998, accession number 0000922423-98- 000585.
(4) Filed herewith.
ITEM 24. Persons Controlled By or Under Common Control with Registrant
None.
ITEM 25. Indemnification
Section 10.02 of the Registrant's Trust Instrument provides as
follows:
"(a) Subject to the exceptions and limitations contained in Subsection
10.02(b):
(i) every person who is, or has been, a Trustee or officer of
the Trust (hereinafter referred to as a "Covered Person") shall be
indemnified by the Trust to the fullest extent permitted by law against
liability and against all expenses reasonably incurred or paid by him
in connection with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of his being or
having been a Trustee or officer and against amounts paid or incurred
by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened while in
office or thereafter, and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments, amounts
paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office or (B) not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust; or
- 6 -
<PAGE>
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office, (A) by the court or other
body approving the settlement; (B) by at least a majority of those
Trustees who are neither Interested Persons of the Trust nor are
parties to the matter based upon a review of readily available facts
(as opposed to a full trial-type inquiry); or (C) by written opinion of
independent legal counsel based upon a review of readily available
facts (as opposed to a full trial-type inquiry).
(c) The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may
now or hereafter be entitled, shall continue as to a person who has
ceased to be a Covered Person and shall inure to the benefit of the
heirs, executors and administrators of such a person. Nothing contained
herein shall affect any rights to indemnification to which Trust
personnel, other than Covered Persons, and other persons may be
entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character
described in Subsection (a) of this Section 10.02 may be paid by the
Trust or Series from time to time prior to final disposition thereof
upon receipt of an undertaking by or on behalf of such Covered Person
that such amount will be paid over by him to the Trust or Series if it
is ultimately determined that he is not entitled to indemnification
under this Section 10.02; provided, however, that either (i) such
Covered Person shall have provided appropriate security for such
undertaking, (ii) the Trust is insured against losses arising out of
any such advance payments or (iii) either a majority of the Trustees
who are neither Interested Persons of the Trust nor parties to the
matter, or independent legal counsel in a written opinion, shall have
determined, based upon a review of readily available facts (as opposed
to a trial-type inquiry or full investigation), that there is reason to
believe that such Covered Person will be found entitled to
indemnification under this Section 10.02."
ITEM 26. Business and Other Connections of Investment Adviser
Registrant is fulfilling the requirement of this Item 28 to provide a
list of the officers and directors of E.I.I. Realty Securities, Inc. ("E.I.I."),
the investment adviser of the Registrant, together with information as to any
other business, profession, vocation or employment of a substantial nature
engaged in by E.I.I. or those of its officers and directors during the past two
years, by incorporating by reference the information contained in the Form ADV
filed with the SEC pursuant to the Investment Advisers Act of 1940 by E.I.I.
(SEC File No. 801-44099).
ITEM 27. Principal Underwriters
(a) None.
(b) The following information is furnished with respect to the
officers and partners of E.I.I. Realty Securities, Inc., the Registrant's
principal underwriter. The business address for all persons listed below is 667
Madison Avenue, 16th Floor, New York, NY 10021.
- 7 -
<PAGE>
Name and Principal Positions and Offices with Positions and Offices
Business Address Principal Underwriter with Registrant
- ---------------- --------------------- ---------------------
Richard J. Adler Managing Director Chairman of the Board
David P. O'Connor Managing Director Trustee, President and
Treasurer
Cydney C. Donnell Managing Director Vice President
(c) Not Applicable. The Registrant's principal underwriter is
an affiliated person of the Registrant.
ITEM 28. Location of Accounts and Records
As required by Section 31(a) of the Investment Company Act of
1940, the accounts, books or other documents relating to the E.I.I. Realty
Securities Fund's budget and accruals will be kept by E.I.I. Realty Securities,
Inc., 667 Madison Avenue, 16th Floor, New York, NY 10021. The accounts, books or
other documents of the Fund relating to shareholder accounts and records and
dividend disbursements will also be kept by E.I.I. Realty Securities, Inc. at
the above address.
ITEM 29. Management Services
There are no management-related service contracts not
discussed in Parts A and B.
ITEM 30. Undertakings
(1) Registrant undertakes to call a meeting of shareholders
for the purpose of voting upon the question of removal of a director or
directors if requested to do so by the holders of at least 10% of the
Registrant's outstanding voting securities, and to assist in communications with
other shareholders as required by Section 16(c) of the 1940 Act.
- 8 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the registration statement on Form N-1A to be signed
on its behalf by the undersigned, thereto duly authorized in the City of New
York, and the State of New York on this 2nd day of August, 1999.
E.I.I. REALTY SECURITIES FUND
(Registrant)
By:/s/ Richard J. Adler
------------------------------
Richard J. Adler, Chairman
================================================================================
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed by the
following persons in the capacities indicated on the 2nd day of August, 1999.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Richard J. Adler Chairman of the Board and 8/02/99
- ----------------------- Chief Executive Officer
Richard J. Adler
/s/David P. O'Connor President and Chief Financial 8/02/99
- ----------------------- Officer
David P. O'Connor
/s/Warren K. Greene* Trustee 8/02/99
- -----------------------
Warren K. Greene
/s/Joseph Gyourko Trustee 8/02/99
- -----------------------
Joseph Gyourko
/s/Richard W. Hutson* Trustee 8/02/99
- -----------------------
Richard W. Hutson
/s/Samuel R. Karetsky* Trustee 8/02/99
- -----------------------
Samuel R. Karetsky
*By /s/ Susan J. Penry-Williams
------------------------------
Susan J. Penry-Williams
Attorney-in-Fact
- 9 -
<PAGE>
INDEX TO EXHIBITS
Exhibit Caption
- ------- -------
EX-99.B11(a) Consent of Kramer Levin Naftalis & Frankel LLP counsel
for Registrant
EX-99.B11(b) Consent of Ernst & Young LLP, independent auditors for
Registrant
EX-99.B27 Financial Data Schedule
- 10 -
[LETTERHEAD OF KRAMER LEVIN NAFTALIS & FRANKEL LLP]
July 30, 1999
E.I.I. Realty Securities Trust
667 Madison Avenue, 16th Floor
New York, New York 10021
Re: E.I.I. Realty Securities Trust
File No. 333-45959
------------------------------
Gentlemen:
We hereby consent to the reference to our firm as counsel in this
Post-Effective Amendment No. 1 to the Registration Statement No. 333-45959 on
Form N-1A.
Very truly yours,
/s/ Kramer Levin Naftalis & Frankel LLP
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial
Highlights" and "Independent Auditors" in this Post-Effective Amendment No.1 to
the Registration Statement on Form N-1A (no. 333-45959) of E.I.I. Realty
Securities Trust.
/s/ ERNST & YOUNG LLP
New York, New York
July 30, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
Fund's unaudited semi-annual report to shareholders dated March 1, 1999 and is
qualified in its entirety by that documents and references contained therein.
</LEGEND>
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 28,159,676
<INVESTMENTS-AT-VALUE> 26,669,375
<RECEIVABLES> 284,726<F1>
<ASSETS-OTHER> 162,377
<OTHER-ITEMS-ASSETS> 6,006
<TOTAL-ASSETS> 27,125,020
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 22,027
<TOTAL-LIABILITIES> 22,027
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 28,540,942 <F2>
<SHARES-COMMON-STOCK> 2,872,927 <F3>
<SHARES-COMMON-PRIOR> 40,091 <F4>
<ACCUMULATED-NII-CURRENT> 138,451
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (86,099)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,490,301)
<NET-ASSETS> 27,102,993
<DIVIDEND-INCOME> 618,449
<INTEREST-INCOME> 24,456
<OTHER-INCOME> 0
<EXPENSES-NET> (72,160)
<NET-INVESTMENT-INCOME> 570,745
<REALIZED-GAINS-CURRENT> (83,540)
<APPREC-INCREASE-CURRENT> (1,504,198)
<NET-CHANGE-FROM-OPS> (1,016,993)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (434,812)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,872,928
<NUMBER-OF-SHARES-REDEEMED> (2)
<SHARES-REINVESTED> 48,694
<NET-CHANGE-IN-ASSETS> 26,589,137
<ACCUMULATED-NII-PRIOR> 2,518
<ACCUMULATED-GAINS-PRIOR> (2,559)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 54,120
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 157,117 <F5>
<AVERAGE-NET-ASSETS> 0 <F6>
<PER-SHARE-NAV-BEGIN> 10.26
<PER-SHARE-NII> 0.18
<PER-SHARE-GAIN-APPREC> (1.14)
<PER-SHARE-DIVIDEND> (0.18)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 9.12
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 1.00
<FN>
<F1>[NSAR reports 287,262]
<F2>[NSAR reports 28,040,942}
<F3>[NSAR reports 2,971,710]
<F4> [NSAR reports 50,091]
<F5> [NSAR reports 159,117]
<F6> [NSAR reports 14,314,442]
</FN>
</TABLE>
