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STATEMENT OF ADDITIONAL INFORMATION
ING Funds Trust
P.O. Box 1239
Malvern, PA 19355-9836
General and Account Information: 1-877-INFO-ING
ING MUTUAL FUNDS MANAGEMENT CO. LLC, Investment Manager
("IMFC" or the "Manager")
ING FUNDS DISTRIBUTOR, INC., Distributor and Principal Underwriter
("IFD" or the "Distributor")
This Statement of Additional Information ("SAI") describes the shares
of 23 funds (each, a "Fund" or, collectively, the "Funds") managed by IMFC. Each
Fund is a portfolio of ING Funds Trust (the "Trust"). The Funds are:
<TABLE>
<CAPTION>
Equity Funds Bond Funds Money Market Funds
- ------------ ---------- ------------------
<S> <C> <C>
ING Large Cap Growth Fund ING Intermediate Bond Fund ING U.S. Treasury Money
ING Growth & Income Fund ING High Yield Bond Fund Market Fund
ING Mid Cap Growth Fund ING International Bond Fund ING Money Market Fund
ING Small Cap Growth Fund ING Mortgage Income Fund ING National Tax-Exempt
ING Balanced Fund ING National Tax-Exempt Bond Fund Money Market Fund
ING Global Brand Names Fund
ING International Equity Fund
ING Emerging Markets Equity Fund
ING European Equity Fund
ING Tax Efficient Equity Fund
ING Focus Fund
ING Global Information
Technology Fund
ING Global Real Estate Fund
ING Internet Fund
ING Quality of Life Fund
</TABLE>
The SAI is not a prospectus and is only authorized for distribution
when preceded or accompanied by a current prospectus for shares of the Funds.
This SAI contains additional and more detailed information than that set forth
in the Prospectus and should be read in conjunction with the Prospectus. The
Prospectus may be obtained without charge by writing or calling the Funds at the
address and information number printed above.
July 1, 1999, as supplemented on September 3, 1999
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TABLE OF CONTENTS
Page
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STATEMENT OF ADDITIONAL INFORMATION............................................1
INVESTMENT POLICIES............................................................1
U.S. TREASURY OBLIGATIONS.............................................1
U.S. GOVERNMENT SECURITIES............................................1
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES...........................1
COMMERCIAL PAPER......................................................2
CORPORATE DEBT SECURITIES.............................................2
MORTGAGE-RELATED SECURITIES...........................................2
GNMA CERTIFICATES.....................................................3
FNMA CERTIFICATES.....................................................4
FHLMC SECURITIES......................................................4
FHLMC CERTIFICATES....................................................5
NON-AGENCY MORTGAGE-BACKED SECURITIES.................................5
ADJUSTABLE RATE MORTGAGE SECURITIES...................................6
COLLATERALIZED MORTGAGE OBLIGATIONS...................................6
REAL ESTATE SECURITIES................................................7
ASSET-BACKED SECURITIES...............................................8
FOREIGN SECURITIES....................................................9
CONVERTIBLE SECURITIES................................................9
VARIABLE RATE DEMAND OBLIGATIONS AND FLOATING RATE INSTRUMENTS.......10
GUARANTEED INVESTMENT CONTRACTS......................................10
PRIVATE FUNDS........................................................11
OPTIONS ON SECURITIES................................................11
OVER-THE-COUNTER OPTIONS.............................................12
OPTIONS ON INDICES...................................................13
FOREIGN CURRENCY OPTIONS.............................................14
DOLLAR ROLL TRANSACTIONS.............................................15
FOREIGN CURRENCY FUTURES TRANSACTIONS................................15
FOREIGN GOVERNMENT OBLIGATIONS;
SECURITIES OF SUPRANATIONAL ENTITIES........................15
INTEREST RATE FUTURES CONTRACTS......................................16
SHORT SALES..........................................................16
LOANS OF PORTFOLIO SECURITIES........................................17
REPURCHASE AGREEMENTS................................................17
BORROWING............................................................18
REVERSE REPURCHASE AGREEMENTS........................................18
LOWER-RATED SECURITIES...............................................18
ILLIQUID SECURITIES..................................................19
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INVESTMENT RESTRICTIONS..............................................21
MANAGEMENT...........................................................23
Trustees and Officers.......................................23
Trustees Biographies........................................23
Officers Biographies........................................23
Investment Manager..........................................24
Sub-Advisers................................................25
Distribution of Fund Shares.................................26
Transfer Agent, Fund Accountant and Account Services........26
Rule 12b-1 Distribution Plan................................27
Shareholder Servicing Plan..................................27
DETERMINATION OF NET ASSET VALUE.....................................28
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.......................29
BROKER-DEALER COMPENSATION...........................................30
PORTFOLIO TRANSACTIONS...............................................31
Portfolio Turnover..........................................33
TAXATION.............................................................33
OTHER INFORMATION....................................................39
Capitalization..............................................39
Voting Rights...............................................40
Custodian...................................................41
Yield and Performance Information...........................41
Other Performance Comparisons...............................43
Independent Auditors........................................43
Registration Statement......................................44
APPENDIX......................................................................45
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INVESTMENT POLICIES
The Prospectus discusses the investment objectives of the
Funds and the policies to be employed to achieve those objectives. This section
contains supplemental information concerning certain types of securities and
other instruments in which the Funds may invest, the investment policies and
portfolio strategies that the Funds may utilize, and certain risks attendant to
such investments, policies and strategies.
U.S. TREASURY OBLIGATIONS (All Funds). Each Fund may invest in
U.S. Treasury obligations, whose principal and interest are backed by the full
faith and credit of the United States Government. U.S. Treasury obligations
consist of bills, notes and bonds, and separately traded interest and principal
component parts of such obligations known as STRIPS, which generally differ in
their interest rates and maturities. U.S. Treasury bills, which have original
maturities of up to one year, notes, which have maturities ranging from two
years to 10 years and bonds, which have original maturities of 10 to 30 years,
are direct obligations of the United States Government.
U.S. GOVERNMENT SECURITIES (All Funds). U.S. Government
securities are obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. U.S. Government securities include debt
securities issued or guaranteed by U.S. Government-sponsored enterprises and
federal agencies and instrumentalities. Some types of U.S. Government securities
are supported by the full faith and credit of the United States Government or
U.S. Treasury guarantees, such as mortgage-backed certificates guaranteed by the
Government National Mortgage Association ("GNMA"). Other types of U.S.
Government securities, such as obligations of the Student Loan Marketing
Association, provide recourse only to the credit of the agency or
instrumentality issuing the obligation. In the case of obligations not backed by
the full faith and credit of the United States Government, the investor must
look to the agency issuing or guaranteeing the obligation for ultimate
repayment.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES (All Funds). The
Funds may purchase securities on a when-issued or delayed-delivery basis. For
example, delivery of and payment for these securities can take place a month or
more after the date of the transaction. The securities so purchased are subject
to market fluctuation during this period and no income accrues to the Fund until
settlement takes place. To facilitate such acquisitions, the Funds will maintain
with the custodian a separate account with a segregated portfolio of liquid
assets in an amount at least equal to the value of such commitments. On the
delivery dates for such transactions, each Fund will meet obligations from
maturities or sales of the securities held in the separate account and/or from
cash flow. While the Funds normally enter into these transactions with the
intention of actually receiving or delivering the securities, they may sell
these securities before the settlement date or enter into new commitments to
extend the delivery date into the future, if the Sub-Adviser considers such
action advisable as a matter of investment strategy. Such securities have the
effect of leverage on the Funds and may contribute to volatility of a Fund's net
asset value.
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COMMERCIAL PAPER (All Funds except ING U.S. Treasury Money
Market Fund). Commercial paper includes short-term unsecured promissory notes,
variable rate demand notes and variable rate master demand notes issued by
domestic and foreign bank holding companies, corporations and financial
institutions and similar taxable instruments issued by government agencies and
instrumentalities. All commercial paper purchased by the Money Market Fund is,
at the time of investment, (i) rated in the highest rating categories by at
least two nationally recognized statistical rating organizations ("NRSROs"),
(ii) issued or guaranteed as to principal and interest by issuers having an
existing debt security rating in the highest rating categories by a least two
NRSROs, or (iii) securities which, if not rated or single rated, are, in the
opinion of the Fund's Sub-Adviser, of an investment quality comparable to rated
commercial paper in which the Fund may invest. See "Variable Rate Demand
Obligations and Floating Rate Instruments."
CORPORATE DEBT SECURITIES (All Funds except ING U.S. Treasury
Money Market Fund). Fund investment in these securities is limited to corporate
debt securities (corporate bonds, debentures, notes and similar corporate debt
instruments) which meet the rating criteria established for each Fund.
The ratings of Standard & Poor's Corporation, Moody's
Investors Service, Inc., and other NRSROs represent their respective opinions as
to the quality of the obligations they undertake to rate. Ratings, however, are
general and are not absolute standards of quality. Consequently, obligations
with the same rating, maturity and interest rate may have different market
prices. After purchase by a Fund, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Fund. Neither
event will require a sale of such security by the Fund. However, each Fund's
Sub-Adviser will consider such event in its determination of whether the Fund
should continue to hold the security. To the extent the ratings given by an
NRSRO may change as a result of changes in such organizations or their rating
systems, the Sub-Adviser will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in the
Prospectus and in this SAI.
It is possible that unregistered securities purchased by a
Fund in reliance upon Section 4(2) or Rule 144A under the Securities Act of 1933
could have the effect of increasing the level of the Fund's illiquidity to the
extent that qualified institutional buyers become, for a period, uninterested in
purchasing these securities.
MORTGAGE-RELATED SECURITIES. (All Funds except ING U.S.
Treasury Money Market Fund). To the extent permitted by the Funds' policies, the
Funds may invest in mortgage-backed securities, including those which represent
undivided ownership interests in pools of mortgages. The U.S. Government or the
issuing agency or instrumentality guarantees the payment of interest on and
principal of these securities. However, the guarantees do not extend to the
yield or value of the securities nor do the guarantees extend to the yield or
value of a Fund's shares. Consistent with the Funds' respective investment
objective and policies, mortgages backing the securities which may be purchased
by the Funds include conventional thirty-year fixed-rate mortgages, graduated
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3
payment mortgages, fifteen-year mortgages, adjustable rate mortgages and balloon
payment mortgages. A balloon payment mortgage-backed security is an amortized
mortgage security with installments of principal and interest, the last
installment of which is predominantly principal. All of these mortgages can be
used to create pass-through securities. A pass-through security is formed when
mortgages are pooled together and undivided interests in the pool or pools are
sold. The cash flow from the mortgages is passed through to the holders of the
securities in the form of periodic payments of interest, principal and
prepayments (net of a service fee). Prepayments occur when the holder of an
undivided mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, mortgage-backed securities are often
subject to more rapid prepayment of principal then their stated maturity would
indicate. The remaining expected average life of a pool of mortgage loans
underlying a mortgage-backed security is a prediction of when the mortgage loans
will be repaid and is based upon a variety of factors, such as the demographic
and geographic characteristics of the borrowers and the mortgaged properties,
the length of time that each of the mortgage loans has been outstanding, the
interest rates payable on the mortgage loans and the current interest rate
environment.
During periods of declining interest rates, prepayment of
mortgages underlying mortgage-backed securities can be expected to accelerate.
When mortgage obligations are prepaid, the Funds reinvest the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at that time.
Therefore, a Fund's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages are reinvested in securities which have lower yields
than the prepaid mortgages. Moreover, prepayments of mortgages which underlie
securities purchased at a premium generally will result in capital losses.
GNMA CERTIFICATES. (All Funds except ING U.S. Treasury Money
Market Fund). Certificates of the Government National Mortgage Association (GNMA
Certificates) are mortgage-backed securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Funds may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment. The GNMA Certificates will
represent a pro rata interest in one or more pools of the following types of
mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; (iii) fixed rate growing equity mortgage
loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on multifamily residential properties under construction;
(vi) mortgage loans on completed multifamily projects; (vii) fixed rate mortgage
loans as to which escrowed funds are used to reduce the borrower's monthly
payments during the early years of the mortgage loans ("buydown" mortgage
loans); (viii) mortgage loans that provide for adjustments in payments based on
periodic changes in interest rates or in other payment terms of the mortgage
loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will
be FHA Loans or VA Loans and, except as otherwise specified above, will be
fully-amortizing loans secured by first liens on one- to-four-family housing
units.
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Legislative changes may be proposed from time to time in relation to the
Department of Housing and Urban Development which, if adopted, could alter the
viability of investing in GNMAs.
FNMA CERTIFICATES. (All Funds except ING U.S. Treasury Money
Market Fund). FNMA is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act. FNMA provides funds to the mortgage market primarily by purchasing home
mortgage loans from local lenders, thereby replenishing their funds for
additional lending. FNMA acquires funds to purchase home mortgage loans from
many capital market investors that may not ordinarily invest in mortgage loans
directly.
Each FNMA Certificate will entitle the registered holder
thereof to receive amounts, representing such holder's pro rata interest in
scheduled principal payments and interest payments (at such FNMA Certificate's
pass-through rate, which is net of any servicing and guarantee fees on the
underlying mortgage loans), and any principal prepayments on the mortgage loans
in the pool represented by such FNMA Certificate and such holder's proportionate
interest in the full principal amount of any foreclosed or otherwise finally
liquidated mortgage loan. The full and timely payment of principal and interest
on each FNMA Certificate will be guaranteed by FNMA, which guarantee is not
backed by the full faith and credit of the U.S. Government.
Each FNMA Certificate will represent a pro rata interest in
one or more pools of FHA Loans, VA Loans or conventional mortgage loans (i.e.,
mortgage loans that are not insured or guaranteed by any governmental agency) of
the following types: (i) fixed rate level payment mortgage loans; (ii) fixed
rate growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects.
FHLMC SECURITIES (All Funds except ING U.S. Treasury Money
Market Fund). The Federal Home Loan Mortgage Corporation (FHLMC) was created in
1970 through enactment of Title III of the Emergency Home Finance Act of 1970
(FHLMC Act). Its purpose is to promote development of a nationwide secondary
market in conventional residential mortgages.
The FHLMC issues two types of mortgage pass-through
securities, mortgage participation certificates (PCs) and guaranteed mortgage
certificates (GMCs). PCs resemble GNMA Certificates in that each PC represents a
pro rata share of all interest and principal payments made and owned on the
underlying pool. The FHLMC guarantees timely monthly payment of interest on PCs
and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of
mortgages. However, these instruments pay interest semi-annually and return
principal once a year in guaranteed minimum payments. The expected average life
of these securities is approximately ten years.
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FHLMC CERTIFICATES (All Funds except ING U.S. Treasury Money
Market Fund). FHLMC is a corporate instrumentality of the United States created
pursuant to the FHLMC Act. The principal activity of FHLMC consists of the
purchase of first lien, conventional, residential mortgage loans and
participation interests in such mortgage loans and the resale of the mortgage
loans so purchased in the form of mortgage securities, primarily FHLMC
Certificates.
FHLMC guarantees to each registered holder of the FHLMC
Certificate the timely payment of interest at the rate provided for by such
FHLMC Certificate, whether or not received. FHLMC also guarantees to each
registered holder of a FHLMC Certificate ultimate collection of all principal on
the related mortgage loans, without any offset or deduction, but does not,
generally, guarantee the timely payment of scheduled principal. FHLMC may remit
the amount due on account of its guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than 30 days
following (i) foreclosure sale, (ii) payment of a claim by any mortgage insurer
or (iii) the expiration of any right of redemption, whichever occurs later, but
in any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. The obligations of FHLMC under
its guarantee are obligations solely of FHLMC and are not backed by the full
faith and credit of the U.S. Government.
FHLMC Certificates represent a pro rata interest in a group of
mortgage loans (a FHLMC Certificate group) purchased by FHLMC. The mortgage
loans underlying the FHLMC Certificates will consist of fixed rate or adjustable
rate mortgage loans with original terms to maturity of between ten and thirty
years, substantially all of which are secured by first liens on one- to
four-family residential properties or multifamily projects. Each mortgage loan
must meet the applicable standards set forth in the FHLMC Act. An FHLMC
Certificate group may include whole loans, participation interests in whole
loans and undivided interests in whole loans and participation comprising
another FHLMC Certificate group.
The market value of mortgage securities, like other
securities, will generally vary inversely with changes in market interest rates,
declining when interest rates rise and rising when interest rates decline.
However, mortgage securities, while having comparable risk of decline during
periods of rising rates, usually have less potential for capital appreciation
than other investments of comparable maturities due to the likelihood of
increased prepayments of mortgages as interest rates decline. In addition, to
the extent such mortgage securities are purchased at a premium, mortgage
foreclosures and unscheduled principal prepayments generally will result in some
loss of the holders' principal to the extent of the premium paid. On the other
hand, if such mortgage securities are purchased at a discount, an unscheduled
prepayment of principal will increase current and total returns and will
accelerate the recognition of income which when distributed to shareholders will
be taxable as ordinary income.
NON-AGENCY MORTGAGE-BACKED SECURITIES (All Funds except ING
U.S. Treasury Money Market Fund). Certain non-agency private entities also issue
mortgage-
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backed securities. Other than lacking the guarantee by the full faith and credit
of the United States, the mortgage-backed securities issued by private issuers
generally have characteristics and risks comparable to those issued by GNMA, as
discussed above. Some mortgage-backed securities issued by non-agency private
issuers may be supported by a pool of mortgages not acceptable to the agency
issuers and thus may carry greater risks. Consistent with the Funds' investment
objective, policies and quality standards, the Funds may invest in these
mortgage-backed securities issued by non-agency private issuers.
ADJUSTABLE RATE MORTGAGE SECURITIES (All Funds except ING
International Bond Fund, ING National Tax Exempt Bond Fund and ING U.S. Treasury
Money Fund). Adjustable rate mortgage securities (ARMS) are pass-through
mortgage securities collateralized by mortgages with adjustable rather than
fixed rates. Generally, ARMS have a specified maturity date and amortize
principal over their life. In periods of declining interest rates, there is a
reasonable likelihood that ARMS will experience increased rates of prepayment of
principal. However, the major difference between ARMS and fixed rate mortgage
securities is that the interest rate and the rate of amortization of principal
of ARMS can and do change in accordance with movements in a particular,
pre-specified, published interest rate index.
The amount of interest on an ARM is calculated by adding a
specified amount, the "margin," to the index, subject to limitations on the
maximum and minimum interest that can be charged to the mortgagor during the
life of the mortgage or to maximum and minimum changes to that interest rate
during a given period. Because the interest rate on ARMS generally moves in the
same direction as market interest rates, the market value of ARMS tends to be
more stable than that of long-term fixed rate securities.
There are two main categories of indices which serve as
benchmarks for periodic adjustments to coupon rates on ARMS: those based on U.S.
Treasury securities and those derived from a calculated measure such as a cost
of funds index or a moving average of mortgage rates. Commonly utilized indices
include the one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost
of Funds, the National Median Cost of Funds, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury Note
rate, closely mirror changes in market interest rate levels. Others, such as the
11th District Home Loan Bank Cost of Funds index (often related to ARMS issued
by FNMA), tend to lag changes in market rate levels and tend to be somewhat less
volatile.
COLLATERALIZED MORTGAGE OBLIGATIONS (All Funds except ING U.S.
Treasury Money Market Fund). Certain issuers of collateralized mortgage
obligations (CMOs), including certain CMOs that have elected to be treated as
Real Estate Mortgage Investment Conduits (REMICs), are not considered investment
companies pursuant to a rule adopted by the Securities and Exchange Commission
("SEC"), and the Funds may invest in the securities of such issuers without the
limitations imposed by the Investment Company Act of
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1940, as amended (the "1940 Act"), on investments by the Funds in other
investment companies. In addition, in reliance on an earlier SEC interpretation,
a Fund's investments in certain other qualifying CMOs, which cannot or do not
rely on the rule, are also not subject to the limitation of the 1940 Act on
acquiring interests in other investment companies. In order to be able to rely
on the SEC's interpretation, these CMOs must be unmanaged, fixed asset issuers,
that (a) invest primarily in mortgage-backed securities, (b) do not issue
redeemable securities, (c) operate under general exemptive orders exempting them
from all provisions of the 1940 Act and (d) are not registered or regulated
under the 1940 Act as investment companies. To the extent that a Fund selects
CMOs or REMICs that cannot rely on the rule or do not meet the above
requirements, the Fund may not invest more than 10% of its assets in all such
entities and may not acquire more than 3% of the voting securities of any single
such entity.
REAL ESTATE SECURITIES (ING Global Real Estate Fund, ING
Emerging Markets Equity Fund, ING Balanced Fund, ING Intermediate Bond Fund, ING
High Yield Bond Fund, ING International Bond Fund, ING Mortgage Income Fund, ING
National Tax-Exempt Bond Fund, and ING Quality of Life Fund). The Funds may
invest in REITs and other real estate industry operating companies ("REOCs").
For purposes of a Fund's investments, an REOC is a company that derives at least
50% of its gross revenues or net profits from either (1) the ownership,
development, construction, financing, management or sale of commercial,
industrial or residential real estate, or (2) products or services related to
the real estate industry, such as building supplies or mortgage servicing.
Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. Although the
Funds will not invest directly in real estate, the fund may invest in equity
securities of issuers primarily engaged in or related to the real estate
industry. Therefore, an investment in REITs is subject to certain risks
associated with the direct ownership of real estate and with the real estate
industry in general. These risks include, among others: possible declines in the
value of real estate; risks related to general and local economic conditions;
possible lack of availability of mortgage funds; overbuilding; extended
vacancies of properties; increases in competition, property taxes and operating
expenses; changes in zoning laws; costs resulting from the clean-up of, and
liability to third parties for damages resulting from, environmental problems;
casualty or condemnation losses; uninsured damages from floods, earthquakes or
other natural disasters; limitations on and variations in rents; and changes in
interest rates. To the extent that assets underlying the REITs' investments are
concentrated geographically, by property type or in certain other respects, the
REITs may be subject to certain of the foregoing risks to a greater extent.
Equity REITs may be affected by changes in the value of the underlying property
owned by the REITs, while mortgage REITs may be affected by the quality of any
credit extended. REITs are dependent upon management skills, are not
diversified, are subject to heavy cash flow dependency, default by borrowers and
self-liquidation. REITs are also subject to the possibilities of failing to
qualify for tax free pass-through of income under the U.S. Internal Revenue Code
and failing to maintain their exemptions from registration under the 1940 Act.
REITs (especially mortgage REITs) are also subject to interest
rate risks. When interest rates decline, the value of a REIT's investment in
fixed rate obligations can be
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expected to rise. Conversely, when interest rates rise, the value of a REIT's
investment in fixed rate obligations can be expected to decline. In contrast, as
interest rates on adjustable rate mortgage loans are reset periodically, yields
on a REIT's investment in such loans will gradually align themselves to reflect
changes in market interest rates, causing the value of such investments to
fluctuate less dramatically in response to interest rate fluctuations than would
investments in fixed rate obligations.
Investing in REITs involves risks similar to those associated
with investing in small capitalization companies. REITs may have limited
financial resources, may trade less frequently and in a limited volume and may
be subject to more abrupt or erratic price movements than larger company
securities.
Investments in mortgage-related securities involve certain
risks. In periods of declining interest rates, prices of fixed income securities
tend to rise. However, during such periods, the rate of prepayment of mortgages
underlying mortgage-related securities tends to increase, with the result that
such prepayments must be reinvested by the issuer at lower rates. In addition,
the value of such securities may fluctuate in response to the market's
perception of the creditworthiness of the issuers of mortgage-related securities
owned by the Fund. Because investments in mortgage-related securities are
interest sensitive, the ability of the issuer to reinvest or to reinvest
favorably in underlying mortgages may be limited by government regulation or tax
policy. For example, action by the Board of Governors of the Federal Reserve
System to limit the growth of the nation's money supply may cause interest rates
to rise and thereby reduce the volume of new residential mortgages.
Additionally, although mortgages and mortgage-related securities are generally
supported by some form of government or private guarantees and/or insurance,
there is no assurance that private guarantors or insurers will be able to meet
their obligations.
ASSET-BACKED SECURITIES (All Funds except ING National
Tax-Exempt Bond Fund, ING Growth and Income Fund, ING Balanced Fund, and ING
U.S. Treasury Money Market Fund). The Funds are permitted to invest in
asset-backed securities. Through the use of trusts and special purpose
subsidiaries, various types of assets, primarily home equity loans and
automobile and credit card receivables, are being securitized in pass-through
structures similar to the mortgage pass-through structures described above.
Consistent with the Funds' investment objectives, policies and quality
standards, the Funds may invest in these and other types of asset-backed
securities which may be developed in the future.
Asset-backed securities involve certain risks that are not
posed by mortgage-related securities, resulting mainly from the fact that
asset-backed securities do not usually contain the benefit of a complete
security interest in the related collateral. For example, credit card
receivables generally are unsecured and the debtors are entitled to the
protection of a number of state and Federal consumer credit laws, some of which
may reduce the ability to obtain full payment. In the case of automobile
receivables, due to various legal and economic factors, proceeds from
repossessed collateral may not always be sufficient to support payments on these
securities. The risks associated with asset-backed securities are often reduced
by the
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addition of credit enhancements such as a letter of credit from a bank, excess
collateral or a third-party guarantee.
FOREIGN SECURITIES (All Funds except the ING Money Market
Fund, ING U.S. Treasury Money Market Fund, and ING National Tax-Exempt Money
Market Fund). As described in the Prospectus, changes in foreign exchange rates
will affect the value of securities denominated or quoted in currencies other
than the U.S. dollar.
Since the Funds may invest in securities denominated in
currencies other than the U.S. dollar, and since those Funds may temporarily
hold funds in bank deposits or other money market investments denominated in
foreign currencies, a Fund may be affected favorably or unfavorably by exchange
control regulations or changes in the exchange rate between such currencies and
the dollar. Changes in foreign currency exchange rates will influence values
within the Fund from the perspective of U.S. investors. Changes in foreign
currency exchange rates may also affect the value of dividends and interest
earned, gains and losses realized on the sale of securities, and net investment
income and gains, if any, to be distributed to shareholders by the Fund. The
rate of exchange between the U.S. dollar and other currencies is determined by
the forces of supply and demand in the foreign exchange markets. These forces
are affected by the international balance of payments and other economic and
financial conditions, government intervention, speculation and other factors.
The Funds may enter into foreign currency exchange contracts
in order to protect against uncertainty in the level of future foreign exchange
rates. A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are entered into in the
interbank market conducted between currency traders (usually large commercial
banks) and their customers. Forward foreign currency exchange contracts may be
bought or sold to protect a Fund against a possible loss resulting from an
adverse change in the relationship between foreign currencies and the U.S.
dollar, or between foreign currencies. Although such contracts are intended to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result
should the value of such currency increase.
CONVERTIBLE SECURITIES (All Funds except ING National
Tax-Exempt Bond Fund, ING U.S. Treasury Money Market Fund, ING Money Market Fund
and ING National Tax-Exempt Money Market Fund). Convertible securities may be
converted at either a stated price or stated rate into underlying shares of
common stock and, therefore, are deemed to be equity securities for purposes of
the Funds' management policies. Convertible securities have characteristics
similar to both fixed-income and equity securities. Convertible securities
generally are subordinated to other similar but nonconvertible securities of the
same issuer, although convertible bonds, as corporate debt obligations, enjoy
seniority in right of payment to all equity securities, and convertible
preferred stock is senior to common stock, of the same issuer. Because of the
subordination feature, however, convertible securities typically have lower
ratings than similar nonconvertible securities.
<PAGE> 13
10
Although to a lesser extent than with fixed-income securities,
the market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion feature, the market value of convertible
securities tends to vary with fluctuations in the market value of the underlying
common stock. A unique feature of convertible securities is that as the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the market
price of the underlying common stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
Convertible securities are investments that provide for a
stable stream of income with generally higher yields than common stocks. There
can be no assurance of current income because the issuers of the convertible
securities may default on their obligations. A convertible security, in addition
to providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because securities prices fluctuate. Convertible
securities, however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation.
VARIABLE RATE DEMAND OBLIGATIONS AND FLOATING RATE INSTRUMENTS
(All Funds). The Funds may acquire variable rate demand obligations. The ING
Intermediate Bond Fund and ING National Tax-Exempt Bond Fund may acquire
floating rate instruments as described in the Prospectus. Variable and floating
rate instruments are frequently not rated by credit rating agencies; however,
unrated variable and floating rate instruments purchased by a Fund will be
determined by the Sub-Adviser to be of comparable quality at the time of
purchase to rated instruments eligible for purchase by the Funds. In making such
determinations, the Sub-Adviser will consider the earning power, cash flows and
other liquidity ratios of the issuers of such instruments (such issuers include
financial, merchandising, investment banking, bank holding and other companies)
and will continuously monitor their financial condition. There may not be an
active secondary market with respect to a particular variable or floating rate
instrument purchased by a Fund. The absence of such an active secondary market
could make it difficult for a Fund to dispose of the variable or floating rate
instrument involved. In the event the issuer of the instrument defaulted on its
payment obligations, a Fund could, for this or other reasons, suffer a loss to
the extent of the default. Variable and floating rate instruments may be secured
by bank letters of credit, guarantees or lending commitments.
GUARANTEED INVESTMENT CONTRACTS (All Funds except ING U.S.
Treasury Money Market Fund). The Funds may invest in Guaranteed Investment
Contracts ("GICs") issued by insurance companies. Pursuant to such contracts,
the Fund makes cash
<PAGE> 14
11
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the Fund on a monthly basis guaranteed
interest which is based on an index. The GICs provide that this guaranteed
interest will not be less than a certain minimum rate. The insurance company may
assess periodic charges against a GIC for expense and service costs allocable to
it, and the charges will be deducted from the value of the deposit fund. In
addition, because the Funds may not receive the principal amount of a GIC from
the insurance company on seven days' notice or less, the GIC is considered an
illiquid investment, and, together with other instruments invested in by a Fund
which are not readily marketable, will not exceed 15% (10% in the case of the
Money Market Fund) of a Fund's net assets. The term of a GIC will be one year or
less. In determining average weighted portfolio maturity, a GIC will be deemed
to have a maturity equal to the period of time remaining until the next
readjustment of the guaranteed interest rate.
PRIVATE FUNDS (ING Large Cap Growth Fund, ING Growth & Income
Fund, ING Mid Cap Growth Fund, ING Small Cap Growth Fund, ING Balanced Fund, ING
Global Brand Names Fund, ING International Equity Fund, ING Emerging Markets
Equity Fund, ING European Equity Fund, ING Tax Efficient Equity Fund, ING Focus
Fund, ING Global Information Technology Fund, ING Global Real Estate Fund, ING
Internet Fund and ING Quality of Life Fund). The Funds may invest in U.S. or
foreign private limited partnerships or other investment funds ("Private
Funds"). Investments in Private Funds may be highly speculative and volatile.
Because Private Funds generally are investment companies for purposes of the
Investment Company Act of 1940, as amended (the "1940 Act"), the Fund's ability
to invest in them will be limited. In addition, Fund shareholders will remain
subject to the Fund's expenses while also bearing their pro rata share of the
operating expenses of the Private Funds. The ability of the Fund to dispose of
interests in Private Funds is very limited and involve risks, including loss of
the Fund's entire investment in the Private Fund.
OPTIONS ON SECURITIES (All Funds except ING U.S. Treasury
Money Market Fund, ING Money Market Fund, ING National Tax-Exempt Money Market
Fund and ING National Tax-Exempt Bond Funds). Each Fund may write (sell)
"covered" call options on securities as long as it owns the underlying
securities subject to the option or an option to purchase the same underlying
securities, having an exercise price equal to or less than the exercise price of
the "covered" option, or will establish and maintain for the term of the option
a segregated account consisting of cash or other liquid securities ("eligible
securities") to the extent required by applicable regulation in connection with
the optioned securities. A Fund may write "covered" put options provided that,
as long as the Fund is obligated as a writer of a put option, the Fund will own
an option to sell the underlying securities subject to the option, having an
exercise price equal to or greater than the exercise price of the "covered"
option, or it will deposit and maintain in a segregated account eligible
securities having a value equal to or greater than the exercise price of the
option. A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the exercise price during or at
the end of the option period. A put option gives the purchaser the right to
sell, and the writer has the obligation to buy, the underlying security at the
exercise price during or at the end of the option period. The premium received
for writing an option will reflect, among other things, the current market price
of the underlying security, the relationship of the
<PAGE> 15
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exercise price to such market price, the price volatility of the underlying
security, the option period, supply and demand and interest rates. The Funds may
write or purchase spread options, which are options for which the exercise price
may be a fixed dollar spread or yield spread between the security underlying the
option and another security that is used as a bench mark. The exercise price of
an option may be below, equal to or above the current market value of the
underlying security at the time the option is written. The buyer of a put who
also owns the related security is protected by ownership of a put option against
any decline in that security's price below the exercise price less the amount
paid for the option. The ability to purchase put options allows a Fund to
protect capital gains in an appreciated security it owns, without being required
to actually sell that security. At times a Fund would like to establish a
position in a security upon which call options are available. By purchasing a
call option, a Fund is able to fix the cost of acquiring the security, this
being the cost of the call plus the exercise price of the option. This procedure
also provides some protection from an unexpected downturn in the market because
a Fund is only at risk for the amount of the premium paid for the call option
which it can, if it chooses, permit to expire.
During the option period the covered call writer gives up the
potential for capital appreciation above the exercise price should the
underlying asset rise in value, and the secured put writer retains the risk of
loss should the underlying security decline in value. For the covered call
writer, substantial appreciation in the value of the underlying asset would
result in the security being "called away." For the secured put writer,
substantial depreciation in the value of the underlying security would result in
the security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain in the amount of the premium received.
If the covered call option writer has to sell the underlying security because of
the exercise of a call option, it realizes a gain or loss from the sale of the
underlying security, with the proceeds being increased by the amount of the
premium.
If a secured put option expires unexercised, the writer
realizes a gain from the amount of the premium. If the secured put writer has to
buy the underlying security because of the exercise of the put option, the
secured put writer incurs an unrealized loss to the extent that the current
market value of the underlying security is less than the exercise price of the
put option. However, this would be offset in whole or in part by gain from the
premium received.
OVER-THE-COUNTER OPTIONS (All Funds except ING U.S. Treasury
Money Market Fund, ING Money Market Fund, ING National Tax-Exempt Money Market
Fund and ING National Tax-Exempt Bond Fund). As indicated in the prospectus (see
"Description of Securities and Investment Practices"), each Fund may deal in
over-the-counter traded options ("OTC options"). OTC options differ from
exchange traded options in several respects. They are transacted directly with
dealers and not with a clearing corporation, and there is a risk of
nonperformance by the dealer as a result of the insolvency of such dealer or
otherwise, in which event a Fund may experience material losses. However, in
writing options the premium is paid in advance by the dealer. OTC options are
available for a greater variety of securities, and a wider range of expiration
dates and exercise prices, than are exchange traded options. Since there is no
exchange, pricing is normally done by reference to
<PAGE> 16
13
information from market makers, which information is carefully monitored by the
investment manager and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it
voluntarily only by entering into a closing transaction. In the case of OTC
options, there can be no assurance that a continuous liquid secondary market
will exist for any particular option at any specific time. Consequently, a Fund
may be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when a Fund writes an OTC option, it generally can close
out that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a purchaser of such put or call option
might also find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The staff of the SEC has taken the position that purchased
options not traded on registered domestic securities exchanges and the assets
used as cover for written options not traded on such exchanges are generally
illiquid securities. However, the staff has also opined that, to the extent a
mutual fund sells an OTC option to a primary dealer that it considers
creditworthy and contracts with such primary dealer to establish a formula price
at which the fund would have the absolute right to repurchase the option, the
fund would only be required to treat as illiquid the portion of the assets used
to cover such option equal to the formula price minus the amount by which the
option is in-the-money. Pending resolution of the issue, the Funds will treat
such options and, except to the extent permitted through the procedure described
in the preceding sentence, assets as subject to each such Fund's limitation on
investments in securities that are not readily marketable.
OPTIONS ON INDICES (All Funds except ING U.S. Treasury Money
Market Fund, ING Money Market Fund, ING National Tax-Exempt Money Market Fund
and ING National Tax-Exempt Bond Fund). Each Fund also may purchase and write
call and put options on securities indices in an attempt to hedge against market
conditions affecting the value of securities that the Fund owns or intends to
purchase, and not for speculation. Through the writing or purchase of index
options, a Fund can achieve many of the same objectives as through the use of
options on individual securities. Options on securities indices are similar to
options on a security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the securities index upon which the option is based
is greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount.
<PAGE> 17
14
Unlike security options, all settlements are in cash and gain or loss depends
upon price movements in the market generally (or in a particular industry or
segment of the market), rather than upon price movements in individual
securities. Price movements in securities that the Fund owns or intends to
purchase will probably not correlate perfectly with movements in the level of an
index since the prices of such securities may be affected by somewhat different
factors and, therefore, the Fund bears the risk that a loss on an index option
would not be completely offset by movements in the price of such securities.
When a Fund writes an option on a securities index, it will
segregate and mark-to-market eligible securities to the extent required by
applicable regulation. In addition, where the Fund writes a call option on a
securities index at a time when the contract value exceeds the exercise price,
the Fund will segregate and mark-to-market, until the option expires or is
closed out, cash or cash equivalents equal in value to such excess.
Each Fund may also purchase and sell options on other
appropriate indices, as available, such as foreign currency indices. Options on
a securities index involve risks similar to those risks relating to transactions
in financial futures contracts described above. Also, an option purchased by a
Fund may expire worthless, in which case the fund would lose the premium paid
therefor.
FOREIGN CURRENCY OPTIONS (All Funds except ING U.S. Treasury
Money Market Fund, ING Money Market Fund, ING National Tax-Exempt Money Market
Fund and ING National Tax-Exempt Bond Fund). Each Fund may engage in foreign
currency options transactions. A foreign currency option provides the option
buyer with the right to buy or sell a stated amount of foreign currency at the
exercise price at a specified date or during the option period. A call option
gives its owner the right, but not the obligation, to buy the currency, while a
put option gives its owner the right, but not the obligation, to sell the
currency. The option seller (writer) is obligated to fulfill the terms of the
option sold if it is exercised. However, either seller or buyer may close its
position during the option period in the secondary market for such options any
time prior to expiration.
A call rises in value if the underlying currency appreciates.
Conversely, a put rises in value if the underlying currency depreciates. While
purchasing a foreign currency option can protect the Fund against an adverse
movement in the value of a foreign currency, it does not limit the gain which
might result from a favorable movement in the value of such currency. For
example, if a Fund were holding securities denominated in an appreciating
foreign currency and had purchased a foreign currency put to hedge against a
decline in the value of the currency, it would not have to exercise its put.
Similarly, if the Fund has entered into a contract to purchase a security
denominated in a foreign currency and had purchased a foreign currency call to
hedge against a rise in value of the currency but instead the currency had
depreciated in value between the date of purchase and the settlement date, the
Fund would not have to exercise its call but could acquire in the spot market
the amount of foreign currency needed for settlement.
<PAGE> 18
15
DOLLAR ROLL TRANSACTIONS (ING Growth & Income Fund, ING
Balanced Fund, ING Emerging Markets Equity Fund, ING Intermediate Bond Fund, ING
High Yield Bond Fund, ING International Bond Fund and ING Mortgage Income Fund).
In connection with their ability to purchase securities on a when-issued or
forward commitment basis, the Funds may enter into "dollar rolls" in which the
Funds sell securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified future date. The Funds
give up the right to receive principal and interest paid on the securities sold.
However, the Funds would benefit to the extent of any difference between the
price received for the securities sold and the lower forward price for the
future purchase plus any fee income received. Unless such benefits exceed the
income and capital appreciation that would have been realized on the securities
sold as part of the dollar roll, the use of this technique will diminish the
investment performance of the Funds compared with what such performance would
have been without the use of dollar rolls. The Funds will hold and maintain in a
segregated account until the settlement date liquid assets in an amount equal to
the value of the when-issued or forward commitment securities. The benefits
derived from the use of dollar rolls may depend, among other things, upon the
Sub-Advisers' ability to predict interest rates correctly. There is no assurance
that dollar rolls can be successfully employed. In addition, the use of dollar
rolls by the Funds while remaining substantially fully invested increases the
amount of a Fund's assets that are subject to market risk to an amount that is
greater than the Fund's net asset value, which could result in increased
volatility of the price of the Fund's shares.
FOREIGN CURRENCY FUTURES TRANSACTIONS (All Funds except ING
U.S. Treasury Money Market Fund, ING Money Market Fund, ING National Tax-Exempt
Money Market Fund and ING National Tax-Exempt Bond Funds). As part of its
financial futures transactions, each Fund may use foreign currency futures
contracts and options on such futures contracts. Through the purchase or sale of
such contracts, a Fund may be able to achieve many of the same objectives as
through forward foreign currency exchange contracts more effectively and
possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign
currency futures contracts and options on foreign currency futures contracts are
standardized as to amount and delivery period and are traded on boards of trade
and commodities exchanges. It is anticipated that such contracts may provide
greater liquidity and lower cost than forward foreign currency exchange
contracts.
FOREIGN GOVERNMENT OBLIGATIONS; SECURITIES OF SUPRANATIONAL
ENTITIES (ING International Bond Fund, ING Intermediate Bond Fund, ING
International Equity Fund, ING Tax Efficient Equity Fund, ING Emerging Markets
Equity Fund, ING Global Brand Names Fund, ING Quality of Life Fund and ING
European Equity Fund only). A Fund may invest in obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities that are determined by the
Sub-Adviser to be of comparable quality to the other obligations in which the
Fund may invest. Such securities also include debt obligations of supranational
<PAGE> 19
16
entities. Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.
INTEREST RATE FUTURES CONTRACTS (All Funds except ING National
Tax-Exempt Bond Fund, ING U.S. Treasury Money Market Fund, ING National
Tax-Exempt Money Market Fund and ING Money Market Fund). The Funds may purchase
and sell interest rate futures contracts ("futures contracts") as a hedge
against changes in interest rates. A futures contract is an agreement between
two parties to buy and sell a security for a set price on a future date. Future
contracts are traded on designated "contracts markets" which, through their
clearing corporations, guarantee performance of the contracts. Currently, there
are futures contracts based on securities such as long-term U.S. Treasury bonds,
U.S. Treasury notes, GNMA Certificates and three-month U.S. Treasury bills.
Generally, if market interest rates increase, the value of
outstanding debt securities declines (and vice versa). Entering into a futures
contract for the sale of securities has an effect similar to the actual sale of
securities, although sale of the futures contract might be accomplished more
easily and quickly. For example, if a Fund holds long-term U.S. Government
securities and the Sub-Adviser anticipates a rise in long-term interest rates,
it could, in lieu of disposing of its portfolio securities, enter into futures
contracts for the sale of similar long-term securities. If rates increased and
the value of a Fund's portfolio securities declined, the value of a Fund's
futures contracts would increase, thereby protecting the Fund by preventing its
net asset value from declining as much as it otherwise would have. Similarly,
entering into futures contracts for the purchase of securities has an effect
similar to actual purchase of the underlying securities, but permits the
continued holding of securities other than the underlying securities. For
example, if the Sub-Adviser expects long-term interest rates to decline, a Fund
might enter into futures contracts for the purchase of long-term securities, so
that it could gain rapid market exposure that may offset anticipated increases
in the cost of securities it intends to purchase, while continuing to hold
higher-yielding short-term securities or waiting for the long-term market to
stabilize. Futures transactions may fail as hedging techniques where price
movements of the underlying securities do not follow price movements of the
portfolio securities subject to the hedge. The loss with respect to futures
transactions is potentially unlimited. Also, the Funds may be unable to control
losses by closing its position where a liquid secondary market does not exist.
SHORT SALES (ING Emerging Markets Equity Fund, ING
Intermediate Bond Fund, ING High Yield Bond Fund and ING International Equity
Fund). The Funds may sell a security it does not own in anticipation of a
decline in the market value of that security (short sales). To complete such a
transaction, the Fund must borrow the security to make delivery to the buyer.
The Fund then is obligated to replace the security borrowed by purchasing it at
market price at the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to pay to the lender any dividends or
interest which accrue during the period of the
<PAGE> 20
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loan. To borrow the security, the Fund also may be required to pay a premium,
which would increase the cost of the security sold. The proceeds of the short
sale will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out. Until the Fund replaces a
borrowed security, the Funds will maintain daily a segregated account with the
Funds' custodian, liquid assets, at such a level that (i) the amount deposited
in the account plus the amount deposited with the broker as collateral will
equal the current value of the security sold short and (ii) the amount deposited
in the segregated account plus the amount deposited with the broker as
collateral will not be less than the market value of the security at the time it
was sold short. The Fund will incur a loss as a result of the short sale if the
price of the security increases between the date of the short sale and the date
on which the Fund replaces the borrowed security. The Funds will realize a gain
if the security declines in price between those dates. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
increased, by the amount of any premium, dividends or interest the Fund may be
required to pay in connection with a short sale. No more than 25% of a Fund's
net assets will be, when added together: (i) deposited as collateral for the
obligation to replace securities borrowed to effect short sales; and (ii)
allocated to segregated accounts in connection with short sales. Short sales
against-the-box are not subject to this 25% limit.
In a short sale "against-the-box," a Fund enters into a short
sale of a security which the Fund owns or has the right to obtain at no added
cost. Not more than 25% of a Fund's net assets (determined at the time of the
short sale against-the-box) may be subject to such sales.
LOANS OF PORTFOLIO SECURITIES (All Funds). The Funds may lend
their portfolio securities to brokers, dealers and financial institutions,
provided: (1) the loan is secured continuously by collateral consisting of U.S.
Government securities or cash or letters of credit maintained on a daily
mark-to-market basis in an amount at least equal to the current market value of
the securities loaned; (2) the Funds may at any time call the loan and obtain
the return of the securities loaned within five business days; (3) the Funds
will receive any interest or dividends paid on the loaned securities; and (4)
the aggregate market value of securities loaned will not at any time exceed
one-third of the total assets of a particular Fund.
The Funds will earn income for lending their securities
because cash collateral pursuant to these loans will be invested in short-term
money market instruments. In connection with lending securities, the Funds may
pay reasonable finders, administrative and custodial fees. Loans of securities
involve a risk that the borrower may fail to return the securities or may fail
to provide additional collateral.
REPURCHASE AGREEMENTS (All Funds). The Funds may invest in
securities subject to repurchase agreements with U.S. banks or broker-dealers.
Such agreements may be considered to be loans by the Funds for purposes of the
1940 Act. A repurchase agreement is a transaction in which the seller of a
security commits itself at he time of the sale to repurchase that security from
the buyer at a mutually agreed upon time and price. The repurchase price exceeds
the sale price, reflecting an agreed-upon interest rate
<PAGE> 21
18
effective for the period the buyer owns the security subject to repurchase. The
agreed-upon rate is unrelated to the interest rate on that security. Each Fund's
Sub-Adviser will monitor the value of the underlying security at the time the
transaction is entered into and at all times during the term of the repurchase
agreement to ensure that the value of the security always equals or exceeds the
repurchase price. In the event of default by the seller under the repurchase
agreement, the Funds may have problems in exercising their rights to the
underlying securities and may incur costs and experience time delays in
connection with the disposition of such securities.
BORROWING (All Funds). The Fund may borrow from banks up to 33
1/3% of the current value of its net assets to purchase securities and for
temporary or emergency purposes and those borrowings may be secured by the
pledge of not more than 33 1/3% of the current value of that Fund's net assets.
REVERSE REPURCHASE AGREEMENTS (All Funds except ING U.S.
Treasury Money Market Fund, ING National Tax-Exempt Money Market Fund and ING
Money Market Fund). A Fund may borrow funds by selling portfolio securities to
financial institutions such as banks and broker/dealers and agreeing to
repurchase them at a mutually specified date and price ("reverse repurchase
agreements"). Reverse repurchase agreements involve the risk that the market
value of the securities sold by a Fund may decline below the repurchase price. A
Fund will pay interest on amounts obtained pursuant to a reverse repurchase
agreement. While reverse repurchase agreements are outstanding, a Fund will
maintain in a segregated account, other liquid assets (as determined by the
Board) of an amount at least equal to the market value of the securities, plus
accrued interest, subject to the agreement.
LOWER-RATED SECURITIES. (ING Emerging Markets Equity Fund and
ING High Yield Bond Fund). Lower-rated securities are lower-rated bonds commonly
referred to as junk bonds or high-yield/high-risk securities. These securities
are rated Baa or lower by Moody's Investors Service, Inc. (Moody's) or BBB or
lower by Standard & Poor's Corporation (S&P). As described in the Prospectus,
certain of the Funds may invest in lower rated and unrated securities of
comparable quality subject to the restrictions stated in the Prospectus.
Growth of High-Yield High-Risk Bond Market. The widespread
expansion of government, consumer and corporate debt within the U.S. economy has
made the corporate sector more vulnerable to economic downturns or increased
interest rates. Further, an economic downtown could severely disrupt the market
for lower-rated bonds and adversely affect the value of outstanding bonds and
the ability of the issuers to repay principal and interest. The market for
lower-rated securities may be less active, causing market price volatility and
limited liquidity in the secondary market. This may limit the Funds' ability to
sell such securities at their market value. In addition, the market for these
securities may be adversely affected by legislative and regulatory developments.
Credit quality in the junk bond market can change suddenly and unexpectedly, and
even recently issued credit ratings may not fully reflect the actual risks
imposed by a particular security.
<PAGE> 22
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Sensitivity to Interest Rate and Economic Changes. Lower rated
bonds are very sensitive to adverse economic changes and corporate developments.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers may experience financial stress that would adversely
affect their ability to service their principal and interest payment
obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a bond defaulted on its obligations to pay interest
or principal or entered into bankruptcy proceedings, the Fund may incur losses
or expenses in seeking recovery of amounts owed to it. In addition, periods of
economic uncertainty and change can be expected to result in increased
volatility of market prices of high-yield, high-risk bonds and the Fund's net
asset value.
Payment Expectations. High-yield, high-risk bonds may contain
redemption or call provisions. If an issuer exercised these provisions in a
declining interest rate market, the Fund would have to replace the security with
a lower yielding security, resulting in a decreased return for investors.
Conversely, a high-yield, high-risk bond's value will decrease in a rising
interest rate market, as will the value of the Fund's assets. If the Fund
experiences significant unexpected net redemptions, this may force it to sell
high-yield, high-risk bonds without regard to their investment merits, thereby
decreasing the asset base upon which expenses can be spread and possibly
reducing the Fund's rate of return.
Liquidity and Valuation. There may be a little trading in the
secondary market for particular bonds, which may affect adversely the Fund's
ability to value accurately or dispose of such bonds. Adverse publicity and
investor perception, whether or not based on fundamental analysis, may decrease
the values and liquidity of high-yield, high-risk bonds, especially in a thin
market.
ILLIQUID SECURITIES (All Funds). Each Fund has adopted a
non-fundamental policy with respect to investments in illiquid securities.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the Securities
Act, including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes.
<PAGE> 23
20
Institutional investors depend on either an efficient institutional market in
which the unregistered security can be readily resold or on the issuer's ability
to honor a demand for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain institutions may not
be indicative of the liquidity of such investments.
Each Fund may also invest in restricted securities issued
under Section 4(2) of the Securities Act ("Section 4(2)"), which exempts from
registration "transactions by an issuer not involving any public offering."
Section 4(2) instruments are restricted in the sense that they can only be
resold through the issuing dealer and only to institutional investors; they
cannot be resold to the general public without registration. Restricted
securities issued under Section 4(2) (other than certain commercial paper issued
pursuant to Section 4(2) discussed below) will be treated as illiquid and
subject to the Fund's investment restriction on illiquid securities.
Pursuant to procedures adopted by the Board of Trustees, the
Funds may treat certain commercial paper issued pursuant to Section 4(2) as a
liquid security and not subject to the Funds' investment restriction on illiquid
investments. Section 4(2) commercial paper may be considered liquid only if all
of the following conditions are met: (i) the Section 4(2) commercial paper must
not be traded flat (i.e. without accrued interest) or be in default as to
principal or interest; and (ii) the Section 4(2) commercial paper must be rated
in one of the two highest rating categories by at least two NRSROs, or if only
NRSRO rates the security, by that NRSRO, or if the security is unrated, the
security has been determined to be of equivalent quality.
The SEC has adopted Rule 144A, which allows a broader
institutional trading market for securities otherwise subject to restrictions on
resale to the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act applicable to resales of certain
securities to qualified institutional buyers. It is the intent of the Funds to
invest, pursuant to procedures established by the Board of Trustees and subject
to applicable investment restrictions, in securities eligible for resale under
Rule 144A which are determined to be liquid based upon the trading markets for
the securities.
Pursuant to guidelines set forth by and under the supervision
of the Board of Trustees, as applicable, the Sub-Adviser will monitor the
liquidity of restricted securities in a Fund's portfolio. In reaching liquidity
decisions, the Sub-Adviser will consider, among other things, the following
factors: (1) the frequency of trades and quotes for the security over the course
of six months or as determined in the discretion of the Sub-Adviser; (2) the
number of dealers wishing to purchase or sell the security and the number of
other potential purchasers over the course of six months or as determined in the
discretion of the Sub-Adviser; (3) dealer undertakings to make a market in the
security; (4) the nature of the security and the marketplace in which it trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer); and (5) other factors, if any, which
the Sub-Adviser deems relevant.
<PAGE> 24
21
Rule 144A securities and Section 4(2) commercial paper which
are determined to be liquid based upon their trading markets will not, however,
be required to be included among the securities considered to be illiquid for
purposes of Investment Restriction No. 9. Investments in Rule 144A securities
and Section 4(2) commercial paper could have the effect of increasing Fund
illiquidity.
INVESTMENT RESTRICTIONS
The Funds have adopted investment restrictions numbered 1
through 8 as fundamental policies, which cannot be changed without approval by
the holders of a majority (as defined in the 1940 Act) of the Fund's outstanding
voting shares. Investment restriction number 7 is not a fundamental policy and
may be changed by vote of a majority of a Fund's board members at any time.
Each Fund, except as indicated, may not:
(1) Borrow money, except to the extent permitted under the
1940 Act (which currently limits borrowing to no more than 33-1/3% of the value
of a Fund's total assets). For purposes of this Investment Restriction, the
entry into reverse repurchase agreements, options, forward contracts, futures
contracts, including those relating to indices, and options on futures contracts
or indices shall not constitute borrowing.
(2) Issue senior securities, except insofar as a Fund may be
deemed to have issued a senior security in connection with any repurchase
agreement or any permitted borrowing;
(3) Make loans, except loans of portfolio securities and
except that a Fund may enter into repurchase agreements with respect to its
portfolio securities and may purchase the types of debt instruments described in
its Prospectus or the SAI;
(4) Invest in companies for the purpose of exercising control
or management;
(5) Purchase, hold or deal in real estate, or oil, gas or
other mineral leases or exploration or development programs, but a Fund may
purchase and sell securities that are secured by real estate or issued by
companies that invest or deal in real estate or real estate investment trusts.
(6) Engage in the business of underwriting securities of other
issuers, except to the extent that the disposal of an investment position may
technically cause it to be considered an underwriter as that term is defined
under the Securities Act of 1933;
(7) Purchase securities on margin, except that a Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities;
<PAGE> 25
22
(8) Purchase a security if, as a result, more than 25% of the
value of its total assets would be invested in securities of one or more issuers
conducting their principal business activities in the same industry, provided
that (a) this limitation shall not apply to obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities; (b) wholly-owned
finance companies will be considered to be in the industries of their parents;
(c) utilities will be divided according to their services. For example, gas, gas
transmission, electric and gas, electric, and telephone will each be considered
a separate industry; (d) the ING Money Market Fund will not be limited in its
investments in obligations issued by domestic banks; and (e) the ING Global
Information Technology Fund, ING Internet Fund and the ING Global Real Estate
Fund will concentrate their investments as described in the Prospectus.
(9) Invest more than 15%, 10% in the case of the Money Market
Funds, of the value of its net assets in investments which are illiquid
(including repurchase agreements having maturities of more than seven calendar
days, variable and floating rate demand and master demand notes not requiring
receipt of principal note amount within seven days' notice and securities of
foreign issuers which are not listed on a recognized domestic or foreign
securities exchange).
In addition, all Funds except for the ING Global Brand Names
Funds, ING Focus Fund, ING Global Real Estate Fund, ING Internet Fund, ING
Quality of Life Fund and ING International Bond Fund are diversified funds. As
such, each will not, with respect to 75% (100% with respect to the Money Market
Funds) of their total assets, invest more than 5% of its total assets in the
securities of any one issuer (except for U.S. Government securities) or purchase
more than 10% of the outstanding voting securities of any one issuer. The Money
Market Funds may invest up to 25% of their total assets in the first tier
securities of a single issuer for a period of up to three business days after
the acquisition thereof provided that the Fund may not invest in the securities
of more than one issuer in accordance with this provision at any time.
If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of a Fund's investments will not constitute a violation of
such limitation, except that any borrowing by a Fund that exceeds the
fundamental investment limitations stated above must be reduced to meet such
limitations within the period required by the 1940 Act (currently three days).
Otherwise, a Fund may continue to hold a security even though it causes the Fund
to exceed a percentage limitation because of fluctuation in the value of the
Fund's assets.
<PAGE> 26
23
MANAGEMENT
Trustees and Officers
The principal occupations of the Trustees and executive
officers of the Funds for the past five years are listed below. The address of
each, unless otherwise indicated, is 1475 Dunwoody Drive, West Chester, PA
19380. Trustees deemed to be "interested persons" of the Funds for purposes of
the 1940 Act are indicated by an asterisk.
Trustees Biographies
John J. Pileggi,* Trustee, Chairman of the Board and President
- - Age 40. President and Chief Executive Officer of ING Mutual Funds Management
Co. LLC (1998-present); Director, Chief Executive Officer, ING Funds
Distributor, Inc. (1999-present); Director of Furman Selz LLC (1994- present);
Senior Managing Director of Furman Selz LLC (1992-1994); Managing Director of
Furman Selz LLC (1984-1992). Mr. Pileggi is also a Trustee of the First Choice
Funds, Intrust Funds and the Performance Funds.
Joseph N. Hankin, Trustee - Age 59. President, Westchester
Community College since 1971; Adjunct Professor of Columbia University Teachers
College since 1976. Dr. Hankin is also a Trustee of the First Choice Funds and
Stagecoach Funds Group.
Jack D. Rehm, Trustee - Age 66. Chairman of the Board
(Retired) of Meredith Corp. (1992-1997); President and Chief Executive Officer
of Meredith Corp. (1986-1996). Mr. Rehm is also a Director of Meredith Corp. and
International Multifoods Corp.
Blaine E. Rieke, Trustee - Age 65. General Partner of
Huntington Partners (1997-present); Chairman and Chief Executive Officer of
Firstar Trust Company (1973-1996).
Richard A. Wedemeyer, Trustee - Age 63. Vice President, The
Channel Corporation (1996-present); Vice President of Performance Advantage,
Inc. (1992-1996); Vice President, Operations and Administration of Jim Henson
Productions (1979-1997). Mr. Wedemeyer is also a Trustee of the First Choice
Funds and the Pacifica Funds.
Officers Biographies
John J. Pileggi, President and Chief Executive Officer - Age
40. See above.
Donald Brostrom, Treasurer - Age 40. Executive Vice President
and Chief Financial Officer, ING Mutual Funds Management Co. LLC (1998-present);
Director, Treasurer and Chief Financial Officer, ING Funds Distributor, Inc.
(1999-present); Managing Director, Furman Selz LLC (1984-1998).
<PAGE> 27
24
Louis S. Citron, Vice President - Age 34. Senior Vice
President and General Counsel, ING Mutual Funds Management Co. LLC
(1998-present); Attorney at Kramer, Levin, Naftalis & Frankel (1994-1998);
Attorney at Reid & Priest (1991-1994).
Ralph G. Norton, III, Vice President - Age 40. Vice President
and Chief Investment Officer, ING Mutual Funds Management Co. LLC
(1999-present); Managing Editor, Standard & Poor's (1996-1999); Vice President,
IBC Financial Data (1992-1996).
Lisa M. Buono, Vice President - Age 34. Vice President -
Financial Operations, ING Mutual Funds Management Co. LLC (1999-present); Vice
President, ING Funds Distributor, Inc. (1999-present); Vice President, Provident
Advisers, Inc. (1996-1999).
Rachelle I. Rehner, Secretary - Age 37. Fund Legal Manager,
ING Mutual Funds Management Co. LLC (1998-present); Secretary, ING Funds
Distributor, Inc. (1999-present); Senior Legal Assistant, Kramer, Levin,
Naftalis & Frankel (1995-1998); Compliance Administrator, BISYS Funds Services
(1994-1995); Senior Legal Assistant, Battle Fowler (1989-1994).
Charles Eng, Assistant Treasurer - Age 35. Fund Accounting
Manager, ING Mutual Funds Management Co. LLC (1998-present); Assistant Manager,
Chase Manhattan Bank (1997-1998); BISYS Fund Services (1996-1997); Associate
Director, Furman Selz LLC (1992-1997).
Amy Lau, Assistant Treasurer - Age 33. Fund Administration
Manager, ING Mutual Funds Management Co. LLC (1998-present); Assistant Vice
President, Smith Barney Asset Management (1996-1998); Associate Director, Furman
Selz LLC (1992-1995).
Trustees of the Funds not affiliated with ING or IFD receive from the
Funds an annual retainer of $5,000.00 and a fee of $835.00 for each Board of
Trustees meeting and Board committee meeting of the Funds attended and are
reimbursed for all out-of-pocket expenses relating to attendance at such
meetings. Trustees who are affiliated with ING or IFD do not receive
compensation from the Funds.
Investment Manager
ING Mutual Funds Management Co. LLC, 1475 Dunwoody Drive, West
Chester, PA 19380, serves as the Manager of the Funds. IMFC is a wholly owned
subsidiary of ING Groep N.V. ("ING Group"). Under the Management Agreement, IMFC
has overall responsibility, subject to the supervision of the Board of Trustees,
for engaging sub-advisers and for monitoring and evaluating the management of
the assets of each Fund by the Sub-Adviser. The Manager is also responsible for
monitoring and evaluating the Sub-Advisers on a periodic basis, and will
consider their performance records with respect to the investment objectives and
policies of each Fund. The Sub-Advisers are affiliated with the Manager. IMFC
also provides certain administrative services necessary for the Funds'
operations including; (i) coordination of the services performed by the Funds'
transfer agent, custodian,
<PAGE> 28
25
independent accountants and legal counsel; (ii) regulatory compliance,
including the compilation of information for documents such as reports to, and
filings with, the SEC and state securities commissions; (iii) preparation of
proxy statements and shareholder reports for the Funds; (iv) general supervision
relative to the compilation of data required for the preparation of periodic
reports distributed to the Funds' officers and Board of Trustees; and (v)
furnishing office space and certain facilities required for conducting the
business of the Funds.
Pursuant to the Management Agreement, the Manager is authorized to
exercise full investment discretion and make all determinations with respect to
the investment of a Fund's assets and the purchase and sale of portfolio
securities for one or more Funds in the event that at any time no Sub-Adviser is
engaged to manage the assets of a Fund. The Management Agreement may be
terminated without penalty by the vote of the Board of Trustees or the
shareholders of the Fund or by the Manager, upon 60 days' written notice by any
party to the agreement, and will terminate automatically if assigned as that
term is described in the 1940 Act.
The Management Agreement provides that the investment manager shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Funds in connection with its performance of services pursuant to the
Management Agreement, except loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the investment adviser in the performance of
its obligations under the Advisory Agreement.
An affiliate of the Manager will make a significant investment in the
Funds. The affiliate may redeem its investment in the Funds at any time. Such
redemption may have an adverse effect on the Funds. In addition, certain
provisions of the 1940 Act may prohibit the Funds from investing in securities
issued by affiliates of the ING Group. Such restrictions may adversely effect
the Funds.
Sub-Advisers
ING Investment Management, LLC ("IIM") serves as Sub-Adviser to each of
the Money Market Funds, other than the ING National Tax-Exempt Money Market
Fund, and the ING Intermediate Bond Fund, ING High Yield Bond Fund, ING Mortgage
Income Fund, and the ING Growth & Income Fund. Located in Atlanta, Georgia, IIM
is a Delaware limited liability company which is engaged in the business of
providing investment advice to affiliated insurance companies.
Baring International Investment Limited ("BIIL") serves as
co-Sub-Adviser to the ING International Bond Fund, ING International Equity Fund
and ING Emerging Markets Equity Fund. Located in London, BIIL is a wholly-owned
subsidiary of Baring Asset Management Holdings Limited ("BAMHL"), the parent of
the worldwide group of investment management companies that operate under the
collective name, Baring Asset Management (the "BAM Group").
<PAGE> 29
26
Furman Selz Capital Management LLC ("FSCM") serves as Sub-Adviser to
the ING National Tax-Exempt Bond Fund, ING National Tax-Exempt Money Market
Fund, ING Mid Cap Growth Fund, ING Balanced Fund, and the ING Focus Fund.
Located at 230 Park Avenue, New York, New York 10169, FSCM is a Delaware limited
liability company which is engaged in the business of providing investment
advice to institutional and individual clients.
Baring Asset Management, Inc. ("BAM") serves as Sub-Adviser to the ING
Large Cap Growth Fund and ING Small Cap Growth Fund and acts as Co-Sub-Adviser
to the ING International Bond Fund, ING International Equity Fund and ING
Emerging Markets Equity Fund. Located at 125 High Street, Boston, Massachusetts
02110, BAM is a wholly-owned subsidiary of BAMHL.
Baring Asset Management (Asia) Limited ("BAML") acts as Co-Sub-Adviser
to the ING International Bond Fund, ING International Equity Fund and ING
Emerging Markets Equity Fund. BAML is located at 19/F Edinburgh Tower, The
Landmark, 15 Queens Road, Central, Hong Kong. BAML is a wholly-owned subsidiary
of BAMHL.
ING Investment Management Advisors, B.V. ("IIMA"), serves as
Sub-Adviser to the ING Global Brand Names Fund, ING European Equity Fund, ING
Global Information Technology Fund, ING Internet Fund, ING Quality of Life Fund
and ING Global Real Estate Fund. Located at Schenkkade 65, 2595 AS, The Hague,
The Netherlands, IIMA operates under the collective management of ING Investment
Management.
Delta Asset Management ("Delta") serves as Sub-Adviser to the ING Tax
Efficient Equity Fund. Located at 333 South Grand Avenue, Los Angeles,
California, Delta is a division of Furman Selz Capital Management.
Distribution of Fund Shares
ING Funds Distributor, Inc., 1475 Dunwoody Drive, West Chester, PA
19380, serves as Distributor and Principal Underwriter of the Funds. As
distributor, IFD sells shares of each Fund on behalf of the Trust.
Transfer Agent, Fund Accountant and Account Services
ING Fund Services Co., LLC has entered into a Fund Services Agreement
with the Funds pursuant to which ING Fund Services will perform or engage third
parties to perform transfer agency, fund accounting, account services and other
services. ING Fund Services has retained DST Systems, Inc. ("DST") to act as the
Funds' transfer agent and First Data Investors Services Group ("First Data") to
act as the Funds' fund accounting agent. DST is located at 333 W. 11th Street,
Kansas City, Missouri 64105. For their services as transfer agent and fund
accounting agent, DST and First Data, respectively, receive a fee from ING Fund
Services (and not the Funds), payable monthly, based upon the average daily net
assets of the Funds.
<PAGE> 30
27
Rule 12b-1 Distribution Plan
Pursuant to a Plan of Distribution adopted by each Fund under Rule
12b-1 under the 1940 Act, each Fund pays the Distributor an annual fee of 0.50%
of average net assets attributable to that Fund's Class A shares, 0.75% of
average net assets attributable to that Fund's Class B, Class C and X shares.
The higher distribution fee attributable to Class B, C, and X shares is
designed to permit an investor to purchase such shares through registered
representatives of the Distributor and other broker-dealers without the
assessment of an initial sales charge and at the same time to permit the
Distributor to compensate its registered representatives and other
broker-dealers in connection with the sale of such shares. The distribution fee
for all classes may be used by the Distributor for the purpose of financing any
activity which is primarily intended to result in the sale of shares of the
applicable Fund. For example, such distribution fee may be used by the
Distributor: (a) to compensate broker-dealers, including the Distributor and its
registered representatives, for their sale of Fund shares, including the
implementation of various incentive programs with respect to broker-dealers,
banks, and other financial institutions, (b) to pay for interest and other
borrowing costs incurred by the distributor; and (c) to pay other advertising
and promotional expenses in connection with the distribution of Fund shares.
These advertising and promotional expenses include, by way of example but not by
way of limitation, costs of prospectuses for other than current shareholders;
preparation and distribution of sales literature; advertising of any type;
expenses of branch offices provided jointly by the Distributor and affiliated
companies; and compensation paid to and expenses incurred by officers, employees
or representatives of the Distributor or of other broker-dealers, banks, or
other financial institutions, including travel, entertainment, and telephone
expenses. If the distribution plan is terminated by the Funds, the Board of
Trustees may allow the Funds to pay the 12b-1 Fees to the Distributor for
distributing shares before the plan was terminated.
Shareholder Servicing Plan
The Funds have adopted a Shareholder Servicing Plan pursuant to which
it may pay a service fee up to an annual rate of 0.25% of Fund average daily net
assets of the Class A, Class B, Class C and Class X shares to various banks,
trust companies, broker-dealers (other than the Distributor) or other financial
organizations including the Manager and its affiliates (collectively, "Service
Organizations") that provide certain administrative and support services to
their customers who own shares of the Funds.
Some Service Organizations may impose additional or different
conditions on their clients, such as requiring their clients to invest more than
the minimum initial or subsequent investments specified by the Funds or charging
a direct fee for servicing. If imposed, these fees would be in addition to any
amounts which might be paid to the Service Organization by the Funds. Each
Service Organization has agreed to transmit to its clients a schedule of any
such fees. Shareholders using Service Organizations are urged to consult them
regarding any such fees or conditions.
<PAGE> 31
28
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting, selling or
distributing securities. There currently is no precedent prohibiting banks from
performing administrative and shareholder servicing functions as Service
Organizations. However, judicial or administrative decisions or interpretations
of such laws, as well as changes in either Federal or state statutes or
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, could prevent a bank from continuing to perform all
or a part of its servicing activities. In addition, state securities laws on
this issue may differ from the interpretations of federal law expressed herein
and banks and financial institutions may be required to register as dealers
pursuant to state law. If a bank were prohibited from so acting, its shareholder
clients would be permitted to remain shareholders of the Funds and alternative
means for continuing the servicing of such shareholders would be sought. In that
event, changes in the operation of the Funds might occur and a shareholder
serviced by such a bank might no longer be able to avail itself to any services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these
occurrences.
DETERMINATION OF NET ASSET VALUE
As indicated under "Fund Share Valuation" in the applicable Prospectus,
the Money Market Funds use the amortized cost method to determine the value of
its portfolio securities pursuant to Rule 2a-7 under the 1940 Act. The amortized
cost method involves valuing a security at its cost and amortizing any discount
or premium over the period until maturity regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
the value, as determined by amortized cost, is higher or lower than the price
which the Fund would receive if the security were sold. During these periods,
the yield to a shareholder may differ somewhat from that which could be obtained
from a similar fund which utilizes a method of valuation based upon market
prices. Thus, during periods of declining interest rates, if the use of the
amortized cost method resulted in lower value of a Fund's portfolio on a
particular day, a prospective investor in the Fund would be able to obtain a
somewhat higher yield than would result from an investment in a fund utilizing
solely market values and existing Fund shareholders would receive
correspondingly less income. The converse would apply during periods of rising
interest rates.
Rule 2a-7 provides that in order to value its portfolio using the
amortized cost method, the Money Market Funds must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase securities having
remaining maturities of 397 days or less and invest only in U.S. dollar
denominated eligible securities determined by the Trust's Board of Trustees to
be of minimal credit risks and which (1) have received the highest short-term
rating by at least two NRSROs, such as "A-1" by Standard & Poor's and "P-1" by
Moody's; (2) are single rated and have received the highest short-term rating by
a NRSRO; or (3) are unrated, but are determined to be of comparable quality by
the Sub-Adviser.
<PAGE> 32
29
In addition, the Money Market Funds will not invest more than 5% of
their total assets in the securities (including the securities collateralizing a
repurchase agreement) of a single issuer, except that, the Funds may invest in
U.S. Government securities or repurchase agreements that are collateralized by
U.S. Government securities without any such limitation. The Money Market Funds
may invest up to 25% of its total assets in the first tier securities of a
single issuer for a period of up to three business days after the acquisition
thereof provided that the Fund may not invest in the securities of more than one
issuer in accordance with this provision at any one time.
Pursuant to Rule 2a-7, the Board of Trustees is also required to
establish procedures designed to stabilize, to the extent reasonably possible,
the price per share of the Funds, as computed for the purpose of sales and
redemptions at $1.00. Such procedures include review of the Fund's portfolio
holdings by the Board of Trustees, at such intervals as it may deem appropriate,
to determine whether the net asset value of the Funds calculated by using
available market quotations deviates from $1.00 per share based on amortized
cost. The extent of any deviation will be examined by the Board of Trustees. If
such deviation exceeds 1/2 of 1%, the Board of Trustees will promptly consider
what action, if any, will be initiated. In the event the Board of Trustees
determines that a deviation exists which may result in material dilution or
other unfair results to investors or existing shareholders, the Board of
Trustees will take such corrective action as it regards as necessary and
appropriate, which may include selling portfolio instruments prior to maturity
to realize capital gains or losses or to shorten average portfolio maturity,
withholding dividends or establishing a net asset value per share by using
available market quotations.
The Non-Money Market Funds value their portfolio securities in
accordance with the procedures described in the Prospectus.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Prospectus contains a general description of how investors may buy
shares of the Funds and states whether the Funds offer more than one class of
shares. This SAI contains additional information which may be of interest to
investors. Class A Shares are generally sold with a sales charge payable at the
time of purchase (with the exception of the Money Market Funds which charges no
sales charge). The prospectuses contain a table of applicable sales charges.
Certain purchases of Class A shares may be exempt from a sales charge. Class B
and X shares may be subject to a contingent deferred sales charge ("CDSC")
payable upon redemption within a specified period after purchase. The
prospectuses contain a table of applicable CDSCs. Class B and X shares will
automatically convert into Class A shares which are not subject to sales charges
or a CDSC and which are available only to certain investors. Class C shares are
offered without an initial sales charge.
The Funds may sell shares without a sales charge or CDSC pursuant to
several different Special Purchase Plans.
<PAGE> 33
30
The obligation of each Fund to redeem its shares when called upon to do
so by the shareholder is mandatory with certain exceptions. The Funds will pay
in cash all redemption requests by any shareholder of record, limited in amount
during any 90-day period to the lesser of 250,000 or 1% of the net asset value
of a Fund at the beginning of such period. When redemption requests exceed such
amount, however, the Funds reserve the right to make part or all of the payment
in the form of readily marketable securities or other assets of the Fund. An
example of when this might be done is in case of emergency, such as in those
situations enumerated in the following paragraph, or at any time a cash
distribution would impair the liquidity of the Fund to the detriment of the
existing shareholders. Any securities being so distributed would be valued in
the same manner as the portfolio of the Fund is valued. If the recipient sold
such securities, he or she probably would incur brokerage charges.
Redemption of shares, or payment, may be suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekend or
holiday closings, (b) when trading on New York Stock Exchange is restricted, (c)
when an emergency exists, as a result of which disposal by a Fund of securities
owned by it is not reasonably practicable, or it is not reasonably practicable
for a Fund fairly to determine the value of its net assets, or during any other
period when the SEC, by order, so permits; provided that applicable rules and
regulations of the SEC shall govern as to whether the conditions prescribed in
(b) or (c) exist. The New York Stock Exchange is not open for business on the
following holidays (nor on the nearest Monday or Friday if the holiday falls on
a weekend), on which the Funds will not redeem shares: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
BROKER-DEALER COMPENSATION
As discussed in the prospectus, a broker-dealer may receive different
levels of compensation depending on which class of shares is sold. The
Distributor may also provide, from its own resources and not from the resources
of the Funds, additional compensation to broker-dealers in connection with
selling shares of the Funds or for the broker-dealer's own company-sponsored
sales programs. This additional compensation may take the form of additional
payments by the Distributor or a reallowance by the Distributor of up to the
full applicable initial sales charge. A broker-dealer who receives a reallowance
of the full applicable initial sales charge may be deemed an "underwriter" under
the Securities Act of 1933 Act, as amended, during such periods.
The following are broker dealers who are currently participating in the
reallowance program: Advest, Inc., Centaurus Financial, Commonwealth Equities,
Crowell Weedon, Everen Securities, Fahnestock & Co., Financial West Group, First
Allied Securities, First Financial Planners, First of Michigan, J.B. Oxford,
Josephthal & Co., Main Street Management, Mesirow Financial, Robert W. Baird,
Sigma Financial, Transamerica Financial Resources, Trust Advisory Group, Vista
Financial Group, Wedbush Morgan, Professional
<PAGE> 34
31
Asset Management, Questar Capital Corporation, and Brookstreet Securities
Corporation. On the ING Internet Fund only, the full dealer reallowance will be
paid to Vestax Securities Corp., Multi-Financial Securities Corporation, Locust
Street Securities, Inc., IFG Network Securities, Inc., and Pro Equities, Inc.
Such programs may be extended for a limited time or may continue until
terminated by the Distributor.
The Distributor may provide up to 1.00% to dealers of record for shares
purchased without a sales charge when shares purchased and paid for with the
proceeds of shares redeemed in the prior 180 days from a mutual fund on which an
initial sales charge or CDSC was paid (other than a mutual fund managed by the
Manager or any of its affiliates).
The Distributor may pay individual representatives of affiliated
companies up to an additional 1.00% of the net asset value of Class A, Class B,
Class C, Class X and/or Class I shares of a Fund or the Funds sold by such
persons. The affiliated companies, as such term is defined under the 1940 Act,
are IFG Network Securities, Inc., Locust Street Securities, Inc.,
Multi-Financial Securities Corporation, Vestax Securities Corp., Southland Life
Insurance Company, Security Life of Denver Insurance Company, Equitable Life
Insurance Company of Iowa, and Compulife Investor Services, Inc. Representatives
of the affiliated companies also may receive up to .20% of the net asset value
of Class A, Class B, Class C and Class X shares of the Funds sold by them.
For selected periods of time, the Distributor has undertaken to pay (i)
2.00% of the net asset value of Class A, Class B, Class C and Class X shares of
the Funds sold (other than the ING Money Market Fund Class A), including sales
and transfers at net asset value to Everen Securities, Inc.; (ii) 1.00% of the
net asset value of Class A, Class B, Class C and Class X shares of the Funds
sold (other than the ING Money Market Fund), including sales and transfers at
net asset value to the following brokers: Raymond James Financial, Cantella, and
James T. Borello and Company; (iii) 1.00% of the net asset value of Class A,
Class B, Class C and Class X shares of the Funds sold (other than the ING Money
Market Fund Class A), including sales and transfers at net asset value to
Securities Service Network and J.B. Oxford; (iv) .25% of the net asset value of
Class A, Class B, Class C and Class X shares of the Funds sold (other than the
ING Money Market Fund), including sales and transfers at net asset value to Dain
Raucher; (v) .20% of the net asset value of Class A, Class B, Class C and Class
X shares of the Funds sold (other than the ING Money Market Fund), including
sales and transfers at net asset value to Advest, Inc.; (vi) 1.00% of Class C
shares of the Funds sold to Mesirow Financial; and (vii) 1.00% of Class B shares
of the Funds sold to Josephthal & Co. Inc. Such programs may be extended for a
limited time or may continue until terminated by the Distributor.
PORTFOLIO TRANSACTIONS
Investment decisions for the Funds and for the other investment
advisory clients of the Sub-Adviser are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the
<PAGE> 35
32
particular client involved. Thus, a particular security may be bought or sold
for certain clients even though it could have been bought or sold for other
clients at the same time. Likewise, a particular security may be bought for one
or more clients when one or more clients are selling the security. In some
instances, one client may sell a particular security to another client. It also
sometimes happens that two or more clients simultaneously purchase or sell the
same security, in which event each day's transactions in such security are,
insofar as possible, averaged as to price and allocated between such clients in
a manner which in the Sub-Adviser's opinion is equitable to each and in
accordance with the amount being purchased or sold by each. There may be
circumstances when purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.
The Funds have no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Funds' Boards of Trustees, the Sub-Adviser is
primarily responsible for portfolio decisions and the placing of portfolio
transactions. In placing orders, it is the policy of the Funds to obtain the
best results taking into account the broker-dealer's general execution and
operational facilities, the type of transaction involved and other factors such
as the dealer's risk in positioning the securities. While the Sub-Adviser
generally seeks reasonably competitive spreads or commissions, the Funds will
not necessarily be paying the lowest spread or commission available. The
reasonableness of such spreads or brokerage commissions will be evaluated by
comparing spreads or commissions among brokers or dealers in consideration of
the factors listed immediately above and research services described below.
Purchases and sales of securities will often be principal transactions
in the case of debt securities and equity securities traded otherwise than on an
exchange. The purchase or sale of equity securities will frequently involve the
payment of a commission to a broker-dealer who effects the transaction on behalf
of a Fund. Debt securities normally will be purchased or sold from or to issuers
directly or to dealers serving as market makers for the securities at a net
price. Generally, money market securities are traded on a net basis and do not
involve brokerage commissions. Under the 1940 Act, persons affiliated with the
Funds or the Distributor are prohibited from dealing with the Funds as a
principal in the purchase and sale of securities except in limited situations
permitted by SEC regulations, unless a permissive order allowing such
transactions is obtained from the SEC.
The cost of executing portfolio securities transactions for the Money
Market Funds primarily consists of dealer spreads and underwriting commissions.
Under the 1940 Act, persons affiliated with the Funds or the Distributor are
prohibited from dealing with the Funds as a principal in the purchase and sale
of securities unless a permissive order allowing such transactions is obtained
from the SEC.
The Sub-Adviser may, in circumstances in which two or more
broker-dealers are in a position to offer comparable results, give preference to
a dealer which has provided statistical or other research services to the
Sub-Adviser. By allocating transactions in this manner, the Sub-Adviser is able
to supplement its research and analysis with the views and information of
securities firms. These items, which in some cases may also be purchased for
<PAGE> 36
33
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities and recommendations as
to the purchase and sale of securities. Some of these services are of value to
the Sub-Adviser in advising various of its clients (including the Funds),
although not all of these services are necessarily useful and of value in
managing the Funds. The management fee paid by the Funds is not reduced because
the Sub-Adviser and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
(the "Act"), the Sub-Adviser may cause the Funds to pay a broker-dealer which
provides "brokerage and research services" (as defined in the Act) to the
Sub-Adviser an amount of disclosed commission for effecting a securities
transaction for the Funds in excess of the commission which another
broker-dealer would have charged for effecting that transaction.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Trustees may determine, the
Sub-Adviser may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute portfolio transactions for the Funds.
Portfolio Turnover
Changes may be made in the portfolio consistent with the investment
objectives and policies of the Funds whenever such changes are believed to be in
the best interests of the Funds and their shareholders. It is anticipated that
the annual portfolio turnover rate normally will not exceed the amounts stated
in the Funds' Prospectuses and financial statements. Portfolio turnover rate is,
in general, the percentage computed by taking the lesser of purchases or sales
of portfolio securities (excluding securities with a maturity date of one year
or less at the time of acquisition) for the period and dividing it by the
monthly average of the market value of such securities during the period.
For purposes of this calculation, portfolio securities exclude all
securities having a maturity when purchased of one year or less.
TAXATION
The Funds intend to qualify and elect annually to be treated as
regulated investment companies under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). To qualify as a regulated investment company,
a Fund must (a) distribute to shareholders at least 90% of its investment
company taxable income (which includes, among other items, dividends, taxable
interest and the excess of net short-term capital gains over net long-term
capital losses); (b) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock, securities or foreign
currencies or other income derived with respect to its business of investing in
such stock, securities or currencies; and (c) diversify its holdings so
<PAGE> 37
34
that, at the end of each quarter of the taxable year, (i) at least 50% of the
market value of the Fund's assets is represented by cash and cash items
(including receivables), U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and not greater than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies). In addition, a Fund earning tax-exempt interest must, in
each year, distribute at least 90% of its net tax-exempt income. By meeting
these requirements, the Funds generally will not be subject to Federal income
tax on its investment company taxable income and net capital gains which are
distributed to shareholders. If the Funds do not meet all of these Code
requirements, they will be taxed as ordinary corporations and their
distributions will be taxed to shareholders as ordinary income.
Amounts, other than tax-exempt interest, not distributed on a timely
basis in accordance with a calendar year distribution requirement are subject to
a nondeductible 4% excise tax. To prevent imposition of the excise tax, each
Fund must distribute for each calendar year an amount equal to the sum of (1) at
least 98% of its ordinary income (excluding any capital gains or losses) for the
calendar year, (2) at least 98% of the excess of its capital gains over capital
losses (adjusted for certain ordinary losses) for the one-year period ending
October 31 of such year, and (3) all ordinary income and capital gain net income
(adjusted for certain ordinary losses) for previous years that were not
distributed during such years. A distribution, including an "exempt-interest
dividend," will be treated as paid on December 31, of a calendar year if it is
declared by a Fund during October, November or December of that year to
shareholders of record on a date in such a month and paid by the Fund during
January of the following year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
Some Funds may invest in stocks of foreign companies that are
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign company is classified as a PFIC under the Code if at least
one-half of its assets constitutes investment-type assets or 75% or more of its
gross income is investment-type income. Under the PFIC rules, an "excess
distribution" received with respect to PFIC stock is treated as having been
realized ratably over the period during which the Fund held the PFIC stock. A
Fund itself will be subject to tax on the portion, if any, of the excess
distribution that is allocated to the Fund's holding period in prior taxable
years (and an interest factor will be added to the tax, as if the tax had
actually been payable in such prior taxable years) even though the Fund
distributes the corresponding income to shareholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain distributions
from a PFIC. All excess distributions are taxable as ordinary income.
A Fund may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, a Fund generally
would be required to include in its gross income its share of the earnings of a
PFIC on a current basis, regardless
<PAGE> 38
35
of whether any distributions are received from the PFIC. If this election is
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, other elections may become
available that would affect the tax treatment of PFIC stock held by a Fund. Each
Fund's intention to qualify annually as a regulated investment company may limit
its elections with respect to PFIC stock.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject a Fund
itself to tax on certain income from PFIC stock, the amount that must be
distributed to shareholders and that will be taxed to shareholders as ordinary
income or long-term capital gain may be increased or decreased substantially as
compared to a Fund that did not invest in PFIC stock. Investors should consult
their own tax advisors in this regard.
Distributions of investment company taxable income generally are
taxable to shareholders as ordinary income. Distributions from certain of the
Funds may be eligible for the dividends-received deduction available to
corporations. To the extent dividends received by a Fund are attributable to
foreign corporations, a corporation that owns shares will not be entitled to the
dividends-received deduction with respect to its pro rata portion of such
dividends, since the dividends-received deduction is generally available only
with respect to dividends paid by domestic corporations. Proposed legislation,
if enacted, would reduce the dividends-received deduction from 70 to 50 percent.
Distributions of net long-term capital gains, if any, designated by the
Funds as long-term capital gain dividends are taxable to shareholders as
long-term capital gain, regardless of the length of time the Funds' shares have
been held by a shareholder. All distributions are taxable to the shareholder in
the same manner whether reinvested in additional shares or received in cash.
Shareholders will be notified annually as to the Federal tax status of
distributions.
Distributions by a Fund reduce the net asset value of the Fund's
shares. Should a distribution reduce the net asset value below a shareholder's
cost basis, such distribution, nevertheless, would be taxable to the shareholder
as ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Funds. The price of shares
purchased at that time includes the amount of the forthcoming distribution.
Those purchasing just prior to a distribution will receive a distribution which
nevertheless generally will be taxable to them.
Upon the taxable disposition (including a sale or redemption) of shares
of a Fund, a shareholder may realize a gain or loss depending upon his basis in
his shares. Such gain or loss generally will be treated as capital gain or loss
if the shares are capital assets in the shareholders' hands. Such gain or loss
will be long-term or short-term, generally depending upon the shareholder's
holding period for the shares. However, a loss realized by a shareholder on the
disposition of Fund shares with respect to which capital gain dividends
<PAGE> 39
36
have been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. A loss realized on the redemption, sale or exchange of Fund
shares will be disallowed to the extent an exempt interest dividend was received
with respect to those shares if the shares have been held by the shareholder for
six months or less. Further, a loss realized on a disposition will be disallowed
to the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will have
a cost basis for Federal income tax purposes in each share received equal to the
net asset value of a share of the Funds on the reinvestment date.
The taxation of equity options is governed by Code section 1234.
Pursuant to Code section 1234, the premium received by a Fund for selling a put
or call option is not included in income at the time of receipt. If the option
expires, the premium is short-term capital gain to the Fund. If the Fund enters
into a closing transaction, the difference between the amount paid to close out
its position and the premium received is short-term capital gain or loss. If a
call option written by a Fund is exercised, thereby requiring the Fund to sell
the underlying security, the premium will increase the amount realized upon the
sale of such security and any resulting gain or loss will be a capital gain or
loss, and will be long-term or short-term depending upon the holding period of
the security. With respect to a put or call option that is purchased by a Fund,
if the option is sold any resulting gain or loss will be a capital gain or loss,
and will be long-term or short-term, depending upon the holding period of the
option. If the option expires, the resulting loss is a capital loss and is
long-term or short-term, depending upon the holding period of the option. If the
option is exercised, the cost of the option, in the case of a call option, is
added to the basis of the purchased security and in the case of a put option,
reduces the amount realized on the underlying security in determining gain or
loss.
Certain of the options, futures contracts, and forward foreign currency
exchange contracts that several of the Funds may invest in are so-called
"section 1256 contracts." With certain exceptions, gains or losses on section
1256 contracts generally are considered 60% long-term and 40% short-term capital
gains or losses ("60/40"). Also, section 1256 contracts held by a Fund at the
end of a taxable year (and, generally, for purposes of the 4% excise tax, on
October 31 of each year) are "marked-to market" with the result that unrealized
gains or losses are treated as though they were realized and the resulting gain
or loss is treated as 60/40 gain or loss. Investors should consult their own tax
advisors in this regard.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for Federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by a Fund. In addition, losses realized
by a Fund on a position that is part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the taxable
income for the taxable year in which such losses are realized. Because only a
few regulations implementing the straddle rules have been
<PAGE> 40
37
promulgated, the tax consequences to a Fund of hedging transactions are not
entirely clear. Hedging transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income when
distributed to stockholders.
A Fund may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under the rules according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders and which will be taxed to shareholders as ordinary
income or long-term capital gain may be increased or decreased substantially as
compared to a Fund that did not engage in such hedging transactions. Investors
should consult their own tax advisors in this regard.
Certain requirements that must be met under the Code in order for a
Fund to qualify as a regulated investment company, may limit the extent to which
a Fund will be able to engage in transactions in options, futures, and forward
contracts.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues interest, dividends
or other receivables, or accrues expenses or other liabilities denominated in a
foreign currency, and the time the Fund actually collects such receivables, or
pays such liabilities, generally are treated as ordinary income or ordinary
loss. Similarly, on disposition of debt securities denominated in a foreign
currency and on disposition of certain options and forward and futures
contracts, gains or losses attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or contract and the
date of disposition also are treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "section 988" gains or losses, may
increase, decrease, or eliminate the amount of a Fund's investment company
taxable income to be distributed to its shareholders as ordinary income.
Investors should consult their own tax advisors in this regard.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other similar income taxes imposed by the foreign
country. If more than 50% of the value of a Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible and intends to elect to "pass-through" to its shareholders the
amount of such foreign taxes paid by the Fund. Pursuant to this election, a
shareholder would be required to include in gross income (in addition to taxable
dividends actually received) his pro rata share of the foreign taxes paid by a
Fund and would be entitled either to deduct his pro rata share of foreign taxes
in computing his taxable income or to use it as a foreign tax credit against his
U.S. Federal income tax liability, subject to limitations. No deduction for
foreign taxes may be claimed by a shareholder who does not
<PAGE> 41
38
itemize deductions, but such a shareholder may be eligible to claim the foreign
tax credit (see below). Each shareholder will be notified within 60 days after
the close of a Fund's taxable year whether the foreign taxes paid by a Fund will
"pass-through" for that year and, if so, such notification will designate (a)
the shareholder's portion of the foreign taxes paid to each such country, and
(b) the portion of the dividend which represents income derived from foreign
sources.
Generally, a credit for foreign taxes is subject to the limitation that
it may not exceed the shareholder's U.S. tax attributable to his total foreign
source taxable income. For this purpose, if a Fund makes the election described
in the preceding paragraph, the source of the Fund's income flows through to its
shareholders. With respect to a Fund, gains from the sale of securities will be
treated as derived from U.S. sources and certain currency fluctuations gains,
including fluctuation gains from foreign currency-denominated debt securities,
receivables and payables, will be treated as ordinary income derived from U.S.
sources. The limitation on the foreign tax credit is applied separately to
foreign source passive income (as defined for purposes of the foreign tax
credit) including foreign source passive income of a Fund. The foreign tax
credit may offset only 90% of the alternative minimum tax imposed on
corporations and individuals, and foreign taxes generally may not be deducted in
computing alternative minimum taxable income.
The Funds are required to report to the Internal Revenue Service
("IRS") all distributions except in the case of certain exempt shareholders. All
such distributions generally are subject to withholding of Federal income tax at
a rate of 31% ("backup withholding") in the case of non-exempt shareholders if
(1) the shareholder fails to furnish the Funds with and to certify the
shareholder's correct taxpayer identification number or social security number,
(2) the IRS notifies the Funds or a shareholder that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he is not subject to backup withholding. If
the withholding provisions are applicable, any such distributions, whether
reinvested in additional shares or taken in cash, will be reduced by the amounts
required to be withheld. Backup withholding is not an additional tax. Any amount
withheld may be credited against the shareholder's U.S. Federal income tax
liability. Investors may wish to consult their tax advisers about the
applicability of the backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, trusts and estates). Distributions by the Funds also
may be subject to state and local taxes and their treatment under state and
local income tax laws may differ from Federal income tax treatment.
Distributions of a Fund which are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities may be exempt
from state and local income taxes in certain states. Shareholders should consult
their tax advisers with respect to particular questions of Federal, state and
local taxation. Shareholders who are not U.S. persons should consult their tax
advisers regarding U.S. and foreign tax consequences of ownership of shares of
the Funds including the likelihood that distributions to them would be subject
to withholding of U.S. tax at a rate of 30% (or at a lower rate under a tax
treaty).
<PAGE> 42
39
ING National Tax-Exempt Bond Fund and ING National Tax-Exempt
Money Market Fund. These Funds intend to manage their respective portfolios so
that each will be eligible to pay "exempt-interest dividends" to shareholders.
The Funds will so qualify if, at the close of each quarter of its taxable year,
at least 50% of the value of their respective total assets consists of state,
municipal, and certain other securities, the interest on which is exempt from
the regular Federal income tax. To the extent that a Fund's dividends
distributed to shareholders are derived from such interest income and are
designated as exempt-interest dividends by the Fund, they will be excludable
from a shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends, however, must be taken into account by shareholders
in determining whether their total incomes are large enough to result in
taxation of up to 85% of their Social Security benefits and certain railroad
retirement benefits. The Funds will inform shareholders annually as to the
portion of the distributions from the Fund which constitute except-interest
dividends. In addition, for corporate shareholders of the Funds, exempt interest
dividends may comprise part or all of an adjustment to alternative minimum
taxable income. Exempt-interest dividends that are attributable to certain
private activity bonds, while not subject to the regular Federal income tax, may
constitute an item of tax preference for purposes of the alternative minimum
tax.
To the extent that a Fund's dividends are derived from its
investment company taxable income (which includes interest on its temporary
taxable investments and the excess of net short-term capital gain over net
long-term capital loss), they are considered ordinary (taxable) income for
Federal income tax purposes. Such dividends will not qualify for the
dividends-received deduction for corporations. Distributions, if any, of net
long-term capital gains (the excess of net long-term capital gain over net
short-term capital loss) designated by a Fund as long-term capital gain
dividends are taxable to shareholders as long-term capital gain regardless of
the length of time the shareholder has owned shares of the Fund.
OTHER INFORMATION
Capitalization
The Trust is a Delaware business trust established under a
Trust Instrument dated July 30, 1998 and currently consists of twenty-three
separately managed portfolios, all of which are discussed in this SAI. Each
portfolio, except as noted, is comprised of five different classes of shares --
Class A shares, Class B shares, Class C shares, Class X shares and Class I
shares. The ING National Tax-Exempt Bond Fund and the ING National Tax-Exempt
Money Market Fund do not offer Class X and Class I shares.
The capitalization of the Funds consists solely of an
unlimited number of shares of beneficial interest with a par value of $0.001
each. The Board of Trustees may establish additional Funds (with different
investment objectives and fundamental policies) at any time in the future.
Establishment and offering of additional Funds will not alter the rights of the
shareholders. When issued, shares are fully paid, non-assessable, redeemable and
freely transferable. Shares do not have preemptive rights or subscription
rights. In any liquidation
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40
of a Fund, each shareholder is entitled to receive his pro rata share of the
net assets of that Fund.
In the event of a liquidation or dissolution of the Funds or
an individual Fund, shareholders of a particular Fund would be entitled to
receive the assets available for distribution belonging to such Fund, and a
proportionate distribution, based upon the relative net asset values of the
respective Funds, of any general assets not belonging to any particular Fund
which are available for distribution. Shareholders of a Fund are entitled to
participate in the net distributable assets of the particular Fund involved in
liquidation, based on the number of shares of the Fund that are held by each
shareholder.
Voting Rights
Under the Trust Instrument, the Funds are not required to hold
annual meetings of each Fund's shareholders to elect Trustees or for other
purposes. It is not anticipated that the Funds will hold shareholders' meetings
unless required by law or the Trust Instrument. In this regard, the Trust will
be required to hold a meeting to elect Trustees to fill any existing vacancies
on the Board if, at any time, fewer than a majority of the Trustees have been
elected by the shareholders of the Funds. In addition, the Trust Instrument
provides that the holders of not less than two-thirds of the outstanding shares
of the Funds may remove persons serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees are required to
call a meeting for the purpose of considering the removal of persons serving as
Trustee if requested in writing to do so by the holders of not less than 10% of
the outstanding shares of the Funds. To the extent required by applicable law,
the Trustees shall assist shareholders who seek to remove any person serving as
Trustee.
The Funds' shares do not have cumulative voting rights, so
that the holder of more than 50% of the outstanding shares may elect the entire
Board of Trustees, in which case the holders of the remaining shares would not
be able to elect any Trustees.
Shareholders of all of the Funds, as well as those of any
other investment portfolio now or hereafter offered by the Fund, will vote
together in the aggregate and not separately on a Fund-by-Fund basis, except as
otherwise required by law or when permitted by the Board of Trustees. Rule 18f-2
under the 1940 Act provides that any matter required to be submitted to the
holders of the outstanding voting securities of an investment company such as
the Funds shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each Fund
affected by the matter. A Fund is affected by a matter unless it is clear that
the interests of each Fund in the matter are substantially identical or that the
matter does not affect any interest of the Fund. Under the Rule, the approval of
an investment advisory agreement or any change in a fundamental investment
policy would be effectively acted upon with respect to a Fund only if approved
by a majority of the outstanding shares of such Fund. However, the Rule also
provides that the ratification of the appointment of independent auditors, the
approval of principal underwriting contracts and the election of trustees may be
effectively acted upon by shareholders of the Funds voting together in the
aggregate without regard to a particular Fund.
<PAGE> 44
41
Custodian
Investors Fiduciary Trust Company acts as custodian of the
Trust's assets. The Trustees of the Funds have reviewed and approved custodial
arrangements for securities held outside of the United States in accordance with
Rule 17f-5 of the 1940 Act.
Yield and Performance Information
The Funds may, from time to time, include their yields,
effective yields, tax equivalent yields and average annual total returns in
advertisements or reports to shareholders or prospective investors.
Current yields for the Money Market Funds will be based on the
change in the value of a hypothetical investment (exclusive of capital changes
such as gains or losses from the sale of securities and unrealized appreciation
and depreciation) over a particular seven-day period, less a pro rata share of
each Fund's expenses accrued over that period (the "base period"), and stated as
a percentage of the investment at the start of the base period (the "base period
return"). The base period return is then annualized by multiplying by 365/7,
with the resulting yield figure carried to at least the nearest hundredth of one
percent. "Effective yield" for each Money Market Fund assumes that all dividends
received during the base period have been reinvested. Calculation of "effective
yield" begins with the same "base period return" used in the calculation of
yield, which is then annualized to reflect weekly compounding pursuant to the
following formula:
Effective Yield = [(Base Period Return +1) [(RAISED TO THE (365/7) POWER]] - 1.
Quotations of yield for the Non-Money Market Funds will be
based on the investment income per share earned during a particular 30-day
period, less expenses accrued during a period ("net investment income") and will
be computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
a - b 6
YIELD = 2[( ---- +1 ) - 1]
cd
where a = dividends and interest earned during the period, b =
expenses accrued for the period (net of any reimbursements), c = the average
daily number of shares outstanding during the period that were entitled to
receive dividends, and d = the maximum offering price per share on the last day
of the period.
<PAGE> 45
42
Quotations of the tax-equivalent yield for the ING National
Tax-Exempt Bond Fund will be calculated according to the following formula:
TAX EQUIVALENT YIELD = ( E )
-----
1 - p
E = Tax-Exempt yield
p = stated income tax rate
Quotations of average annual total return will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in a Fund over periods of 1, 5 and 10 years (up to the life of the
Fund), calculated pursuant to the following formula:
n
P(l+T) = ERV
(where P = a hypothetical initial payment of $1,000, T = the
average annual total return, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). All total return figures will reflect a proportional share of Fund
expenses (net of certain reimbursed expenses) on an annual basis, and will
assume that all dividends and distributions are reinvested when paid.
Quotations of yield and total return will reflect only the
performance of a hypothetical investment in the Funds during the particular time
period shown. Yield and total return for the Funds will vary based on changes in
the market conditions and the level of a Fund's expenses, and no reported
performance figure should be considered an indication of performance which may
be expected in the future.
In connection with communicating its yields or total return to
current or prospective shareholders, the Funds also may compare these figures to
the performance of other mutual funds tracked by mutual fund rating services or
to other unmanaged indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
Investors who purchase and redeem shares of the Funds through
a customer account maintained at a Service Organization may be charged one or
more of the following types of fees as agreed upon by the Service Organization
and the investor, with respect to the customer services provided by the Service
Organization: account fees (a fixed amount per month or per year); transaction
fees (a fixed amount per transaction processed); compensating balance
requirements (a minimum dollar amount a customer must maintain in order to
obtain the services offered); or account maintenance fees (a periodic charge
based upon a percentage of the assets in the account or of the dividends paid on
those assets). Such fees will have the effect of reducing the yield and average
annual total return of the Funds for those investors. Investors who maintain
accounts with the Trust as transfer agent will not pay these fees.
<PAGE> 46
43
Other Performance Comparisons
The Funds may from time to time include in advertisements,
sales literature, communications to shareholders and other materials,
comparisons of its total return to the return of other mutual funds with similar
investment objectives, broadly-based market indices, other investment
alternatives, rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the performance of the funds may be compared to data prepared by Lipper
Analytical Services, Inc., Morningstar, Inc., the S&P 500 index, the Dow Jones
Industrial Average, or the Russell 2000. Lipper Analytical Services, Inc.
maintains statistical performance databases, as reported by a diverse universe
of independently-managed mutual funds. Morningstar, Inc. is a mutual fund
performance rating service that rates mutual funds on the basis of risk-adjusted
performance. Evaluations of fund performance made by independent sources may
also be used in advertisements concerning the funds, including reprints of, or
selections from editorials or articles about the funds or the funds managers.
The Funds may also publish rankings or ratings of the
managers. Materials may include a list of representative clients of the Funds'
investment advisers and may contain information regarding the background,
expertise, etc. of the investment advisers or of funds' portfolio managers. The
distributor may provide information that discusses the Managers' philosophy,
investment strategy, investment process, security selection criteria and
screening methodologies.
In addition, the Funds may also include in materials
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies or
investment suitability of a Fund, economic and political conditions, the
relationship between sectors of the economy and the economy as a whole, various
securities markets, the effects of inflation and historical performance of
various asset classes, including but not limited to, stocks, bonds and Treasury
securities, and hypothetical investment returns based on certain assumptions.
From time to time, materials may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Fund) as well as the views of the advisers as to current market, economic, trade
and interest rate trends, legislative, regulatory and monetary developments,
investment strategies and related matters believed to be of relevance to a Fund.
Material may also contain fund holdings, sector allocations, asset allocations,
credit ratings, and regional allocations. Material may refer to various fund
identifiers such as the CUSIP numbers or NASDAQ symbols.
Independent Auditors
Ernst & Young LLP serves as the independent auditors for the
Funds. Ernst & Young LLP provides audit services, tax return preparation and
assistance and consultation in connection with review of SEC filings. Ernst &
Young LLP's address is 787 Seventh Avenue, New York, NY 10019.
<PAGE> 47
44
Registration Statement
This SAI and the Prospectus do not contain all the information
included in the Funds' Registration Statement filed with the SEC under the
Securities Act of 1933 with respect to the securities offered hereby, certain
portions of which have been omitted pursuant to the rules and regulations of the
SEC. The Registration Statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the
contents of any contract or other documents referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
<PAGE> 48
APPENDIX
45
DESCRIPTION OF MOODY'S BOND RATINGS:
Excerpts from Moody's description of its four highest bond ratings are
listed as follows: Aaa -- judged to be the best quality and they carry the
smallest degree of investment risk; Aa -- judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally know as
high grade bonds; A -- possess many favorable investment attributes and are to
be considered as "upper medium grade obligations"; Baa -- considered to be
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. This group is the
lowest which qualifies for investment grade. Other Moody's bond descriptions
include: Ba -- judged to have speculative elements, their future cannot be
considered as well assured; B -- generally lack characteristics of the desirable
investment; Caa -- are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest; Ca --
speculative in a high degree, often in default; C -- lowest rated class of
bonds, regarded as having extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating
categories. The modifier 1 indicates that the security is in the higher end of
its rating category; the modifier 2 indicates a mid-range ranking; and modifier
3 indicates a ranking toward the lower end of the category.
DESCRIPTION OF S&P'S BOND RATINGS:
Excerpts from S&P's description of its four highest bond ratings are
listed as follows: AAA -- highest grade obligations, in which capacity to pay
interest and repay principal is extremely strong; AA -- also qualify as high
grade obligations, having a very strong capacity to pay interest and repay
principal, and differs from AAA issues only in a small degree; A -- regarded as
upper medium grade, having a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories; BBB -- regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories. This group is the lowest which
qualifies for investment grade. BB, B, CCC, CC -- predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with terms
of the obligations; BB indicates the highest grade and CC the lowest within the
speculative rating categories.
S&P applies indicators "+," no character, and "-" to its rating
categories. The indicators show relative standing within the major rating
categories.
<PAGE> 49
46
DESCRIPTION OF MOODY'S RATINGS OF NOTES AND VARIABLE RATE DEMAND INSTRUMENTS:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity.
MIG 1/VMIG 1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMG 2: This denotes high quality. Margins of protection are ample
although not as large as in the preceding group.
DESCRIPTION OF MOODY'S TAX-EXEMPT COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations which have an original maturity not
exceeding nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. The following designations, all judged to be
investment grade, indicate the relative repayment ability of rated issuers of
securities in which the Trust may invest.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term promissory obligations.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term promissory obligations.
DESCRIPTION OF S&P'S RATINGS FOR MUNICIPAL BONDS:
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in a small
degree.
A: Debt rated "A" has strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
<PAGE> 50
47
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
BB, B, CCC, CC: Debt rated in these categories is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
CI: The "CI" rating is reserved for income bonds on which no interest
is being paid.
D: Debt rated "D" is in default, and payment of interest and/or
repayment of principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
DESCRIPTION OF S&P'S RATINGS FOR INVESTMENT GRADE MUNICIPAL NOTES AND SHORT-TERM
DEMAND OBLIGATIONS:
SP-1: Issues carrying this designation have a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a plus (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to
pay principal and interest.
DESCRIPTION OF S&P'S RATINGS FOR DEMAND OBLIGATIONS AND TAX-EXEMPT COMMERCIAL
PAPER:
An S&P commercial paper rating is a current assessment of the
likelihood of timely repayment of debt having an original maturity of no more
than 365 days. The two rating categories for securities in which the Trust may
invest are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics will be denoted with a plus (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
<PAGE> 51
REPORT OF INDEPENDENT AUDITORS
Shareholder and Board of Trustees
ING Funds Trust
We have audited the accompanying statements of assets, liabilities and capital
of ING Money Market Fund, ING Intermediate Bond Fund, ING High Yield Bond Fund,
ING International Bond Fund, ING Large Cap Growth Fund, ING Growth and Income
Fund, ING Mid Cap Growth Fund, ING Small Cap Growth Fund, ING Global Brand Names
Fund, ING International Equity Fund, ING European Equity Fund, ING Tax Efficient
Equity Fund, ING Focus Fund and ING Global Information Technology Fund (the
"Portfolios") (fourteen of the portfolios comprising ING Mutual Funds Trust) as
of October 27, 1998. These statements of assets, liabilities and capital are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these statements of assets, liabilities and capital based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of assets, liabilities and
capital are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statements of
assets, liabilities and capital. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall statements of assets, liabilities and capital
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the statements of assets, liabilities and capital referred to
above present fairly, in all material respects, the financial position of the
Portfolios of ING Funds Trust at October 27, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
-------------------------------
ERNST & YOUNG LLP
New York, New York
October 27, 1998
<PAGE> 52
ING FUNDS TRUST
Statements of Assets, Liabilities and Capital
October 27, 1998
<TABLE>
<CAPTION>
ING ING ING
ING Money Intermediate High Yield International
Market Fund Bond Fund Bond Fund Bond Fund
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Cash $ 7,142.86 $ 7,142.86 $ 7,142.86 $ 7,142.86
---------------------------------------------------------------------------------
LIABILITIES: $ - $ - $ - $ -
---------------------------------------------------------------------------------
CAPITAL:
Shares of beneficial interest
outstanding (par value of
$0.001per share); unlimited
amount of shares authorized $ 7,142.86 $ 7,142.86 $ 7,142.86 $ 7,142.86
=================================================================================
SHARES OUTSTANDING:
Class A 2,380.960 238.096 238.096 238.096
Class B 2,380.950 238.095 238.095 238.095
Class C 2,380.950 238.095 238.095 238.095
NET ASSET VALUE:
Class A (and redemption price) $ 1.00 $ 10.00 $ 10.00 $ 10.00
Class B $ 1.00 $ 10.00 $ 10.00 $ 10.00
Class C $ 1.00 $ 10.00 $ 10.00 $ 10.00
OFFERING PRICE(a):
Class A $ 1.00 $ 10.50 $ 10.50 $ 10.50
Class B $ 1.00 $ 10.00 $ 10.00 $ 10.00
Class C $ 1.00 $ 10.00 $ 10.00 $ 10.00
</TABLE>
<TABLE>
<CAPTION>
ING Large ING Growth ING ING ING Global
Cap Growth and Income Mid Cap Small Cap Brand Names
Fund Fund Growth Fund Growth Fund Fund
- ------------------------------------------ ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash $ 7,142.86 $ 7,142.86 $ 7,142.86 $ 7,142.86 $ 7,142.85
----------------------------------------------------------------------------------
LIABILITIES: $ - $ - $ - $ - $ -
----------------------------------------------------------------------------------
CAPITAL:
Shares of beneficial interest
outstanding (par value of
$0.001per share); unlimited
amount of shares authorized $ 7,142.86 $ 7,142.86 $ 7,142.86 $ 7,142.86 $ 7,142.85
==================================================================================
SHARES OUTSTANDING:
Class A 238.096 238.096 238.096 238.096 238.095
Class B 238.095 238.095 238.095 238.095 238.095
Class C 238.095 238.095 238.095 238.095 238.095
NET ASSET VALUE:
Class A (and redemption price) $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Class B $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Class C $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
OFFERING PRICE(a):
Class A $ 10.61 $ 10.61 $ 10.61 $ 10.61 $ 10.61
Class B $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Class C $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
</TABLE>
<TABLE>
<CAPTION>
ING
ING ING ING ING Global Information
International European Tax Efficient Focus Technology
Equity Fund Equity Fund Equity Fund Fund Fund
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash $ 7,142.85 $ 7,142.85 $ 7,142.86 $ 7,142.86 $ 7,142.85
------------------------------------------------------------------------------------
LIABILITIES: $ - $ - $ - $ - $ -
------------------------------------------------------------------------------------
CAPITAL:
Shares of beneficial interest
outstanding (par value of
$0.001per share); unlimited
amount of shares authorized $ 7,142.85 $ 7,142.85 $ 7,142.86 $ 7,142.86 $ 7,142.85
====================================================================================
SHARES OUTSTANDING:
Class A 238.095 238.095 238.096 238.096 238.095
Class B 238.095 238.095 238.095 238.095 238.095
Class C 238.095 238.095 238.095 238.095 238.095
NET ASSET VALUE:
Class A (and redemption price) $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Class B $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Class C $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
OFFERING PRICE(a):
Class A $ 10.61 $ 10.61 $ 10.61 $ 10.61 $ 10.61
Class B $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Class C $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
</TABLE>
(a) Maximum sales load is 4.75% for ING Intermediate Bond Fund, ING High Yield
Bond Fund and ING International Bond Fund, respectively, and is 5.75% for
the ING Large Cap Growth Fund, ING Growth and Income Fund, ING Mid Cap
Growth Fund, ING Small Cap Growth Fund, ING Global Brand Names Fund, ING
International Equity Fund, ING European Equity Fund, ING Tax Efficient
Equity Fund, ING Focus Fund and ING Global Information Technology Fund,
respectively.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE> 53
ING FUNDS TRUST
Notes to Financial Statements
October 27, 1998
1. DESCRIPTION
ING Funds Trust (the "Trust") is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment company,
and was organized as a Delaware business trust on July 30, 1998. The
capitalization of the Trust consists solely of an unlimited number of shares of
beneficial interest with a par value of $0.001 each. The Trust has twenty
separate investment portfolios and has initially seeded fourteen investment
portfolios: ING Money Market Fund, ING Intermediate Bond Fund, ING High Yield
Bond Fund, ING International Bond Fund, ING Large Cap Growth Fund, ING Growth
and Income Fund, ING Mid Cap Growth Fund, ING Small Cap Growth Fund, ING Global
Brand Names Fund, ING Intermediate Equity Fund, ING European Equity Fund, ING
Tax Efficient Equity Fund, ING Focus Fund, and ING Global Information Technology
Fund (each, a "Fund," collectively, the "Funds"). Other investment portfolios
not yet seeded are ING U.S. Treasury Money Market Fund, ING Mortgage Income
Fund, ING National Tax-Exempt Bond Fund, ING Balanced Fund, ING Emerging Markets
Equity Fund and ING Global Real Estate Fund. The Trust has had no operations
since July 30, 1998 other than matters relating to its organization and
registration.
2. MANAGEMENT AND DISTRIBUTION AGREEMENTS
ING Mutual Funds Management Co. LLC ("IMFC"), a wholly owned subsidiary
of ING Groep NV ("ING Group"), acts as the investment manager to the Funds. As
the investment manager of the Funds, IMFC has overall responsibility, subject to
the supervision of the Board of Trustees, for engaging sub-advisers and for
monitoring and evaluating the management of the assets of each Fund by the
sub-adviser. IMFC also provides certain administrative services necessary for
the Funds' operations. Pursuant to a Management Agreement, the Trust will pay
IMFC a fee applied to the average daily net assets of the Funds, computed daily
and paid monthly, at an annual rate as follows:
FUND ANNUAL RATE
- ---------------------------------------------------- ---------------------------
ING Money Market Fund 0.25%
ING Intermediate Bond Fund 0.50%
ING High Yield Bond Fund 0.65%
ING International Bond Fund 1.00%
ING Large Cap Growth Fund 0.75%
ING Growth and Income Fund 0.75%
ING Mid Cap Growth Fund 1.00%
ING Small Cap Growth Fund 1.00%
ING Global Brand Names Fund 1.00%
ING International Equity Fund 1.25%
ING European Equity Fund 1.15%
ING Tax Efficient Equity Fund 0.80%
ING Focus Fund 1.00%
ING Global Information Technology Fund 1.25%
The Trust also has entered into a Distribution Agreement under which
the Trust's shares will be continuously offered by ING Fund Distributor Inc., an
affiliate of IMFC.
3. FEDERAL INCOME TAXES
Each of the Funds intend to qualify as a "regulated investment company"
and as such (and by complying with the applicable provisions of the Internal
Revenue Code of 1986, as amended) will not be subject to Federal income tax on
taxable income (including realized capital gains) that is distributed to
shareholders.
