THE STOCKBACK FUND
PROSPECTUS
August 14, 2000
The Fund seeks long-term capital appreciation.
As with all mutual funds, the Securities and Exchange Commission has
not approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any contrary representation is a criminal offense.
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TABLE OF CONTENTS
PAGE
RISK/RETURN SUMMARY.......................................................4
PRICING OF FUND SHARES....................................................9
HOW YOU MAY PURCHASE AND REDEEM FUND SHARES..............................10
SALES OF SECURITIES......................................................16
TEMPORARY DEFENSIVE INVESTMENTS..........................................16
UNLISTED SECURITIES......................................................16
FEES PAID TO STOCKBACK BY PARTICIPATING MERCHANTS........................16
THE ADVISER, SUB-ADVISER AND THE ADVISERS' AFFILIATES....................17
DIVIDENDS AND OTHER DISTRIBUTIONS........................................18
TAX CONSEQUENCES.........................................................18
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Stockback.com, LLC ("Stockback") and its affiliates operate a Web site
(http://www.stockback.com), as part of a consumer stock ownership program
("Consumer Stock Ownership Program"), sponsored by Stockback Capital, LLC
("Stockback Capital"), a registered broker-dealer and a member of the National
Association of Securities Dealers, Inc. ("NASD"). The Web site allows customers
to directly access the Web sites of providers of goods and services that
participate in the Consumer Stock Ownership Program. We refer to these providers
as Participating Merchants or Merchants. You can find a current list of
Participating Merchants at www.stockback.com. Under the Consumer Stock Ownership
Program, each time a member of the Consumer Stock Ownership Program (a "Member")
makes a purchase from a Participating Merchant, the Participating Merchant will
rebate a percentage of the purchase price in cash to Stockback Capital for the
benefit of the Member.
You may become a Member of the Consumer Stock Ownership Program by
completing an online application to open an investment account with Stockback
Capital. As a Member, you may choose to instruct Stockback Capital to either (i)
use your cash rebates to purchase shares of the Stockback Fund (the "Fund"), or
(ii) hold your rebates as cash in an investment account with Stockback Capital.
Stockback Advisers, LLC currently serves as the investment adviser ("Adviser")
of the Fund. The Adviser has delegated the day-to-day discretionary management
of the Fund's assets to Merrill Lynch Investment Managers, L.P. ("Sub-Adviser").
You may also purchase shares of the Fund directly, as discussed in more detail
below. At any time, you may ask Stockback Capital to issue a check to you for
the cash held in your investment account. You will find a more detailed
description of the Fund, the Consumer Stock Ownership Program and Participating
Merchants within this prospectus, which we encourage you to read in its entirety
and save for future reference.
RISK/RETURN SUMMARY
Investment Objective and Goals
The Fund's investment objective is to provide long-term capital
appreciation. There can be no assurance that the Fund will be able to achieve
its investment objective. This investment objective is non-fundamental and may
be changed without the approval of the Fund's shareholders.
Principal Strategies
The Fund will seek to achieve its objective by investing, under normal
market conditions, at least 65% of its total assets in common stock of companies
that the Fund's portfolio management team believes have the potential to
increase in value.
In selecting stocks for the Fund, the Sub-Adviser will focus primarily
on large capitalization companies that it believes are current industry leaders.
The Sub-Adviser will use quantitative techniques to seek to create a diversified
portfolio of stocks issued by large capitalization companies. The Sub-Adviser
will begin by constructing an "optimal" portfolio that has risk and style
characteristics similar to the large capitalization market segment as a whole,
by focusing on quantifiable measures such as overall portfolio valuation, sector
representation, and volatility. The Sub-Adviser will emphasize the individual
stocks within this portfolio that it believes will outperform other large
capitalization companies. The Sub-Adviser will select such stock through
technical and in-depth quantitative analysis that involves a blend of "value"
(investments in securities with lower price/earnings ratios and lower forecasted
growth values) and "growth" (investments in securities with higher
price/earnings ratios and higher forecasted growth values) strategies and
focuses on a variety of factors, such as:
. earnings (surprises and equity analysts' revisions);
. momentum (price and earnings); and
. valuation (enterprise value, price versus cash flow and
dividend discount models).
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As part of its investment in the common stock of companies that the
Fund's portfolio management team believes have the potential to increase in
value, the Fund may also invest in publicly traded common stock issued by each
of the Participating Merchants (or, where the Participating Merchant is not
publicly traded, in the publicly traded parent company of such Merchant).
Participating Merchants engage, in levels varying from company to company, in
online commerce as part of their marketing and sales operations. Some
Participating Merchants (or their parent companies) have issued common stock
that is currently publicly traded. We use the term "Public Merchants" in this
prospectus to refer to:
. publicly traded Participating Merchants; and
. publicly traded parent companies of non-publicly traded
Participating Merchants ("Parent Companies").
The remaining Participating Merchants have not issued common stock that is
publicly traded. The Fund will not invest in non-publicly traded common stock of
Participating Merchants.
Certain Public Merchants may be well-established, large capitalization
companies. Other Public Merchants may be new, smaller capitalization companies
that are leaders in their internet commerce sector. The Fund's investments in
the common stock of Public Merchants that are not included in the Standard &
Poor's 500 Composite Stock Index will not exceed 35% of the value of the Fund's
total assets, measured immediately following each acquisition of such
securities. The Fund's Board of Trustees may change this percentage limit or the
index of large capitalization stocks used to apply this percentage limit.
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The Sub-Adviser will determine:
. whether to invest in an individual Public Merchant's common
stock;
. the actual amount of any investment in an individual Public
Merchant's common stock; and
. the total amount of the Fund's investments in all Public
Merchants' common stock.
Any investment in a Public Merchant will depend upon the extent to
which the Sub-Adviser believes that an investment in that Public Merchant will
meet the Sub-Adviser's investment criteria. The Sub-Adviser may sell investments
in any Public Merchant if those investments no longer meet the Sub-Adviser's
investment criteria.
The Fund may invest up to 30% of its total assets in securities issued
by foreign companies. Such investments may include direct investments in
non-U.S.-dollar-denominated securities traded outside of the United States and
dollar-denominated securities of foreign issuers traded in the United States.
Foreign securities include the common stocks (or their equivalent) of foreign
companies, as well as investments in (i) American Depositary Receipts ("ADRs")
and American Depositary Shares ("ADSs"), which are U.S.-dollar-denominated
receipts representing shares of foreign-based corporations or (ii) Global
Depositary Receipts ("GDRs"), which may be denominated in the currency of the
country in which those GDRs are traded.
Although the Fund will invest primarily in large capitalization
companies, there is no minimum or maximum market capitalization requirement for
the companies in which the Fund may invest, nor does the Fund require an
operating history as a prerequisite for an investment by the Fund.
The Fund may invest in futures contracts. Futures allow the Fund to
increase or decrease exposure to the equity markets quickly and at less cost
than buying or selling individual stocks. The Fund will invest in futures in
order to gain market exposure quickly in the event of large cash flows, to
maintain liquidity in the event of redemptions and to keep trading costs low.
Principal Risks
There is no assurance that the Fund will achieve its investment
objective. The Fund's shares may not increase in value and could decline in
value while you are invested in the Fund, even if you are a long-term investor.
The value of your investment in the Fund changes with the values of the
Fund's investments. Many factors can affect those values, and the principal
risks of the Fund are identified below. Like any investor in a mutual fund, you
will face the risk that, when you sell shares in the Fund, you may receive less
than the price you paid for them.
The Fund is subject to the following principal investment risks:
Management Risk. The Fund is subject to management risk because it is
an actively managed investment portfolio.
Market Risk. The market price of portfolio securities owned by the Fund
may go up or down, sometimes rapidly or unpredictably. Portfolio securities may
decline in value due to factors affecting securities markets generally or
particular industries represented in the Fund's portfolio. The price of the
Fund's shares will decline or fluctuate from time to time, sometimes sharply, in
response to various factors, including general market, economic and business
conditions and specific conditions relating to particular issuers whose
securities are held by the Fund. The value of a security may decline due to
general market conditions which are not specifically related to a particular
company, such as real or perceived adverse economic conditions, changes in the
general outlook for corporate earnings, changes in interest or currency rates or
adverse investor sentiment generally. They may also decline due to factors which
may affect a particular industry or industries, such as reduced spending by
consumers, labor shortages or increased production costs and competitive
conditions within an industry.
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Issuer Risk. You should be particularly aware that the Fund currently
anticipates that a portion of the Fund's total assets will be invested in common
stock of each of the Public Merchants that participates in the Consumer Stock
Ownership Program. The Consumer Stock Ownership Program currently includes a
limited number of Public Merchants. Because up to 35% of the Fund's total assets
may be invested in the common stock of a limited number of issuers, the value of
the Fund's holdings in the Public Merchants (including the Fund's holdings in
Parent Companies) may be sensitive to factors and risks that specifically affect
those companies.
The Fund may invest in common stock issued by Public Merchants and
other retailers and other providers of goods or services that engage in online
commerce as part (often a significant part) of their marketing and sales
operations. Parent Companies typically also engage in online commerce as part
(often a significant part) of their marketing and sales operations. Companies
that engage in online commerce are particularly vulnerable to the relatively
high risk of obsolescence resulting from rapid technological development, as
well as to government regulation. Any developments in technology or government
regulation that have an adverse effect on these businesses generally could be
expected to result in a decline in the value of the Fund's investments.
Accordingly, the Fund may involve significantly greater risks and may experience
greater volatility than a mutual fund that does not invest in companies that
receive a significant portion of their revenues from the online sale of goods
and services.
Sector Risk. Market or economic factors affecting certain companies or
industries in a particular industry sector could have a major effect on the
value of the Fund's investments. Many retail stocks, especially those of smaller
less-seasoned companies, tend to be more volatile than the overall market due to
uncertainties such as changes in demand for a company's products or services or
changes in consumer preferences and spending patterns.
Smaller Company Risk. The Fund may also invest in small or medium size
companies. The stocks of smaller companies may be more susceptible to market
downturns, and their prices may be more volatile than those of larger companies.
Smaller companies often have narrower markets and more limited managerial and
financial resources than larger, more established companies. In addition, small
companies' stocks typically trade in lower volumes, and their issuers are
subject to greater degrees of changes in their earnings and prospects. In
addition, investment in smaller company stocks may be difficult to purchase or
sell, possibly preventing the Fund from selling those securities at an
advantageous time or price.
Foreign Securities Risk. The Fund may invest up to 30% of its assets in
securities issued by foreign companies. The Fund may invest in equity securities
issued by foreign Participating Merchants, either directly or in the form of
ADRs, ADSs and GDRs. Securities of foreign issuers are often subject to risks
that are greater than or equal to the risks to which the securities of U.S.
issuers are subject. Such risks include, among others, different accounting,
auditing and financial reporting standards and adverse changes in regulatory and
market structures.
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Because the Fund may invest in securities that trade in, and receive
revenues in, foreign currencies, the Fund is subject to the risk that those
currencies will decline in value relative to the U.S. dollar. Currency rates in
foreign countries may fluctuate significantly over short periods of time for a
number of reasons, including changes in interest rates, intervention (or the
failure to intervene) by U.S. or foreign governments, or by the imposition of
currency controls or other political developments in the U.S. or abroad. Adverse
changes in currency exchange rates (relative to the U.S. dollar) may erode or
reverse any potential gains from the Fund's investment in securities denominated
in a foreign currency or may widen existing losses.
Futures Risk. The Fund's investment in futures may subject the Fund's
portfolio to certain risks. The Sub-Adviser's predictions of movements in the
direction of the stock market may be inaccurate, and the adverse consequences to
the Fund (e.g., a reduction in the Fund's net asset value or a reduction in the
amount of income available for distribution) may leave the Fund in a worse
position than if these strategies were not used. Other risks inherent in the use
of futures include, for example, the possible imperfect correlation between the
price of futures contracts and movements in the prices of the securities, and
the possible absence of a liquid secondary market for any particular instrument.
In light of these risks you should consider an investment in the Fund
only if:
. you are a long-term investor who is capable of tolerating
day-to-day share price volatility and have no need for current
income from your investment in shares of the Fund;
. you understand that an investment in the Fund does not constitute
a complete investment program; and
. you believe the common stock of the companies in which the Fund
invests is likely to appreciate in value over the long term.
Performance
The Fund commenced operations on August 14, 2000. Therefore, the
performance information (including annual total returns and average annual total
return) for a full calendar year is not yet available.
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Fees And Expenses
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund. The Fund is new, and therefore, has no historical
expense data.
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SHAREHOLDER FEES
(fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions None
Maximum Redemption Fee (as a percentage of redemption proceeds, payable to the Fund only if shares
are redeemed within less than 365 days) 2.00% (1)
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets):
Management Fees 0.55%(2)
Distribution and Service (12b-1) Fees None
Other Expenses 0.95%(3)
Total Annual Fund Operating Expenses 1.50%
Fee Waiver (0.55%)(2)
Net Expenses 0.95%
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(1) The Fund imposes a redemption fee of 2.00% if shares are redeemed within
less than 365 days, and a redemption fee of 1.00% if shares are redeemed within
less than two years.
(2) The Adviser has contractually agreed to waive its management fees for a
period of one year from the date of effectiveness of the Trust's registration
statement. This waiver will terminate on August 14, 2001.
(3) Other Expenses reflect an estimated amount for the current fiscal year.
Example
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same (other than the
termination of the contractual fee waiver). Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 year 3 years
$197 $418
You would pay the following expenses if you did not redeem your shares:
$97 $418
PRICING OF FUND SHARES
The Fund will value its shares on each day on which the New York Stock
Exchange, Inc. ("NYSE") is open for business. In determining the net asset value
per share on a particular purchase or redemption date, the Fund will first
determine the overall net asset value of the Fund on that date (calculated as of
the close of trading on the floor of the NYSE, generally 4:00 p.m., Eastern
time), and then divide the overall net asset value by the number of Fund shares
then outstanding. In determining its overall net asset value, the Fund will
first determine the overall value of its portfolio investments, and then
subtract from that value the amount of its liabilities, including accrued
expenses. In determining the overall value of its portfolio investments, the
Fund will value securities for which market quotations are readily available
(expected to constitute all or virtually all of the Fund's portfolio) at their
market price. In the unlikely event the Fund invests in illiquid securities or
other securities and assets for which market quotations are not readily
available (or in securities that were liquid when purchased but are no longer
liquid or for which market quotations no longer are readily available), it will
value such investments at "fair value," as determined in good faith by or under
the direction of its Board of Trustees.
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The equity securities of certain foreign issuers may trade in the U.S.
securities markets in the form of ADRs or ADSs, which represent interests in
such foreign issuers' equity securities (typically, common stock). In other
cases, however, the equity securities of foreign issuers may not trade in the
U.S. securities markets, and may trade in foreign markets on days on which the
NYSE is closed. Consequently, the Fund's net asset value and, as a result, the
net asset value of the Fund's shares, may change on days when you will not be
able to purchase or redeem your shares.
HOW YOU MAY PURCHASE AND REDEEM FUND SHARES
Who May Purchase Fund Shares
In order to be eligible to purchase Fund shares, you must first become
a Member of the Consumer Stock Ownership Program by completing the online
investment account application with Stockback Capital that can be found at
www.stockback.com. As part of the application process, you must provide both of
the following: (1) a U.S. mailing address; and (2) a social security number or
U.S. tax identification number. The Fund does not currently offer or sell its
shares to non-U.S. residents. There is no fee for opening or maintaining your
investment account with Stockback Capital. Further, you will be asked to give
your consent to certain matters, including your consent to electronic delivery
of all reports, statements and other information that the Fund or Stockback
Capital may deliver to you. As an investment account holder, you will be subject
to Stockback Capital's general account requirements as described in Stockback
Capital's Account Agreement that can be found at www.stockback.com.
Currently, the SEC requires that a Member invested in the Fund be
offered the opportunity to revoke his/her consent to receive shareholder
information (including prospectuses and annual and semi-annual reports)
electronically. In order to revoke a prior consent, a Member may call the Fund
toll free at 1-877-506-2524, or write to the Fund at Stockback Capital's address
located on the last page of this prospectus. After consent is revoked, the Fund
will send paper documents to the Member at no charge.
As described in more detail below, you may elect to have Stockback
Capital use the funds in your account (which may include cash rebates and funds
that you have directly contributed to your account) to purchase shares of the
Fund. Alternatively, you may elect to withdraw the cash rebates from your
account.
After you register as a Member, Stockback Capital will ask if you want
to decide where to direct your cash rebates. If you answer "no," cash rebates
will be held in your investment account at Stockback Capital until further
notice.
Once you have registered, you may make your investment decision to
invest in the Fund. You may elect to instruct Stockback Capital to invest the
funds in your account in shares of the Fund. You will have the right to change
this decision at any time.
<PAGE>
How You May Purchase Fund Shares
Once you have opened an investment account with Stockback Capital, you
may purchase Fund shares by one of two ways:
. affirmatively electing to have the funds in your Stockback
Capital account (and future cash rebates) applied to purchases of
Fund shares; or
. directly sending a check or wire transfer to Stockback Capital to
purchase Fund shares.
We describe these purchase methods in more detail below.
If you do not elect to use your cash rebates to purchase shares of the
Fund, those rebates will be automatically deposited and held as cash in your
Stockback Capital investment account. You may:
. hold in your Stockback Capital account the cash received from the
rebates; or
. request that Stockback Capital send you a check for the cash
amount in your account.
If you request a check and have an aggregate account balance of less
than $25.00 prior to such withdrawal, Stockback Capital will deduct a $1.50
processing fee from the check proceeds.
Purchases Of Goods Or Services From Participating Merchants
Each time you purchase a good or service from a Participating Merchant,
the Participating Merchant will rebate (on a daily, weekly, monthly or quarterly
basis, depending on the Merchant's payment processing procedures) a particular
percentage of the purchase price ("Rebate Percentage") in cash to Stockback
Capital. Within 30 days of making a purchase, Stockback Capital will advise you
of the rebate amount that you will receive from that purchase (unless you have
already returned the good or obtained a refund on the service). Each
Participating Merchant will send your cash rebates to Stockback Capital within
90 days after your purchase (unless you have already returned the good or
obtained a refund on the service). Stockback Capital will then deposit those
amounts with a bank escrow agent (currently, Bank of New York Insurance Trust
and Escrow Department) in an escrow account for the benefit of each of Stockback
Capital's investment accounts. These cash rebates will be held with the bank
escrow agent for your benefit and your portion of such cash rebates will be
reflected in your investment account balance.
Once Stockback Capital receives your rebate payment, deposits it with
the escrow agent for your benefit and such rebate amounts are reflected in your
investment account, Stockback Capital cannot rescind such transaction.
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This policy may be reviewed from time to time, and the policy may be
changed by posting the change at www.stockback.com. Any such change would be
effective only with respect to rebates attributable to purchases made after the
posting of such change.
The particular percentage of the purchase price that a Participating
Merchant will rebate in cash to your investment account will be determined by
agreement between Stockback and the Merchant and will be posted at
www.stockback.com. The factors that Stockback and the Participating Merchant may
consider in setting the Rebate Percentage include, but are not limited to, the
following: (i) the costs saved by Merchants that market online; (ii) the number
of new customers generated by the Consumer Stock Ownership Program; and (iii)
the economics of online retailing where affiliate sites maintain advertisements
for, and hyperlinks to, Merchants' sites in exchange for receiving commissions,
which the Merchant typically pays out of its marketing budget. Stockback and
Participating Merchants may change the Rebate Percentages from time to time. Any
such changes will be posted at www.stockback.com and will be effective only with
respect to rebates attributable to purchases made after the posting of such
change.
Purchases Of Fund Shares With Funds In Your Stockback Capital Account
With the funds accrued in your investment account at Stockback Capital,
you may: (1) instruct Stockback Capital to purchase shares of the Fund, provided
that you have at least $10 in your Stockback Capital account; (2) hold all
amounts in cash in your Stockback Capital account; or (3) request that Stockback
Capital send you a check for the cash amount in your account. If you request a
check and have an aggregate account balance of less than $25.00 at the time of
such withdrawal request, a $1.50 processing fee will apply. At any time, you may
change the instructions that you have given to Stockback Capital with respect to
the use of the cash in your account. If you do not give instructions, your
rebates will remain in cash, uninvested, in your Stockback Capital account until
further notice.
Fund shares will be priced at the net asset value per share next
computed at the time of the investment. Stockback Capital processes instructions
received from Members to use cash rebates to purchase shares of the Fund in the
following manner. On a weekly basis, Stockback Capital will determine which of
the Members have given and not rescinded instructions to use cash balances held
in their investment accounts at Stockback Capital to purchase Fund shares. In
the case of an initial purchase of Fund shares, such cash balances must equal at
least $10.00 and in the case of subsequent purchases, the cash balances must
equal at least $1.00. Once this information has been determined, Stockback
Capital will use all cash amounts held in the accounts of such Members to
purchase shares of the Fund. The Fund will process these purchase orders on the
day of each week on which they are received from Stockback Capital (currently
the last business day of each week) and the orders will be priced at the net
asset value per share of the Fund calculated as of the close of the NYSE on that
day.
You should be aware that, within 30 days of making a purchase,
Stockback Capital will advise you of the rebate amount that you will receive
from that purchase (unless you have already returned the good or obtained a
refund on the service). Each Participating Merchant will send your cash rebates
to Stockback Capital within 90 days after your purchase (unless you have already
returned the good or obtained a refund on the service). Stockback Capital will
then deposit those amounts with a bank escrow agent (currently, Bank of New York
Insurance Trust and Escrow Department) in an escrow account for the benefit of
each of Stockback Capital's investment accounts. These cash rebates will be
reflected in each Member's investment account balance.
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This policy may be reviewed from time to time, and the policy may be
changed by posting the change at www.stockback.com. Any such change would be
effective only with respect to rebates attributable to purchases made after the
posting of such change.
Cash Purchases
You may purchase shares for cash by sending an application directing
Stockback Capital to purchase Fund shares. This application must be accompanied
by a check or wire transfer in the amount of the purchase price and sent to the
address for Stockback Capital listed at www.stockback.com. Additionally, you may
authorize Stockback Capital to make automatic deductions from your bank checking
or savings account for the purpose of purchasing shares. Shares will be
purchased as of the close of business on the Fund business day on which
Stockback Capital receives your application. As long as Stockback Capital
receives instructions prior to the close of the NYSE (generally 4:00 p.m.,
Eastern time) on a day on which the NYSE is open, your order will be priced at
the Fund's net asset value per share calculated as of the close of the NYSE on
that day. If Stockback Capital does not receive your instructions until after
the close of the NYSE (generally 4:00 p.m., Eastern time), on a day in which the
NYSE is open, purchases will be made as of the close of business on the next
Fund business day (at the net asset value per share in effect at that time).
Each cash purchase made in this manner must be in an amount not less
than $10.00.
The Fund will incur costs in processing purchases by check or wire
transfer. To offset these costs, the Fund will charge a processing fee not to
exceed $5.00 for each purchase of shares made by check and a wire transfer fee
not to exceed $1.00 for purchase of shares made by wire transfer.
How You May Redeem Fund Shares
You may redeem Fund shares on any Fund business day by making an online
redemption request to Stockback Capital in proper form. You may also redeem your
shares by calling Stockback Capital at 1-877-506-2524. Telephone redemptions
will be recorded by Stockback Capital. The Fund reserves the right to refuse a
telephone redemption request if you are not able to verify that you are the
account holder. If Stockback Capital receives your redemption request prior to
the close of the NYSE (generally 4:00 p.m., Eastern time), on a day on which the
NYSE is open, your redemption request will be effected at the Fund's net asset
value per share calculated as of the close of business on that day. If Stockback
Capital receives your redemption request after the close of the NYSE (generally
4:00 p.m., Eastern time), your redemption will be effected at the Fund's net
asset value per share calculated as of the close of business on the next Fund
business day.
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Online redemption requests should be submitted by means of an online
redemption application form available at www.stockback.com. We consider requests
to be in "proper form" when all required documents are properly completed and
received. Redemption requests that contain a restriction as to the time, date or
share price at which the redemption is to be effective will not be honored.
If you request a redemption of Fund shares, you will ordinarily receive
a check in the amount of the redemption proceeds (minus (a) a $1.50 processing
fee if the aggregate account balance prior to such redemption is less than
$25.00 and (b) any applicable redemption fee). The Fund will usually make
payments for redemptions of Fund shares within one business day, but in any
event not later than seven calendar days, after it receives a redemption
request. The Fund, at its discretion, may agree to forward redemption proceeds
(minus the amount of the redemption fee, if you have held the shares for less
than two years) to you or on your behalf by less traditional means, such as a
wire transfer of the proceeds to a designated bank account.
The Fund reserves the right to redeem your shares "in-kind" (that is,
with securities held by the Fund) rather than in cash. The Fund generally does
not intend to exercise its right to redeem your shares in kind. In addition, the
Fund may not exercise the right unless the aggregate dollar amount of your
redemptions during any 90-day period exceeds the lesser of (i) $250,000 or (ii)
an amount equal to 1% of the net asset value of the Fund at the beginning of
such 90-day period.
Redemption Fee
The Fund is intended for long-term investors. The Fund's redemption fee
is intended to ensure that the costs associated with short-term trading are
borne by the investors making the transactions--and not by those shareholders
investing in the Fund for the long term. For this reason, the Fund assesses the
following redemption fees: (i) a 2.00% redemption fee on the redemption of
shares held for less than 365 days; and (ii) a 1.00% redemption fee on the
redemption of shares held for longer than 364 days, but less than two years. Any
redemption fees charged by the Fund will be payable to the Fund, not to the
Adviser or any other service provider. Accordingly, redemption fees charged by
the Fund will be used to pay expenses the Fund would otherwise bear (including
any transaction expenses incurred by the Fund in liquidating investments in
order to meet redemption requests), to make additional portfolio investments, or
to pay dividends to Fund shareholders.
The redemption fee will not apply to any shares purchased through
reinvested distributions (dividends and capital gains) or to shares held in IRA
accounts.
The Fund will use the "first-in, first-out" (FIFO) method to determine
whether a redeeming shareholder will be charged the applicable redemption fee.
Under this method, the date of the redemption will be compared to the earliest
purchase date of shares held in the account. For example, if the holding period
of the shares determined in accordance with this method is less than 365 days,
the 2.00% redemption fee will be assessed against such shares. The redemption
fee will not decrease during the 364-day period in which shares are held. In
other words, the full 2.00% fee will apply to shares redeemed on the 364th day
after purchase as well as to shares redeemed earlier.
<PAGE>
Automatic Redemptions
The Fund has reserved the right to redeem your shares (unless your
account is an IRA) if, after giving effect to a particular redemption request,
the total value of your remaining Fund shares would be less than $10.00. We will
provide you with no less than two months' notice before we redeem your shares,
during which time you may make additional investments to increase the value of
your Fund holdings to $10.00 or more.
If you pay with a check or wire transfer that does not clear or if your
payment is not timely received, your purchase will be canceled. You will be
responsible for any losses or expenses incurred by the Fund or transfer agent,
and the Fund can redeem shares you own in the investment account as
reimbursement. The Fund and its agents have the right to reject or cancel any
purchase, exchange, or redemption due to nonpayment.
Transfer Restrictions
All of your Fund shares will be issued by the Fund in the name of
Stockback Capital or its nominee, which will hold the shares on its books for
your account and benefit. You may transfer the beneficial ownership of your
shares by giving notice to Stockback Capital. Stockback Capital will charge a
nominal fee for such transfers and will post such fee at www.stockback.com. If
this fee is changed, the new fee will be posted at www.stockback.com and would
be effective only with respect to transfers made after the posting of such
change. The Fund does not issue certificates for its shares, nor will the Fund
issue shares in your name or the name of any of your transferees.
Closing Your Account
If you close your investment account with Stockback Capital, you must
redeem your shares in the Fund. If you submit a request to close your investment
account, you will be notified that your request will be deemed to include a
request to redeem your Fund holdings. You will then be asked if you still wish
to close your investment account. If you click on the "Continue" button, your
investment account will be closed and your shares will be redeemed. If you click
on the "Cancel" button, your investment account will remain open and you will
remain an investor in the Fund.
<PAGE>
SALES OF SECURITIES
The Fund will pursue a "buy and hold" strategy. That is, once funds
received by the Fund from its investors have been invested, the Fund will not
ordinarily sell its investments unless it is required to do so: (1) in order to
meet investor redemption requests; (2) to ensure that the Fund will be treated
as a diversified fund for federal income tax purposes; or (3) because the
Sub-Adviser does not believe that the current stock price is supported by their
expectations regarding the company's future growth potential.
TEMPORARY DEFENSIVE INVESTMENTS
For temporary defensive purposes, the Fund may invest, without
limitation, in Short-Term Investments (i.e., instruments issued or guaranteed by
the federal government, its agencies, government-sponsored enterprises, or
instruments rated within one of the top three rating categories by at least two
nationally recognized statistical rating organizations, in each case having a
maturity of one year or less at the time of purchase). Similarly, the Fund may
hold proceeds from the sale of portfolio securities or from the sale of Fund
shares in cash, or Short-Term Investments, until such amounts are invested in
accordance with the Fund's investment objective and strategies or are
distributed to Fund shareholders. Finally, to the extent the Fund borrows in
order to meet anticipated redemption requests, the Fund may invest those amounts
in Short-Term Investments until Fund shares are redeemed.
UNLISTED SECURITIES
The Fund may, but currently does not anticipate that it will, invest in
unlisted securities.
FEES PAID TO STOCKBACK BY PARTICIPATING MERCHANTS
As disclosed above, Stockback will receive fees from Participating
Merchants for services provided in connection with the Consumer Stock Ownership
Program. The fees payable by Participating Merchants to Stockback generally may
take one of two forms. First, a Merchant might agree to pay Stockback an amount
equal to a percentage of the dollar amount of each purchase you make. Second, a
Merchant might agree to pay Stockback an annual fee or a fixed dollar amount in
connection with each purchase you make from that Merchant.
The following is an example of a typical arrangement between Stockback
and a Merchant. You make a qualifying purchase of goods or services from a
Merchant at a retail price of $100. As part of its agreement to participate in
the Consumer Stock Ownership Program, the Merchant has agreed to pay a cash
rebate to your account in the amount of 10% of the purchase price. Therefore,
the Merchant makes a direct payment of $10 to Stockback Capital for your
benefit. The Merchant also has agreed to pay a loyalty program outsourcing fee
in the amount of 2% of the purchase price to compensate Stockback for
facilitating your purchase. Therefore, the Merchant pays a loyalty program
outsourcing fee of an additional $2 directly to Stockback. This loyalty program
outsourcing fee is a payment that is entirely separate and distinct from the
cash rebate payable to your account, and Stockback does not take any portion of
your rebate. Further, any amounts payable by Participating Merchants to
Stockback will be payable even if you determine to withdraw the amounts of
rebates credited to your account in the form of cash instead of applying such
amounts to the purchase of Fund shares.
<PAGE>
THE ADVISER, SUB-ADVISER AND THE ADVISERS' AFFILIATES
Investment Adviser
Under an investment advisory agreement ("Investment Advisory
Agreement") with the Fund, the Adviser provides investment advisory services to
the Fund. The Adviser is a direct wholly owned subsidiary of Stockback. The
Adviser is located at 11 Broadway, 17th Floor, New York, New York 10004. As
investment adviser, the Adviser will have responsibility for the management of
the Fund's investments, for providing various administrative services to the
Fund and for supervising the Fund's daily business affairs, subject to the
overall authority and supervision of the Fund's Board of Trustees. For its
advisory services, the Fund has agreed to pay the Adviser an investment advisory
fee at an annual rate equal to 0.55% of the Fund's average daily net assets. The
Adviser has agreed to waive its advisory fee for a period of one year from the
date of effectiveness of the Trust's registration statement, and, therefore, the
Fund will not accrue or pay an advisory fee to the Adviser until after that
date.
Sub-Adviser
The Adviser has entered into a subadvisory agreement ("Subadvisory
Agreement") with the Sub-Adviser to delegate the day-to-day discretionary
management of the Fund's assets. The Sub-Adviser is solely responsible for
managing the Fund's portfolio on a day-to-day basis and, subject to oversight by
the Adviser and the Fund's Board of Trustees, has absolute discretion in making
investment decisions. While the Fund will own common stock of Participating
Merchants, the amount of such stock to be held by the Fund will be decided
solely by the Sub-Adviser. For its services, the Sub-Adviser receives a fee from
the Adviser. The Fund does not pay the Sub-Adviser for its services.
A team of professional portfolio managers employed by the Sub-Adviser
makes investment decisions for the Fund. Frank Salerno is the Senior Management
Professional with the Sub-Adviser that is responsible for making investment
decisions for the Fund. Mr. Salerno has been a Managing Director with the
Sub-Adviser since 1999. Prior to his role with the Sub-Adviser, Mr. Salerno
worked as a portfolio manager and subsequently as the Chief Investment Officer
for Quantitative Investment Management at Banker's Trust Company and its
successor, Deutsche Asset Management, from 1982 to 1999.
The Sub-Adviser is part of the Asset Management Group of Merrill Lynch
& Co., Inc., which had over $555 billion in investment company and other
portfolio assets under management as of June 30, 2000. This amount includes
assets managed for Merrill Lynch affiliates. The Sub-Adviser is located at 200
Scudders Mill Road, Plainsboro, NJ 08536.
Advisers' Affiliates
The affiliates of Stockback that will administer the Consumer Stock
Ownership Program include Stockback Capital and the Adviser. Stockback Capital
is registered as a broker-dealer under the Securities Exchange Act of 1934, and
is a member of the NASD. Stockback has contracted with Participating Merchants
to participate in the Consumer Stock Ownership Program.
<PAGE>
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund is designed for investors whose objective is long-term capital
appreciation. Some of the companies in which the Fund will invest will be in the
"start-up" or development phase and may not be expected to pay dividends or make
other distributions for the foreseeable future. The Fund may not be in a
position to pay dividends or, if it is in a position to pay dividends, those
dividends may not be substantial.
If the Fund should receive dividends or other distributions from the
companies in which it invests it will automatically reinvest your share of such
dividends in additional shares of the Fund, unless you affirmatively elect to
receive dividends from the Fund in cash. You may make this election by notifying
the Fund online or in writing at any time prior to the record date for a
particular dividend or distribution.
There are no sales or other charges in connection with the reinvestment
of dividends and other distributions.
TAX CONSEQUENCES
Taxes On Redemption Of Fund Shares
When you redeem shares, you may receive more or less than the price
paid for them, resulting in a taxable gain or loss to you.
This summary of tax consequences is intended for general information
only. You should consult a tax adviser concerning the tax consequences of your
investment in the Fund.
Taxes On Dividends And Other Distributions Made By The Fund
The Fund will distribute substantially all of its income and gains to
its shareholders each year. Dividends and other distributions you receive from
the Fund (if any) are subject to federal income tax and may also be subject to
state and local taxes. This is the case even if you reinvest these dividends and
other distributions in additional Fund shares. If the Fund declares a dividend
in October, November, or December but pays it in January, you may be taxed on
the dividend as if you received it in the previous year. For federal tax
purposes, to the extent the Fund's dividends or other distributions are
attributable to dividends received by the Fund from the companies in which it
invests, or to the sale of portfolio securities held by the Fund for one year or
less, your share of such dividends and distributions generally will be taxable
to you as ordinary income. To the extent that the Fund's dividends or other
distributions are attributable to the sale of portfolio securities held by the
Fund for more than one year, your share of such dividends and distributions
generally will be taxable to you as long-term capital gains as long as the Fund
so designates.
If you acquire shares when the Fund has realized but not yet
distributed income or capital gains, you will be "buying a dividend" by paying
the full price for the shares and then receiving a portion of the price back in
the form of a taxable distribution.
<PAGE>
[Outside Back Cover]
The Fund's Statement of Additional Information ("SAI") includes
additional information about the Fund. The SAI is incorporated into this
Prospectus by reference (that means it is legally considered a part of this
Prospectus). Additional information about the Fund's investments is available in
the Fund's annual and semi-annual reports to shareholders. In the Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year.
Additional information including the SAI and the most recent annual and
semi-annual reports (when available) to shareholders may be obtained without
charge at www.stockback.com. Shareholders will be notified when a prospectus,
prospectus update, amendment, annual or semi-annual report is available.
Shareholders may also call the toll-free number listed below for additional
information or with any inquiries.
Further information about the Fund (including the SAI) can also be
reviewed and copied at the SEC's Public Reference Room in Washington, D.C. You
may call 1-202-942-8090 for information about the operations of the public
reference room. Reports and other information about the Fund are also available
on the SEC's Internet site at http://www.sec.gov or copies can be obtained, upon
payment of a duplicating fee, by electronic request at the following e-mail
address: [email protected] or by writing the Public Reference Section of the
SEC, Washington, D.C. 20549-0102.
Stockback Capital, LLC
11 Broadway
17th Floor
New York, NY 10004
Telephone: (212) 973-4000
Toll Free: (877) 506-2524
http://www.stockback.com
Investment Company Act of 1940, File No. 811-09587.
<PAGE>
THE STOCKBACK FUND
a series of
THE STOCKBACK TRUST
STATEMENT OF ADDITIONAL INFORMATION
August 14, 2000
This Statement of Additional Information ("SAI") is not a prospectus and should
be read together with the Prospectus dated August 14, 2000, (as amended from
time to time) for the Stockback Fund (the "Fund"), a separate series of the
Stockback Trust. Unless otherwise defined herein, capitalized terms have the
meanings given to them in the Fund's Prospectus.
To obtain a copy of the Fund's Prospectus and the Fund's most recent
shareholders report (when issued), please access our Web site online
(http://www.stockback.com) or call our toll-free number at 1-877-506-2524. Only
customers of Stockback Capital, LLC who consent to receive all information about
the Fund electronically may invest in the Fund. Neither Stockback's Web site,
nor the Web site of any Participating Merchant, forms part of the Prospectus or
this SAI and no such Web site is incorporated by reference into either the
Prospectus or this SAI.
<PAGE>
TABLE OF CONTENTS
Page
FUND HISTORY...............................................................1
THE FUND...................................................................1
INVESTMENT STRATEGIES AND RISKS............................................1
FUND POLICIES.............................................................17
MANAGEMENT OF THE FUND....................................................19
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.......................22
INVESTMENT MANAGEMENT.....................................................23
SERVICE PROVIDERS.........................................................24
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION............................25
ORGANIZATION, DIVIDEND AND VOTING RIGHTS..................................27
PRICING OF FUND SHARES....................................................28
TAXATION..................................................................29
UNDERWRITER...............................................................34
PERFORMANCE INFORMATION...................................................34
<PAGE>
FUND HISTORY
The Trust is organized as a Delaware business trust and was formed on
September 16, 1999. The Trust is authorized to create any number of separate and
distinct series (each, a "Series").
THE FUND
The Fund is currently the only Series maintained by the Trust, and is a
diversified Series of the Trust. The Fund is classified as an open-end,
management investment company. The Fund (and any other Series of the Trust
formed hereafter) will be treated as a separate entity for purposes of Delaware
law, for certain purposes of the Investment Company Act of 1940, as amended (the
"1940 Act"), and for certain other purposes. In this regard, the Fund (and any
such other Series) will bear its own expenses (except to the extent another
party has agreed to bear such expenses on its behalf) and other liabilities, as
well as its pro rata share of the Trust's liabilities. A shareholder of one
Series will have an undivided beneficial interest in the assets of that Series
only (unless, of course, the shareholder also acquires shares of another
Series), and a shareholder who purchases shares of one Series will not thereby
acquire shares of or any other interest in any other Series. As a result, a
person who purchases shares of the Fund becomes entitled to his or her pro rata
share of the dividends and other distributions, if any, paid by the Fund, and
must bear his or her pro rata share of any Fund losses, but is not, in his or
her capacity as a shareholder of the Fund, entitled to receive dividends or
other distributions from any other Series or subject to the losses of any other
Series.
INVESTMENT STRATEGIES AND RISKS
The following supplements the discussion in the Prospectus of the
Fund's investment strategies, policies and risks. An investment in the Fund is
not intended to provide a balanced investment program. These investment
strategies and policies may be changed without shareholder approval unless
otherwise noted.
Futures Contracts and Options on Futures Contracts
The Fund may use futures as a substitute for a comparable market
position in the underlying securities. In purchasing a futures contract, the
buyer agrees to purchase a specified underlying instrument at a specified future
date. In selling a futures contract, the seller agrees to sell a specified
underlying instrument at a specified future date. The price at which the
purchase and sale will take place is fixed when the buyer and seller enter into
the contract. Some currently available futures contracts are based on specific
securities, such as U.S. Treasury bonds or notes, and some are based on indices
of securities prices, such as the Standard & Poor's 500 Index SM (S&P
500(registered trademark)). Futures can be held until their delivery dates, or
can be closed out before then if a liquid secondary market is available.
<PAGE>
The value of a futures contract tends to increase and decrease in
tandem with the value of its underlying instrument. Therefore, purchasing
futures contracts will tend to increase the Fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When the Fund sells a futures
contract, by contrast, the value of its futures position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
Futures Margin Payments. The purchaser or seller of a futures contract
is not required to deliver or pay for the underlying instrument unless the
contract is held until the delivery date. However, both the purchaser and seller
are required to deposit "initial margin" with a futures broker, known as a
futures commission merchant ("FCM"), when the contract is entered into. Initial
margin deposits are typically equal to a percentage of the contract's value. If
the value of either party's position declines, that party will be required to
make additional "variation margin" payments to settle the change in value on a
daily basis. The party that has a gain may be entitled to receive all or a
portion of this amount. Initial and variation margin payments do not constitute
purchasing securities on margin for purposes of the Fund's investment
limitations. In the event of the bankruptcy of an FCM that holds margin on
behalf of the Fund, the Fund may be entitled to return of margin owed to it only
in proportion to the amount received by the FCM's other customers, potentially
resulting in losses to the Fund.
Limitations on Futures and Options Transactions. The Fund has filed a
notice of eligibility for exclusion from the definition of the term "commodity
pool operator" with the Commodity Futures Trading Commission ("CFTC") and the
National Futures Association, which regulate trading in the futures markets. The
Fund intends to comply with Rule 4.5 under the Commodity Exchange Act, which
limits the extent to which the Fund can commit assets to initial margin deposits
and option premiums.
In addition, the Fund will not: (a) sell futures contracts, purchase
put options, or write call options if, as a result, more than 25% of the Fund's
total assets would be hedged with futures and options under normal conditions;
(b) purchase futures contracts or write put options if, as a result, the Fund's
total obligations upon settlement or exercise of purchased futures contracts and
written put options would exceed 25% of its total assets under normal
conditions; or (c) purchase call options if, as a result, the current value of
option premiums for call options purchased by the Fund would exceed 5% of the
Fund's total assets. These limitations do not apply to options attached to or
acquired or traded together with their underlying securities, and do not apply
to securities that incorporate features similar to options.
The above limitations on the Fund's investments in futures contracts,
and the Fund's policies regarding futures contracts discussed elsewhere in this
SAI may be changed as regulatory agencies permit.
Options
Purchasing and Writing Options on Securities. The Fund may purchase and
sell (write) (i) both put and call options on debt or other securities in
standardized contracts traded on national securities exchanges, boards of trade,
similar entities, or for which an established over-the-counter market exists;
and (ii) agreements, sometimes called cash puts, which may accompany the
purchase of a new issue of bonds from a dealer.
<PAGE>
An option on a security is a contract that gives the holder of the
option, in return for a premium, the right to buy from (in the case of a call)
or sell to (in the case of a put) the writer of the option the security
underlying the option at a specified exercise price at any time during the term
of the option. The writer of an option on a security has the obligation upon
exercise of the option to deliver the underlying security upon payment of the
exercise price or to pay the exercise price upon delivery of the underlying
security.
The Fund may purchase put options on securities to protect holdings in
an underlying or related security against a substantial decline in market value.
Securities are considered related if their price movements generally correlate
to one another. For example, the purchase of put options on debt securities held
in the Fund will enable the Fund to protect, at least partially, an unrealized
gain in an appreciated security without actually selling the security. In
addition, the Fund will continue to receive interest income on such security.
The Fund may purchase call options on securities to protect against substantial
increases in prices of securities the Fund intends to purchase pending its
ability to invest in such securities in an orderly manner. The Fund may sell put
or call options it has previously purchased, which could result in a net gain or
loss depending on whether the amount realized on the sale is more or less than
the premium and other transaction costs paid on the put or call option which is
sold. The Fund may also allow options to expire unexercised.
In order to earn additional income on its Fund securities or to protect
partially against declines in the value of such securities, the Fund may write
covered call options. The exercise price of a call option may be below, equal
to, or above the current market value of the underlying security at the time the
option is written. During the option period, a covered call option writer may be
assigned an exercise notice by the broker-dealer through whom such call option
was sold requiring the writer to deliver the underlying security against payment
of the exercise price. This obligation is terminated upon the expiration of the
option period or at such earlier time in which the writer effects a closing
purchase transaction. Closing purchase transactions will ordinarily be effected
to realize a profit on an outstanding call option, to prevent an underlying
security from being called, to permit the sale of the underlying security, or to
enable the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both.
In order to earn additional income or to facilitate its ability to
purchase a security at a price lower than the current market price of such
security, the Fund may write secured put options. During the option period, the
writer of a put option may be assigned an exercise notice by the broker-dealer
through whom the option was sold requiring the writer to purchase the underlying
security at the exercise price.
The Fund may write call options and put options only if they are
"covered" or "secured." In the case of a call option on a security, the option
is "covered" if the Fund owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount are segregated) upon conversion or exchange of other
securities held by the Fund, or, if the Fund has a call on the same security if
the exercise price of the call held (i) is equal to or less than the exercise
price of the call written or (ii) is greater than the exercise price of the call
written, if the difference is maintained by the Fund in segregated cash, U.S.
Government securities or liquid securities marked-to-market daily. A put is
secured if the Fund maintains cash, U.S. Government securities or liquid
securities marked-to-market daily with a value equal to the exercise price on a
segregated basis, sells short the security underlying the put option at an equal
or greater exercise price, or holds a put on the same underlying security at an
equal or greater exercise price.
<PAGE>
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security, exercise price, and expiration). There can be no
assurance, however, that a closing purchase or sale transaction can be effected
when the Fund desires.
The Fund will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or, if it is more, the Fund will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Fund will realize a capital gain or, if
it is less, the Fund will realize a capital loss. The principal factors
affecting the market value of a put or a call option include supply and demand,
interest rates, the current market price of the underlying security in relation
to the exercise price of the option, the volatility of the underlying security,
and the time remaining until the expiration date.
The premium paid for a put or call option purchased by the Fund is an
asset of the Fund. The premium received for an option written by the Fund is
recorded as a deferred credit. The value of an option purchased or written is
marked-to-market daily and is valued at the closing price on the exchange on
which it is traded or, if not traded on an exchange or no closing price is
available, at the mean between the last bid and asked prices.
Purchasing and Writing Options on Stock Indices. A stock index is a
method of reflecting in a single number the market values of many different
stocks or, in the case of value weighted indices that take into account prices
of component stocks and the number of shares outstanding, the market values of
many different companies. Stock indices are compiled and published by various
sources, including securities exchanges. An index may be designed to be
representative of the stock market as a whole, of a broad market sector (e.g.,
industrials), or of a particular industry (e.g., electronics). An index may be
based on the prices of all, or only a sample, of the stocks whose value it is
intended to represent.
A stock index is ordinarily expressed in relation to a "base"
established when the index was originated. The base may be adjusted from time to
time to reflect, for example, capitalization changes affecting component stocks.
In addition, stocks may from time to time be dropped from or added to an index
group. These changes are within the discretion of the publisher of the index.
Different stock indices are calculated in different ways. Often the
market prices of the stocks in the index group are "value weighted;" that is, in
calculating the index level, the market price of each component stock is
multiplied by the number of shares outstanding. Because of this method of
calculation, changes in the stock prices of larger corporations will generally
have a greater influence on the level of a value weighted (or sometimes referred
to as a capitalization weighted) index than price changes affecting smaller
corporations.
<PAGE>
In general, index options are very similar to stock options, and are
basically traded in the same manner. However, when an index option is exercised,
the exercise is settled by the payment of cash--not by the delivery of stock.
The assigned writer of a stock option is obligated to pay the exercising holder
cash in an amount equal to the difference (expressed in dollars) between the
closing level of the underlying index on the exercise date and the exercise
price of the option, multiplied by a specified index "multiplier." A multiplier
of 100, for example, means that a one-point difference will yield $100. Like
other options listed on United States securities exchanges, index options are
issued by the Options Clearing Corporation ("OCC").
Gains or losses on the Fund's transactions in securities index options
depend primarily on price movements in the stock market generally (or, for
narrow market indices, in a particular industry or segment of the market) rather
than the price movements of individual securities held by the Fund of the Fund.
The Fund may sell securities index options prior to expiration in order to close
out its positions in stock index options which it has purchased. The Fund may
also allow options to expire unexercised.
Risks of Options Transactions. There are several risks associated with
transactions in options. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when, and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out an
option it had purchased on a security, it would have to exercise the option to
realize any profit or the option may expire worthless. If the Fund were unable
to close out a covered call option it had written on a security, it would not be
able to sell the underlying security unless the option expired without exercise.
As the writer of a covered call option, the Fund forgoes, during the option's
life, the opportunity to profit from increases in the market value of the
security covering the call option above the sum of the premium and the exercise
price of the call.
If trading were suspended in an option purchased by the Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased.
With respect to index options, current index levels will ordinarily
continue to be reported even when trading is interrupted in some or all of the
stocks in an index group. In that event, the reported index levels will be based
on the current market prices of those stocks that are still being traded (if
any) and the last reported prices for those stocks that are not currently
trading. As a result, reported index levels may at times be based on non-current
price information with respect to some or even all of the stocks in an index
group. Exchange rules permit (and in some instances require) the trading of
index options to be halted when the current value of the underlying index is
unavailable or when trading is halted in stocks that account for more than a
specified percentage of the value of the underlying index. In addition, as with
other types of options, an exchange may halt the trading of index options
whenever it considers such action to be appropriate in the interests of
maintaining a fair and orderly market and protecting investors. If a trading
halt occurs, whether for these or for other reasons, holders of index options
may be unable to close out their positions and the options may expire worthless.
<PAGE>
Spread Transactions. Spread transactions are not generally exchange
listed or traded. Spread transactions may occur in the form of options, futures,
forwards or swap transactions. The purchase of a spread transaction gives the
Fund the right to sell or receive a security or a cash payment with respect to
an index at a fixed dollar spread or fixed yield spread in relationship to
another security or index which is used as a benchmark. The risk to the Fund in
purchasing spread transactions is the cost of the premium paid for the spread
transaction and any transaction costs. The sale of a spread transaction
obligates the Fund to purchase or deliver a security or a cash payment with
respect to an index at a fixed dollar spread or fixed yield spread in
relationship to another security or index which is used as a benchmark. In
addition, there is no assurance that closing transactions will be available. The
purchase and sale of spread transactions will be used in furtherance of the
Fund's objectives and to protect the Fund against adverse changes in prevailing
credit quality spreads, i.e., the yield spread between high quality and lower
quality securities. Such protection is only provided during the life of the
spread transaction. The Fund does not consider a security covered by a spread
transaction to be "pledged" as that term is used in the Fund's policy limiting
the pledging or mortgaging of its assets. The sale of spread transactions will
be "covered" or "secured" as described in the "Options", "Options on Foreign
Currencies", "Futures Contracts and Options on Futures Contracts", and "Swap
Agreements and Options on Swap Agreements" sections.
Options on Foreign Currencies
The Fund may purchase and sell options on foreign currencies for
hedging purposes in a manner similar to that in which futures or forward
contracts on foreign currencies will be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated will reduce the U.S. dollar value of such securities, even if their
value in the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Fund may buy put options
on the foreign currency. If the value of the currency declines, the Fund will
have the right to sell such currency for a fixed amount in U.S. dollars and will
offset, in whole or in part, the adverse effect on its portfolio.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Fund may buy call options thereon. The purchase of
such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to the Fund from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
if currency exchange rates do not move in the direction or to the extent
desired, the Fund could sustain losses on transactions in foreign currency
options that would require the Fund to forgo a portion or all of the benefits of
advantageous changes in those rates.
The Fund may write options on foreign currencies for hedging purposes.
For example, to hedge against a potential decline in the U.S. dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates, the Fund could, instead of purchasing a put option, write a call option
on the relevant currency. If the expected decline occurs, the option will most
likely not be executed and the diminution in value of portfolio securities will
be offset by the amount of the premium received.
<PAGE>
Similarly, instead of purchasing a call option to hedge against a
potential increase in the U.S. dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates move in
the manner projected, will expire unexercised and allow the Fund to hedge the
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium. If exchange rates do not move
in the expected direction, the option may be exercised and the Fund would be
required to buy or sell the underlying currency at a loss which may not be
offset by the amount of the premium. Through the writing of options on foreign
currencies, the Fund also may lose all or a portion of the benefits which might
otherwise have been obtained from favorable movements in exchange rates.
The Fund may write covered call and put options on foreign currencies.
A call option written on a foreign currency by the Fund is "covered" if the Fund
(i) owns the underlying foreign currency covered by the call; (ii) has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in segregation)
upon conversion or exchange of other foreign currency held in its portfolio;
(iii) has a call on the same foreign currency and in the same principal amount
as the call written if the exercise price of the call held (a) is equal to or
less than the exercise price of the call written, or (b) is greater than the
exercise price of the call written, if the difference is maintained by the Fund
in segregated government securities, cash or liquid securities marked-to-market
daily, and/or cash, U.S. Government securities, or liquid securities
marked-to-market daily; or (iv) segregates and marks-to-market cash or liquid
assets equal to the value of the underlying foreign currency. A put option
written on a foreign currency by the Fund is "covered" if the option is secured
by (i) segregated government securities, cash or liquid securities
marked-to-market daily of that foreign currency, and/or segregated U.S.
Government securities, cash or liquid securities marked-to-market daily at least
equal to the exercise price, (ii) sells short the security underlying the put
option at an equal or greater exercise price, or (iii) a put on the same
underlying currency at an equal or greater exercise price.
The Fund also may write call options on foreign currencies for cross-
hedging purposes that would not be deemed to be covered. A written call option
on a foreign currency is for cross-hedging purposes if it is not covered but is
designed to provide a hedge against a decline due to an adverse change in the
exchange rate in the U.S. dollar value of a security which the Fund owns or has
the right to acquire and which is denominated in the currency underlying the
option. In such circumstances, the Fund collateralizes the option by segregating
cash, U.S. Government Securities, and/or liquid securities marked-to-market
daily in an amount not less than the value of the underlying foreign currency in
U.S. dollars marked-to-market daily.
Foreign currency options are subject to the risks of the availability
of a liquid secondary market described above, as well as the risks regarding
adverse market movements, margining of options written, the nature of the
foreign currency market, possible intervention by governmental authorities and
the effects of other political and economic events. In addition, exchange-traded
options on foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such options
must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions or taxes would
prevent the orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose special
procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
<PAGE>
In addition, options on foreign currencies may be traded on foreign
exchanges and over-the-counter in foreign countries. Such transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies or securities. The value of such positions also could be
adversely affected by (i) other complex foreign political and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) low
trading volume.
Future Developments
The Fund may take advantage of opportunities in the area of options and
futures contracts and options on futures contracts and any other derivative
investments which are not presently contemplated for use by the Fund or which
are not currently available but which may be developed, to the extent such
opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund. Before entering into such transactions or
making any such investment, the Fund will provide any appropriate additional
disclosure in its prospectus.
Forward Commitments, When-Issued Purchases and Delayed-Delivery Transactions
The Fund may purchase or sell securities on a when-issued or
delayed-delivery basis and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. Securities
purchased or sold on a when-issued, delayed-delivery or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines, or
the value of the security to be sold increases, before the settlement date.
Although the Fund will generally purchase securities with the intention of
acquiring them, the Fund may dispose of securities purchased on a when-issued,
delayed-delivery or a forward commitment basis before settlement when deemed
appropriate.
Certain of the securities in which the Fund may invest will be
purchased on a when-issued basis, in which case delivery and payment normally
take place within 45 days after the date of the commitment to purchase. The Fund
will only make commitments to purchase securities on a when-issued basis with
the intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable. When-issued securities are subject to
market fluctuation, and no income accrues to the purchaser during the period
prior to issuance. The purchase price and the interest rate that will be
received on debt securities purchased on a when-issued basis are fixed at the
time the purchaser enters into the commitment.
Purchasing a security on a when-issued basis can involve a risk that
the market price at the time of delivery may be lower than the agreed-upon
purchase price, in which case there could be an unrealized loss at the time of
delivery. The Fund currently does not intend to invest more than 5% of its
assets in when-issued securities during the coming year. The Fund will establish
a segregated account in which it will maintain cash or liquid securities in an
amount at least equal in value to the Fund's commitments to purchase when-issued
securities. If the value of these assets declines, the Fund will place
additional liquid assets in the account on a daily basis so that the value of
the assets in the account is equal to the amount of such commitments.
<PAGE>
Short-term Instruments and Temporary Investments
The Fund may invest in high-quality money market instruments on an
ongoing basis to provide liquidity or for temporary purposes to meet anticipated
shareholder purchases or redemptions. The instruments in which the Fund may
invest include: (i) short-term obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities (including government-sponsored
enterprises); (ii) negotiable certificates of deposit ("CDs"), bankers'
acceptances, fixed time deposits and other obligations of domestic banks
(including foreign branches) that have more than $1 billion in total assets at
the time of investment and that are members of the Federal Reserve System or are
examined by the Comptroller of the Currency or whose deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC"); (iii) commercial paper rated at
the date of purchase "Prime-1" by Moody's Investors Service, Inc. ("Moody's") or
"A-1+" or "A-1" by Standard & Poor's Ratings Services ("S&P"), or, if unrated,
of comparable quality as determined by the Sub-Adviser; (iv) non-convertible
corporate debt securities (e.g., bonds and debentures) with remaining maturities
at the date of purchase of not more than one year that are rated at least "Aa"
by Moody's or "AA" by S&P; (v) repurchase agreements; and (vi) short-term, U.S.
dollar-denominated obligations of foreign banks (including U.S. branches) that,
at the time of investment have more than $10 billion, or the equivalent in other
currencies, in total assets and in the opinion of the Sub-Adviser are of
comparable quality to obligations of U.S. banks which may be purchased by the
Fund.
Bank Obligations
The Fund may invest in bank obligations, including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations of
domestic banks, foreign subsidiaries of domestic banks, foreign branches of
domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time. Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by the Fund will not benefit from insurance from the
Bank Insurance Fund or the Savings Association Insurance Fund administered by
the Federal Deposit Insurance Corporation. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations, bearing fixed,
floating- or variable-interest rates.
Commercial Paper and Short-Term Corporate Debt Instruments
The Fund may invest in commercial paper (including variable amount
master demand notes), which consists of short-term, unsecured promissory notes
issued by corporations to finance short-term credit needs. Commercial paper is
usually sold on a discount basis and has a maturity at the time of issuance not
exceeding nine months. Variable amount master demand notes are demand
obligations that permit the investment of fluctuating amounts at varying market
rates of interest pursuant to arrangements between the issuer and a commercial
bank acting as agent for the payee of such notes whereby both parties have the
right to vary the amount of the outstanding indebtedness on the notes. The
Sub-Adviser to the Fund monitors on an ongoing basis the ability of an issuer of
a demand instrument to pay principal and interest on demand.
<PAGE>
The Fund also may invest in non-convertible corporate debt securities
(e.g., bonds and debentures) with not more than one year remaining to maturity
at the date of settlement. The Fund will invest only in such corporate bonds and
debentures that are rated at the time of purchase at least "Aa" by Moody's or
"AA" by S&P. Subsequent to its purchase by the Fund, an issue of securities may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Fund. The Sub-Adviser to the Fund will consider such an
event in determining whether the Fund should continue to hold the obligation. To
the extent the Fund continues to hold such obligations, it may be subject to
additional risk of default.
To the extent the ratings given by Moody's or S&P may change as a
result of changes in such organizations or their rating systems, the Fund will
attempt to use comparable ratings as standards for investments in accordance
with the investment policies contained in its Prospectus and in this SAI.
Repurchase Agreements
The Fund may enter into a repurchase agreement wherein the seller of a
security to the Fund agrees to repurchase that security from the Fund at a
mutually-agreed upon time and price. The period of maturity is usually quite
short, often overnight or a few days, although it may extend over a number of
months. The Fund may enter into repurchase agreements only with respect to
securities that could otherwise be purchased by the Fund, including government
securities and mortgage-related securities, regardless of their remaining
maturities, and requires that additional securities be deposited with the
custodian if the value of the securities purchased should decrease below the
repurchase price.
The Fund may incur a loss on a repurchase transaction if the seller
defaults and the value of the underlying collateral declines or is otherwise
limited or if receipt of the security or collateral is delayed. The Fund's
custodian has custody of, and holds in a segregated account, securities acquired
as collateral by the Fund under a repurchase agreement. Repurchase agreements
are considered loans by the Fund. All repurchase transactions must be
collateralized.
In an attempt to reduce the risk of incurring a loss on a repurchase
agreement, the Fund limits investments in repurchase agreements to selected
securities dealers or domestic banks or other recognized financial institutions
deemed creditworthy by the Fund's Sub-Adviser. The Fund's Sub-Adviser monitors
on an ongoing basis the value of the collateral to assure that it always equals
or exceeds the repurchase price.
<PAGE>
Reverse Repurchase Agreements and Dollar Rolls
The Fund may enter into reverse repurchase agreements with brokers,
dealers, domestic and foreign banks or other financial institutions. In a
reverse repurchase agreement, the Fund sells a security and agrees to repurchase
it at a mutually agreed upon date and price, reflecting the interest rate
effective for the term of the agreement. It may also be viewed as the borrowing
of money by the Fund. The Fund's investment of the proceeds of a reverse
repurchase agreement is the speculative factor known as leverage. The Fund may
enter into a reverse repurchase agreement only if the interest income from
investment of the proceeds is greater than the interest expense of the
transaction and the proceeds are invested for a period no longer than the term
of the agreement. At the time the Fund enters into a reverse repurchase
agreement, it will establish and maintain a segregated account with an approved
custodian containing cash or other liquid securities having a value not less
than the repurchase price (including accrued interest). If interest rates rise
during a reverse repurchase agreement, it may adversely affect the Fund's net
asset value. See "Fundamental Restrictions" for more information concerning
restrictions on borrowing by the Fund. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act.
The assets contained in the segregated account will be marked-to-market
daily and additional assets will be placed in such account on any day in which
the assets fall below the repurchase price (plus accrued interest). The Fund's
liquidity and ability to manage its assets might be affected when it sets aside
cash or portfolio securities to cover such commitments. Reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale may decline below the price of the securities the Fund has sold but
is obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities, and the Fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision.
In "dollar roll" transactions, the Fund sells fixed-income securities
for delivery in the current month and simultaneously contracts to repurchase
similar but not identical (same type, coupon and maturity) securities on a
specified future date. During the roll period, the Fund would forego principal
and interest paid on such securities. The Fund would be compensated by the
difference between the current sales price and the forward price for the future
purchase, as well as by the interest earned on the cash proceeds of the initial
sale. At the time the Fund enters into a dollar roll transaction, it will place
in a segregated account maintained with an approved custodian cash or other
liquid securities having a value not less than the repurchase price (including
accrued interest) and will subsequently monitor the account to ensure that its
value is maintained.
Letters of Credit
Certain of the debt obligations (including municipal securities,
certificates of participation, commercial paper and other short-term
obligations) which the Fund may purchase may be backed by an unconditional and
irrevocable letter of credit of a bank, savings and loan association or
insurance company which assumes the obligation for payment of principal and
interest in the event of default by the issuer. Only banks, savings and loan
associations and insurance companies which, in the opinion of the Sub-Adviser
are of comparable quality to issuers of other permitted investments of the Fund
may be used for letter of credit-backed investments.
<PAGE>
Floating-and Variable-Rate Obligations
The Fund may purchase debt instruments with interest rates that are
periodically adjusted at specified intervals or whenever a benchmark rate or
index changes. These adjustments generally limit the increase or decrease in the
amount of interest received on the debt instruments. Floating- and variable-rate
instruments are subject to interest-rate risk and credit risk.
Loans of Portfolio Securities
The Fund may lend securities from its portfolios to brokers, dealers
and financial institutions (but not individuals) in order to increase the return
on its portfolio. The value of the loaned securities may not exceed one-third of
the Fund's total assets and loans of portfolio securities are fully
collateralized based on values that are marked-to-market daily. The Fund will
not enter into any portfolio security lending arrangement having a duration of
longer than one year. In determining whether to lend a security to a particular
broker, dealer or financial institution, the Fund's Sub-Adviser/Custodian
considers all relevant facts and circumstances, including the size,
creditworthiness and reputation of the broker, dealer, or financial institution.
Any loans of portfolio securities are fully collateralized and marked to market
daily. Any securities that the Fund may receive as collateral will not become
part of the Fund's investment portfolio at the time of the loan and, in the
event of a default by the borrower, the Fund will, if permitted by law, dispose
of such collateral except for such part thereof that is a security in which the
Fund is permitted to invest. During the time securities are on loan, the
borrower will pay the Fund any accrued income on those securities, and the Fund
may invest the cash collateral and earn income or receive an agreed upon fee
from a borrower that has delivered cash-equivalent collateral.
The principal risk of portfolio lending is potential default or
insolvency of the borrower. In either of these cases, the Fund could experience
delays in recovering securities or collateral or could lose all or part of the
value of the loaned securities. The Fund may pay reasonable administrative and
custodial fees in connection with loans of portfolio securities and may pay a
portion of the interest or fee earned thereon to the borrower or a placing
broker.
Investment Company Securities
The Fund may invest in securities issued by other open-end management
investment companies which principally invest in securities of the type in which
such Fund invests. Under the 1940 Act, a Fund's investment in such securities
currently is limited, subject to certain exceptions, to (i) 3% of the total
voting stock of any one investment company, (ii) 5% of the Fund's net assets
with respect to any one investment company and (iii) 10% of the Fund's net
assets in the aggregate. Investments in the securities of other investment
companies generally will involve duplication of advisory fees and certain other
expenses, if any. The Fund may also purchase shares of exchange-listed
closed-end funds.
Illiquid Securities
To the extent that such investments are consistent with its investment
objective, the Fund may invest up to 15% of the value of its net assets in
securities as to which a liquid trading market does not exist. Such securities
may include securities that are not readily marketable, such as privately issued
securities and other securities that are subject to legal or contractual
restrictions on resale, floating- and variable-rate demand obligations as to
which the Fund cannot exercise a demand feature on not more than seven days'
notice and as to which there is no secondary market and repurchase agreements
providing for settlement more than seven days after notice.
<PAGE>
The foregoing restriction on illiquid investments does not apply to
purchases of restricted securities eligible for sale to qualified institutional
buyers in reliance upon Rule 144A under the Securities Act of 1933 that the
Board or the Adviser (operating under the general oversight of the Board)
determines to be liquid. In making such determination, the Board or the Adviser
will take into account trading activity for such securities and the availability
of reliable pricing information, among other factors. To the extent that
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities, the Fund's holdings of those securities may become
illiquid. The foregoing restriction also does not apply to purchases of
securities of foreign issuers offered and sold outside the United States in
reliance upon the exemption from registration provided by Regulation S under the
Securities Act of 1933 to the extent that a liquid trading market for those
securities exists.
Obligations of Foreign Governments, Banks and Corporations
The Fund may invest in U.S. dollar-denominated short-term obligations
issued or guaranteed by one or more foreign governments or any of their
political subdivisions, agencies or instrumentalities that are determined by its
Sub-Adviser to be of comparable quality to the other obligations in which the
Fund may invest.
To the extent that such investments are consistent with its investment
objective, the Fund may also invest in debt obligations of supranational
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 Union, the Asian Development Bank and
the InterAmerican Development Bank. The percentage of the Fund's assets invested
in obligations of foreign governments and supranational entities will vary
depending on the relative yields of such securities, the economic and financial
markets of the countries in which the investments are made and the interest rate
climate of such countries.
The Fund may also invest a portion of its total assets in high quality,
short-term (one year or less) debt obligations of foreign branches of U.S. banks
or U.S. branches of foreign banks that are denominated in and pay interest in
U.S. dollars.
U.S. Government Obligations
The Fund may invest in various types of U.S. Government obligations.
U.S. Government obligations include securities issued or guaranteed as to
principal and interest by the U.S. Government, its agencies or
instrumentalities. Payment of principal and interest on U.S. Government
obligations (i) may be backed by the full faith and credit of the United States
(as with U.S. Treasury obligations and GNMA certificates) or (ii) may be backed
solely by the issuing or guaranteeing agency or instrumentality itself (as with
FNMA notes). In the latter case, the investor must look principally to the
agency or instrumentality issuing or guaranteeing the obligation for ultimate
repayment, which agency or instrumentality may be privately owned. There can be
no assurance that the U.S. Government would provide financial support to its
agencies or instrumentalities where it is not obligated to do so. As a general
matter, the value of debt instruments, including U.S. Government obligations,
declines when market interest rates increase and rises when market interest
rates decrease. Certain types of U.S. Government obligations are subject to
fluctuations in yield or value due to their structure or contract terms.
<PAGE>
Unrated, Downgraded and Below Investment Grade Investments
The Fund may purchase instruments that are not rated if, in the opinion
of its Sub-Adviser, such obligations are of an investment quality comparable to
other rated investments that are permitted to be purchased by the Fund. After
purchase by the 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 provided that the amount of such
securities held by the Fund does not exceed 5% of the Fund's net assets. To the
extent the ratings given by Moody's or S&P may change as a result of changes in
such organizations or their rating systems, the Fund will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained in this SAI.
Because the Fund is not required to sell downgraded securities, the
Fund could hold up to 5% of its net assets in debt securities rated below "Baa"
by Moody's or below "BBB" by S&P or in unrated, low quality (below investment
grade) securities. Although they may offer higher yields than do higher rated
securities, low rated, and unrated, low quality debt securities generally
involve greater volatility of price and risk of principal and income, including
the possibility of default by, or bankruptcy of, the issuers of the securities.
In addition, the markets in which low rated and unrated, low quality debt are
traded are more limited than those in which higher rated securities are traded.
The existence of limited markets for particular securities may diminish the
Fund's ability to sell the securities at fair value either to meet redemption
requests or to respond to changes in the economy or in the financial markets and
could adversely affect and cause fluctuations in the daily net asset value of
the Fund's shares.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated or
unrated, low quality debt securities, especially in a thinly traded market.
Analysis of the creditworthiness of issuers of low rated or unrated, low quality
debt securities may be more complex than for issuers of higher rated securities,
and the ability of the Fund to achieve its investment objective may, to the
extent it holds low rated or unrated low quality debt securities, be more
dependent upon such creditworthiness analysis than would be the case if the Fund
held exclusively higher rated or higher quality securities.
Low rated or unrated low quality debt securities may be more
susceptible to real or perceived adverse economic and competitive industry
conditions than investment grade securities. The prices of such debt securities
have been found to be less sensitive to interest rate changes than higher rated
or higher quality investments, but more sensitive to adverse economic downturns
or individual corporate developments. A projection of an economic downturn or of
a period of rising interest rates, for example, could cause a decline in low
rated or unrated, low quality debt securities prices because the advent of a
recession could dramatically lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
the debt securities defaults, the Fund may incur additional expenses to seek
recovery.
<PAGE>
Warrants
To the extent that such investments are consistent with its investment
objective, the Fund may invest up to 5% of its net assets in warrants. Warrants
represent rights to purchase securities at a specific price valid for a specific
period of time. The prices of warrants do not necessarily correlate with the
prices of the underlying securities. The Fund may purchase warrants only on
securities in which the Fund may invest directly.
Investments in Foreign Securities
Investing in the securities of foreign issuers involves significant
risks that are not typically associated with investing in securities of domestic
issuers. In addition to being affected by changes in currency exchange rates, as
discussed below, such investments may be affected by changes in foreign or U.S.
laws or restrictions applicable to such investments and by changes in exchange
control regulations.
Since foreign issuers are not subject to uniform accounting, auditing
and financial reporting standards, practices and requirements comparable to
those applicable to U.S. issuers, there may be less publicly available
information about a foreign issuer than about a domestic issuer. Volume and
liquidity in many foreign securities markets are less than volume and liquidity
in U.S. securities markets, and securities of many foreign issuers are less
liquid and more volatile than securities of comparable domestic issuers. Fixed
commissions on certain foreign securities exchanges are generally higher than
negotiated commissions on U.S. exchanges. There is generally less government
supervision and regulation of securities exchanges, brokers, dealers and listed
and unlisted issuers in foreign countries than in the United States.
Foreign investment markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the Fund's assets is uninvested and no return is
earned on such assets. The inability of the Fund to make intended securities
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of Fund investments due to
settlement problems could result either in losses to the Fund due to subsequent
declines in value of the portfolio securities or, if the Fund has entered into a
contract to sell the securities, could result in possible liability of the Fund
to the purchaser. In addition, with respect to certain foreign countries, there
is the possibility of expropriation, confiscatory taxation, political or social
instability, or diplomatic developments which could affect the Fund's
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency or balance of payments position.
<PAGE>
Investments in Depositary Receipts
Many securities of foreign issuers are represented by American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) and similar Depositary Receipts. ADRs are
certificates issued by a U.S. bank or trust company that represent the right to
receive securities of foreign issuers deposited with the bank or trust company
or a foreign corespondent bank. Prices of ADRs and ADSs are quoted in U.S.
dollars traded in the United States on exchanges or over-the-counter. ADRs and
ADSs do not eliminate all the risks inherent in investing in the securities of
foreign issuers. To the extent that the Fund acquires ADRs or ADSs through banks
which do not have a contractual relationship with the foreign issuer of the
security underlying the ADR or ADSs to issue and service such ADR or ADSs (i.e.,
an unsponsored ADR), there may be an increased possibility that the Fund would
not become aware of and be able to respond in a timely manner to corporate
actions such as stock splits or rights offerings involving the foreign issuer.
In addition, the lack of information may result in inefficiencies in the
valuation of such instruments. However, by investing in ADRs or ADSs rather than
directly in the stock of foreign issuers, the Fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there is
a large, liquid market in the United States for ADRs and ADSs quoted on a
national securities exchange or the NASDAQ Stock Market. The information
available for ADRs and ADSs is subject to the accounting, auditing and financial
reporting standards of the domestic market or exchange on which they are traded,
which standards are more uniform and more exacting than those to which many
foreign issuers may be subject.
EDRs and GDRs are receipts evidencing an arrangement with a non-U.S.
bank similar to that for ADRs and are designed for use in non-U.S. securities
markets. EDRs and GDRs are not necessarily quoted in the same currency as the
underlying security.
Currency Risk
To the extent that the Fund's assets consist of investments quoted or
denominated in a currency other than the U.S. dollar or to the extent that the
Fund holds securities issued by companies that have significant assets located
outside the U.S., the Fund will be exposed to adverse developments affecting the
value of such currency. A decline in the currency in which a foreign security is
quoted or denominated might reduce the value of the Fund's investment in such a
security. In addition, if the exchange rate for the currency in which the Fund
receives dividend payments declines against the U.S. dollar before such
dividends are paid by the Fund to its shareholders, the Fund may have to sell
portfolio securities to obtain sufficient cash to pay such dividends. The Fund
may from time to time have substantial currency exposure from investments quoted
or denominated in foreign currencies.
<PAGE>
Currency exchange rates may fluctuate significantly over short periods
of time causing, along with other factors, the Fund's net asset value to
fluctuate. Such exchange rates generally are determined by the forces of supply
and demand in the foreign exchange markets and the relative merits of
investments in different countries, actual or anticipated changes in interest
rates and other complex factors. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments
in the U.S. or abroad. To the extent that a substantial portion of the Fund's
total assets is denominated or quoted in the currencies of foreign countries,
the Fund will be more susceptible to the risk of adverse economic and political
developments within those countries.
Borrowing
The Fund may borrow money from a bank on a secured or unsecured basis
for temporary purposes (such as for meeting redemption requests), in an amount
which, when considered with any other amounts borrowed by the Fund which have
not been repaid, does not exceed 33 1/3% of its total net asset value
(determined at the time of such borrowing and not counting such borrowing, or
the other amounts borrowed by the Fund which have not been repaid, for purposes
of determining net asset value). Interest on borrowed money is an expense that
the Fund would not otherwise incur, so that the Fund may have little or no net
investment income during periods of borrowing. Since substantially all of the
Fund's assets fluctuate in value whereas borrowing obligations are fixed, when
the Fund has outstanding borrowings, its net asset value will tend to increase
and decrease more when portfolio investments increase and decrease,
respectively, than would otherwise be the case.
Portfolio Turnover
The Fund's trading activities will depend heavily on the frequency
with which investors purchase and redeem shares. Purchases of Fund shares will
depend on the frequency with which investors make direct cash purchases of Fund
shares and the frequency of share redemptions. Fund purchases and redemptions
cannot be gauged with any degree of accuracy. Accordingly, turnover rates may
vary greatly from year to year as well as within a particular year and may be
affected not only by cash requirements for redemptions of the Fund's shares, but
also by certain requirements which the Fund must satisfy to receive certain
favorable tax treatment. Although the Fund intends to pursue a "buy and hold"
strategy, if the Sub-Adviser deems it appropriate to purchase or sell a
portfolio security, it will do so without regard to the effect on the Fund's
portfolio turnover rate.
FUND POLICIES
Fundamental Investment Restrictions
The following are the Fund's fundamental investment restrictions, which
cannot be changed without shareholder approval by a vote of a majority of the
outstanding shares of the Fund, as defined in the 1940 Act. All other investment
restrictions listed in the Prospectus or in this SAI may be changed by the
Fund's Board of Trustees without shareholder approval.
Unless noted otherwise, if a percentage restriction (whether or not a
fundamental restriction) is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in the Fund's assets
(i.e., due to cash inflows or redemptions) or in market value of the investment
or the Fund's assets will not constitute a violation of that restriction.
<PAGE>
Unless indicated otherwise below, the Fund:
1. may not, with respect to 75% of the Fund's total assets, purchase
the securities of any issuer (other than securities issued or guaranteed by the
U.S. government, or its agencies or instrumentalities and securities issued by
other investment companies), if as a result, more than 5% of its assets would be
invested in the securities of that issuer;
2. may not, with respect to 75% of the Fund's total assets, purchase
the securities of any issuer (other than securities issued or guaranteed by the
U.S. government, or its agencies or instrumentalities and securities issued by
other investment companies), if as a result, it would hold more than 10% of the
outstanding voting securities of such issuer;
3. may not issue senior securities, except as permitted under the 1940
Act and as interpreted and modified by regulatory authority having jurisdiction,
from time to time;
4. may not borrow money, except as permitted under the 1940 Act and as
interpreted and modified by regulatory authority having jurisdiction, from time
to time;
5. may not engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be an underwriter in
connection with the disposition of portfolio securities;
6. may not concentrate its investments in a particular industry, as
that term is used in the 1940 Act, and as interpreted or modified or otherwise
permitted by regulatory authority having jurisdiction, from time to time. For
purposes of this restriction, an "industry" will be defined by reference to the
four-digit Standard Industrial Classification (SIC) Codes;
7. may not purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except that the Fund reserves
freedom of action to hold and to sell real estate acquired as a result of the
Fund's ownership of securities;
8. may not purchase physical commodities or contracts relating to
physical commodities; and
9. may not make loans, except as permitted under the 1940 Act and as
interpreted or modified by regulatory authority having jurisdiction, from time
to time. A purchase of a debt security or similar instrument will not be
considered to be a loan.
<PAGE>
Non-Fundamental Operating Restrictions
The following are the Fund's non-fundamental operating restrictions,
which may be changed by the Fund's Board of Trustees without shareholder
approval.
Unless indicated otherwise below:
1. The Fund may change the aggregate percentage amount in which the
Fund invests in the common stock of the Participating Merchants;
2. The Fund may not pledge, mortgage or hypothecate its assets, except
to the extent necessary to secure permitted borrowings and to the extent related
to the purchase of securities on a when-issued or forward commitment basis and
the deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with respect
to options, forward contracts, futures contracts, including those relating to
indices, and options on futures contracts or indices;
3. The Fund may not purchase securities of other investment companies,
except as permitted under the 1940 Act and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
4. The Fund may not invest in illiquid securities if, after such
investment, more than 15% of its net assets would be invested in illiquid
securities; and
5. The Fund may, notwithstanding any other investment policy or
restriction, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objective, policies, and restrictions as the Fund.
MANAGEMENT OF THE FUND
Board of Trustees
Under the Trust's Amended and Restated Trust Instrument, the Board is
responsible for the overall management and conduct of the business and affairs
of the Fund, including general supervision and review of its investment
activities and the conformity with Delaware Law and stated policies of the Fund.
Subject to that general responsibility, the Board is authorized to delegate
day-to-day investment management responsibilities with respect to the management
of the Fund's assets to one or more investment advisers, which in turn are
authorized to delegate such day-to-day investment management responsibilities to
one or more sub-advisers. In addition, the Board may elect one or more officers
of the Fund and, subject to the Board's general responsibility with respect to
the Fund, may delegate to such officers such duties and responsibilities as the
Board determines to be necessary, advisable or appropriate to the management and
conduct of the Fund's day-to-day business and affairs.
<PAGE>
Management Information
The names of the Trustees and Officers of the Fund, as well as their
addresses, ages and principal occupations for the past five years, are set forth
below. Each "interested or affiliated person," as defined in the 1940 Act, is
indicated by an asterisk (*).
<TABLE>
<S> <C> <C>
Principal Occupation(s)
Name, Address and Age Position(s) Held with Fund During Past 5 Years
--------------------- -------------------------- ------------------------
*Robert S. Feidelson, 36 Trustee; Chief Financial Director and Chief Executive Officer of
11 Broadway Officer and Treasurer Stockback.com, LLC, Stockback Advisers,
New York, NY 10004 LLC and Stockback Capital, LLC; Managing
Director of Lehman Brothers Holdings,
Inc. from 1994 to 1999.
*Timothy C. Parrott, 33 Trustee; President Director and President of Stockback.com,
11 Broadway LLC, Stockback Advisers, LLC and
New York, NY 10004 Stockback Capital, LLC; Managing
Director of Saker Advisors Limited, an
Investment Management Regulatory
Organization and Commodity Futures
Trading Commission regulated investment
adviser in the United Kingdom, from
March 1999 to May 1999; Executive
Director and head of European Hedge Fund
Group, from 1996 to 1999; Senior Vice
President, Refco Commodities Group, from
1994 to 1996.
*C. Eric Peters, 33 Trustee; Vice President and Director and Chief Operating Officer of
11 Broadway Secretary Stockback.com, LLC, Stockback Advisers,
New York, NY 10004 and Stockback Capital, LLC; Director,
Saker Advisors Limited, an Investment
Management Regulatory Organization and
Commodity Futures Trading Commission
regulated investment adviser in the
United Kingdom, from 1998 to 1999;
Proprietary Trader, Credit Suisse First
Boston in 1997; Vice President and
Proprietary Trader, Lehman Brothers
Holdings, Inc., from 1994 to 1997.
George Green, 62 Trustee President, Hearst Magazines International.
959 Eighth Avenue
New York, NY 10019
Doug Hitchner, 39 Trustee Odyssey Investment Partners, a private
Odyssey Investment Partners investment firm, from 1998 to Present;
280 Park Avenue Investment Banker, Goldman Sachs &
New York, NY 10017 Company, from March 1996 to January
1998; Financial Services, GE Capital
Corporation, from March 1990 to February
1996.
Milind Rao, 39 Trustee Associate Professor, Columbia
505 Uris Hall University, from January 1998 to
Columbia University Present; Associate Professor, Colgate
Business School University, from 1995 to December 1997.
New York, NY 10027
Mason Slaine, 47 Trustee President and Chief Executive Officer,
2777 Summer Street Trustee Information Holdings Inc., from 1996 to
Suite 209 Present; President, Thomson Financial,
Stamford, CT 06905 from 1994 to 1996.
</TABLE>
No Trustee will receive any benefits upon retirement. Thus, no pension or
retirement benefits have accrued as part of the Fund's expenses.
<PAGE>
Compensation
Each Trustee of the Trust who is not an interested persons of the Trust
will receive an annual retainer of $6,250 plus $1,500 for each Board of Trustees
meeting attended in person or $750 for each meeting attended telephonically,
plus reimbursement of expenses. The following table provides an estimate of each
Trustee's compensation for the current fiscal year ending December 31, 2000:
<TABLE>
<S> <C> <C> <C>
Estimated Compensation Table
--------------------------------------- -------------------------------- ----------------------------------------
Name of Person, Position Aggregate Total Compensation From Fund
Compensation from and Fund Complex Paid to
the Fund Trustees or
Expected to be Paid to
Trustees (1)
--------------------------------------- -------------------------------- ----------------------------------------
Robert S. Feidelson None None
C. Eric Peters None None
Timothy C. Parrott None None
Doug Hitchner $9,250 $9,250
George Green $8,500 $8,500
Milind Rao $9,250 $9,250
Mason Slaine $7,750 $7,750
</TABLE>
(1) This amount represents the estimated aggregate amount of compensation
paid to each Trustee of the Trust, who is not an interested persons of
the Trust, for service on the Board of Trustees for the fiscal year
ending December 31, 2000. The Fund is one Series of the Trust, which
began operations in August 14, 2000.
Code of Ethics
Pursuant to Rule 17j-1 under the 1940 Act, the Fund has adopted a code
of ethics. The Fund's investment adviser and principal underwriter have also
adopted codes of ethics under Rule 17j-1. Each code of ethics permits personal
trading by covered personnel, including securities that may be purchased or held
by the Fund, subject to certain reporting requirements and restrictions.
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Control Persons and Principal Holders of Securities
As of August 14, 2000, Stockback Holdings, Inc. ("Holdings"), a
Delaware corporation whose address is 11 Broadway, 17th Floor, New York, NY
10004, owned, beneficially and of record, 100% of the issued and outstanding
capital shares of the Fund, all of which were issued to Holdings in connection
with the organization of the Fund. It is expected that Holdings will own,
beneficially and of record, substantially less than 25% of the Fund's
outstanding capital shares within six months of the date on which the Fund first
offers and sells its shares to the public. As a result, although Holdings may
now control the Fund, it is not expected that it will continue to control the
Fund subsequent to the expiration of that six-month period.
As of August 14, 2000, no person other than Holdings owned of record 5%
or more of the Fund's outstanding capital shares.
As of August 14, 2000, due to their ownership of membership interests
in Holdings, the following individuals and entities would be deemed to
beneficially own more than 5% of the Fund's outstanding shares:
<TABLE>
<S> <C> <C> <C>
Name Address Percentage
Robert S. Feidelson 11 Broadway 14.28%
New York, NY 10004
Timothy C. Parrott 11 Broadway 14.28%
New York, NY 10004
C. Eric Peters 11 Broadway 14.28%
New York, NY 10004
</TABLE>
It is expected that each of the Messrs. Feidelson, Parrott and Peters
will own, beneficially and of record, less than 5% of the Fund's outstanding
shares within six months of the date on which the Fund first offers and sells
its shares to the public. As a result, none of these persons is expected to be a
principal holder of Fund shares subsequent to the expiration of that six-month
period.
Management Ownership
As of the date of this SAI, the Trustees and officers of the Fund, as a
group, owned less than 1% of the Fund's outstanding shares.
<PAGE>
INVESTMENT MANAGEMENT
The Investment Adviser
Under an investment advisory agreement ("Investment Advisory
Agreement") with the Fund, the Adviser, a registered investment adviser,
provides investment management services to the Fund. The Adviser is located at
11 Broadway, 17th Floor, New York, New York 10004.
Subject to the general supervision of the Trust's Board of Trustees and
in accordance with the investment objective, policies and restrictions of the
Fund, the Adviser will have responsibility for the management of the Fund's
investments. In this connection, the Adviser will keep, prepare or file, or
cause to be kept, prepared or filed, all accounts, books, records and other
documents required to be kept, prepared or filed by the Fund under federal or
state law, as well as provide additional services with respect to the daily
administration of the Fund. The Adviser is a recently-organized investment
adviser, and, therefore, has no experience as an investment adviser.
For its advisory services, the Fund pays the Adviser an investment
advisory fee at an annual rate equal 0.55% of the Fund's average daily net
assets. The Adviser has contractually agreed to waive its investment advisory
fee for a period of one year from the date of effectiveness of the Trust's
registration statement.
The Adviser is a wholly owned by Stockback and an indirect subsidiary
of Holdings.
Each of Messrs. Feidelson, Parrott and Peters is affiliated with and/or
an officer of Holdings and its subsidiary companies, including the Adviser.
The Sub-Adviser
The Adviser has entered into a sub-advisory agreement ("Sub-Advisory
Agreement") with Merrill Lynch Investment Managers, L.P., 200 Scudders Mill
Road, Plainsboro, New Jersey 08536, to be the Sub-Adviser to the Fund. The
Sub-Adviser is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc.
Under the Sub-Advisory Agreement, the Sub-Adviser is responsible for the
day-to-day management of the Fund's portfolio pursuant to the Fund's investment
objective and restrictions. For its services, the Sub-Adviser receives a fee
from the Adviser at an annual rate equal to 0.30% of the Fund's average daily
net assets. However, subject to the renewal and termination provisions of the
Sub-Advisory Agreement, the Sub-Adviser shall be entitled to receive from the
Adviser the following amounts if greater than 0.30% of the Fund's average daily
net assets during any such year:
First Year: $25,000
Second Year: $50,000
Third Year: The sum of $500,000 minus aggregate fee
paid to the Sub-Adviser by the Adviser in
the first two years.
<PAGE>
The Sub-Advisory Agreement is subject to the same Board of Trustee
approval, oversight and renewal as the Investment Advisory Agreement.
The Investment Advisory Agreement and the Sub-Advisory Agreement will
continue in effect for more than two years provided the continuance is approved
annually (i) by the holders of a majority of the Fund's outstanding voting
securities or by the Fund's Board of Trustees and (ii) by a majority of the
Trustees of the Fund who are not parties to the Investment Advisory Agreement or
the Sub-Advisory Agreement or affiliates of any such party. Both the Investment
Advisory Agreement and the Sub-Advisory Agreement may be terminated on 60 days'
written notice by any such party and will terminate automatically if assigned.
SERVICE PROVIDERS
Principal Underwriter
Stockback Capital, LLC, 11 Broadway, 17th Floor, New York, New York
10004 ("Stockback Capital"), is the principal underwriter for the Fund.
The underwriter is a wholly owned subsidiary of Stockback. Stockback is
a wholly owned subsidiary of Holdings.
Each of Messrs. Feidelson, Parrott and Peters is affiliated with and/or
an officer of Holdings and its subsidiary companies, including Stockback
Capital.
Administrator of the Fund
The Adviser also serves as the Fund's administrator. As the Fund's
administrator, the Adviser provides administrative services directly or through
sub-contracting, including: (i) coordinating the services performed by the
transfer and dividend disbursing agent, custodian, independent auditors and
legal counsel; (ii) preparing or supervising the preparation of periodic reports
to the Fund's shareholders; (iii) generally supervising regulatory compliance
matters, including the compilation of information for documents such as reports
to, and filings with, the SEC and other federal or state governmental agencies;
and (iv) monitoring and reviewing the Fund's contracted services and
expenditures. The Adviser also furnishes office space and certain facilities
required for conducting the business of the Fund. Pursuant to an administrative
services agreement with the Fund, the Adviser receives a fee equal to 0.25% of
the average daily net assets of the Fund.
Custodian
The Bank of New York (the "Custodian") serves as the custodian of the
assets of the Fund pursuant to a custodian services agreement ("Custodian
Services Agreement"). The principal office of the Custodian is located at 101
Barclay Street, New York, New York 10286. Under the Custodial Services
Agreement, the Custodian is compensated for its services by the Fund. Also, the
Custodial Services Agreement authorizes the Custodian to appoint one or more
sub-custodians with the approval of the Board. The Custodian does not play any
role in determining the investment policies of the Fund or the securities
purchased or sold by the Fund.
<PAGE>
Transfer Agent and Divided Paying Agent
American Data Services, Inc. (the "Transfer Agent") serves as the
transfer and dividend paying agent for the Fund pursuant to a Transfer Agency
Agreement. The principal office of the Transfer Agent is located at Hauppauge
Corporate Center, 150 Motor Parkway, Suite 109, Hauppauge, NY 11788.
Independent Accountants
PricewaterhouseCoopers LLP, 1301 Avenue of Americas, New York, NY
10036, serves as independent auditors for the Trust and performs an audit of the
Trust's financial statements annually.
Legal Counsel
Dechert Price & Rhoads, 1775 Eye Street N.W., Washington, DC
20006-2401, acts as legal counsel for the Fund. Vedder, Price, Kaufman &
Kammholz, acts as legal counsel for the independent trustees.
FEES PAID TO STOCKBACK BY PARTICIPATING MERCHANTS
When negotiating the participation of a Participating Merchant in the
Consumer Stock Ownership Program, the parties negotiate the percentage of the
cash rebate that the Merchant is willing to pay to Stockback Capital on behalf
of the Member in connection with the Member's purchases of goods or services
from the Participating Merchant. In addition, Stockback will receive fees from
Participating Merchants for services provided in connection with the Consumer
Stock Ownership Program.
Accordingly, each time that a Member makes a qualifying purchase from a
Participating Merchant (i.e. a purchase made on-line at www.stockback.com or
otherwise qualifying under the Consumer Stock Ownership Stock Program), the
Merchant will make two payments. The first payment is the cash rebate payment
that is paid directly to Stockback Capital for the benefit of the Member that
has made the purchase. The cash rebate is calculated as a fixed percentage of
the purchase price of the goods or services that have been purchased by the
Member. While this percentage may vary from Participating Merchant to
Participating Merchant, the specific percentage for each Participating Merchant
is clearly disclosed at www.stockback.com.
The second payment is the loyalty program outsourcing fee that is paid
to Stockback for facilitating the purchase by the Member. The fees payable by
Participating Merchants to Stockback generally may take one of two forms. First,
a Merchant might agree to pay Stockback an amount equal to a percentage of the
dollar amount of each purchase you make. Second, a Merchant might agree to pay
Stockback an annual fee or a fixed dollar amount in connection with each
purchase you make from that Merchant.
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION
Investment decisions for the Fund are made with a view to achieving its
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the Fund.
The Fund has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Pursuant to the
Sub-Advisory Agreement and subject to policies established by the Fund's Board
of Trustees, the Sub-Adviser is responsible for the Fund's investment portfolio
decisions and the placing of portfolio transactions. In placing orders, it is
the policy of the Fund 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 broker/dealer's risk in
positioning the securities involved. While the Sub-Adviser generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available.
Purchase and sale orders of the securities held by the Fund may be
combined with those of other accounts that the Sub-Adviser manages, and for
which it has brokerage placement authority, in the interest of seeking the most
favorable overall net results. When the Sub-Adviser determines that a particular
security should be bought or sold for the Fund and other accounts managed by the
Sub-Adviser, the Sub-Adviser undertakes to allocate those transactions among the
participants equitably.
Under the 1940 Act, persons affiliated with the Fund, the Sub-Adviser
and its affiliates are prohibited from dealing with the Fund as a principal in
the purchase and sale of securities unless an exemptive order allowing such
transactions is obtained from the Securities and Exchange Commission ("SEC") or
an exemption is otherwise available.
Except in the case of equity securities purchased by the Fund,
purchases and sales of securities usually will be principal transactions.
Portfolio securities normally will be purchased or sold from or to dealers
serving as market makers for the securities at a net price. The Fund also will
purchase portfolio securities in underwritten offerings and may generally
purchase securities directly from the issuer. Generally, money market securities
and other debt obligations are traded on a net basis and do not involve
brokerage commissions.
Purchases and sales of equity securities on a securities exchange are
effected through brokers who charge a negotiated commission for their services.
Orders may be directed to any broker to the extent and in the manner permitted
by applicable law. In the over-the-counter market, securities are generally
traded on a "net" basis with dealers acting as principal for their own accounts
without a stated commission, although the price of the security usually includes
a profit to the dealer. In underwritten offerings, securities are purchased at a
fixed price that includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount.
<PAGE>
In placing orders for portfolio securities of the Fund, the Sub-Adviser
is required to give primary consideration to obtaining the most favorable price
and efficient execution. This means that the Sub-Adviser seeks to execute each
transaction at a price and commission, if any, that is expected to provide the
most favorable total cost or proceeds reasonably attainable in the
circumstances. While the Sub-Adviser generally seeks reasonably competitive
spreads or commissions, the Fund will not necessarily be paying the lowest
spread or commission available. In executing portfolio transactions and
selecting brokers or dealers, the Sub-Adviser seeks to obtain the best overall
terms available for the Fund. In assessing the best overall terms available for
any transaction, the Sub-Adviser considers factors deemed relevant, including
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. Rates are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the
broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Fund's Board.
Certain of the brokers or dealers with whom the Fund may transact
business offer commission rebates to the Fund. The Sub-Adviser considers such
rebates in assessing the best overall terms available for any transaction. The
overall reasonableness of brokerage commissions paid is evaluated by the
Sub-Adviser based upon its knowledge of available information as to the general
level of commission paid by other institutional investors for comparable
services.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receives research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
the Sub-Adviser receives research services from many broker-dealers with which
it places the Fund's portfolio transactions. The Sub-Adviser may also receive
research or research credits from brokers which are generated from underwriting
commissions when purchasing new issues of fixed income securities or other
assets for the Fund. These services, which in some cases may also be purchased
for 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.
The Adviser, subject to seeking the most favorable price and best
execution and in compliance with the Conduct Rules of the National Association
of Securities Dealers, Inc., may consider sales of shares of the Fund as a
factor in the selection of broker-dealers. The Fund may direct the Adviser to
cause the Sub-Adviser to effect securities transactions through broker-dealers
in a manner that would help to generate resources to (i) pay the cost of certain
expenses which the Trust is required to pay or for which the Trust is required
to arrange payment pursuant to the Investment Advisory Agreement ("Trust
Expenses"); or (ii) finance activities that are primarily intended to result in
the sale of Fund shares. At the discretion of the Board of Trustees, such
resources may be used to pay or cause the payment of Trust Expenses or may be
used to finance activities that are primarily intended to result in the sale of
Fund shares.
<PAGE>
ORGANIZATION, DIVIDEND AND VOTING RIGHTS
All shareholders may vote on each matter presented to shareholders.
Fractional shares have the same rights proportionately as do full shares. Shares
of the Trust have no preemptive, conversion, or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. If the Trust
issues additional Series, each Series of shares will be held separately by the
custodian, and in effect each Series will be a separate fund.
All shares of the Trust have equal voting rights. Approval by the
shareholders of a fund is effective as to that fund whether or not sufficient
votes are received from the shareholders of the other investment portfolios to
approve the proposal as to those investment portfolios.
Generally, the Trust will not hold an annual meeting of shareholders
unless required by the 1940 Act. The Trust will hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Trustee
or Trustees if requested in writing by the holders of at least 10% of the
Trust's outstanding voting securities, and will assist such shareholders in
communicating with other shareholders as required by Section 16(c) of the 1940
Act.
Each share of the Fund represents an equal proportionate interest in
the Fund and is entitled to such dividends and distributions out of the income
earned on the assets belonging to the Fund as are declared in the discretion of
the Trustees. In the event of the liquidation or dissolution of the Trust,
shareholders of a Fund are entitled to receive the assets attributable to the
Fund that are available for distribution, and a distribution of any general
assets not attributable to a particular investment portfolio that are available
for distribution in such manner and on such basis as the Trustees in their sole
discretion may determine.
The Trust Instrument further provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees will not be liable for any action or failure to act,
but nothing in the Trust Instrument protects a Trustee against any liability to
which the Trustee would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved in the
conduct of the Trustee's office.
Under Delaware law, the shareholders of the Fund are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a Series of the Trust will not be liable for the
debts or obligations of any other Series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states or jurisdictions. As a result, to the extent that a
Delaware business trust or a shareholder is subject to the jurisdiction of
courts of such other states or jurisdictions, the courts may not apply Delaware
law and may thereby subject the Delaware business trust shareholders to
liability. To guard against this risk, the Trust Instrument contains an express
disclaimer of shareholder liability for acts or obligations of a Series of the
Trust. Notice of such disclaimer will generally be given in each agreement,
obligation or instrument entered into or executed by a Series or the Trustees.
The Trust Instrument also provides for indemnification by the relevant Series
for all losses suffered by a shareholder as a result of an obligation of the
series. In view of the above, the risk of personal liability of shareholders of
a Delaware business trust is remote.
The Fund only recently commenced operations. Like any venture, there
can be no assurance that the Fund as an enterprise will be successful or will
continue to operate indefinitely.
<PAGE>
PRICING OF FUND SHARES
The Fund will value its shares on each day on which the NYSE is open
for business, unless the Fund does not receive a purchase or redemption request
and no Fund shares are tendered for redemption on any such day. The Fund
reserves the right to change the time at which purchases and redemptions are
priced if the NYSE closes at a time other than 4:00 p.m. Eastern time or if an
emergency exists. In determining the net asset value per share on a particular
purchase or redemption date, the Fund will first determine the overall net asset
value of the Fund on that date (calculated as of the close of trading on the
floor of the NYSE, generally 4:00 p.m., Eastern time), and then divide the
overall net asset value by the number of Fund shares then outstanding. In
determining its overall net asset value, the Fund will first determine the
overall value of its portfolio investments, and then subtract from that value
the amount of its liabilities, including accrued expenses. In determining the
overall value of its portfolio investments, the Fund will value securities for
which market quotations are readily available (expected to constitute the bulk
of the Fund's portfolio) at their market price. In the unlikely event the Fund
invests in illiquid securities and other securities and assets for which market
quotations are not readily available, it will value such investments at "fair
value," as determined in good faith by or under the direction of the Board of
Trustees.
Securities that are primarily traded on foreign securities exchanges
are generally valued at the last sale price on the exchange where they are
primarily traded. All foreign securities traded primarily in the foreign over
the counter market are generally valued at the last sale quotation, if market
quotations are available, or the last reported bid price if there is no active
trading in a particular security on a given day. However, if intervening events
resulting in market volatility have significantly affected the value of any such
foreign securities after the close of trading on the relevant foreign market,
but before the Fund values its shares on any particular day on which the Fund is
required to value its shares, the Fund may, but is not required to, determine
the value of such securities at "fair value," as determined in good faith by or
under the direction of the Board of Trustees.
Quotations of foreign securities in foreign currencies are converted,
at current exchange rates, to their U.S. dollar equivalents in order to
determine their current value. In addition, to the extent that the Fund values
its foreign securities (other than ADRs and ADSs) as of the close of trading on
various exchanges and over-the-counter markets throughout the world, the
calculation of the Fund's net asset value may not take place contemporaneously
with the valuation of foreign securities held by the Fund.
Short-term debt securities with a maturity of 60 days or less are
generally valued on an amortized cost basis. Under the amortized cost basis
method of valuation, the security is initially valued at its purchase price and
thereafter by amortizing any premium or discount uniformly to maturity. If for
any reason the Board believes the amortized cost method valuation does not
fairly reflect the fair value of any security, fair value will be determined in
good faith by or under the direction of the Board.
<PAGE>
TAXATION
Set forth below is a discussion of certain U.S. federal income tax
issues concerning the Fund and the purchase, ownership, and disposition of Fund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances. This discussion is based upon present
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
regulations promulgated thereunder, and judicial and administrative ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisers with
regard to the federal tax consequences of the purchase, ownership, or
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
Tax Status of the Fund
The Fund intends to be taxed as a regulated investment company under
Subchapter M of the Code. Accordingly, the Fund must, among other things, (a)
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to certain 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 (b) diversify its holdings so that, at the end of
each fiscal quarter, (i) at least 50% of the value of the Fund's total assets is
represented by cash and cash items, U.S. Government securities, the securities
of other regulated investment companies and other securities, with such other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the value of the Fund's total assets and 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 and the securities of other regulated investment
companies).
As a regulated investment company, the Fund generally is not subject to
U.S. federal income tax on income and gains that it distributes to shareholders,
if at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax at
the Fund level. To avoid the tax, the Fund must distribute during each calendar
year an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement.
<PAGE>
A distribution will be treated as paid on December 31 of a calendar
year if it is declared by the Fund in October, November or December of that year
with a record date in such a month and paid by the Fund during January of the
following year. Such a distribution will be taxable to shareholders in the
calendar year in which the distribution is declared, rather than the calendar
year in which it is received.
Distributions
Distributions of investment company taxable income are taxable to a
U.S. shareholder as ordinary income, whether paid in cash or shares. Dividends
paid by the Fund to a corporate shareholder, to the extent such dividends are
attributable to dividends received by the Fund from U.S. corporations, may,
subject to limitation, be eligible for the dividends received deduction.
However, the alternative minimum tax applicable to corporations may reduce the
value of the dividends received deduction.
The excess of net long-term capital gains over net short-term capital
losses realized, distributed and properly designated by the Fund, whether paid
in cash or reinvested in Fund shares, will generally be taxable to shareholders
as long-term gain, regardless of how long a shareholder has held Fund shares.
The current maximum tax on long-term gains applicable to individuals is 20%. Net
capital gains from assets held for one year or less will be taxed as ordinary
income.
Shareholders will be notified annually as to the U.S. federal tax
status of distributions, and shareholders receiving distributions in the form of
newly issued shares will receive a report as to the net asset value of the
shares received.
If the net asset value of shares is reduced below a shareholder's cost
as a result of a distribution by the Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
Dispositions
Upon a redemption, sale or exchange of shares of the Fund, a
shareholder will realize a taxable gain or loss depending upon his or her basis
in the shares. A gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands, and the rate of tax will
depend upon the shareholder's holding period for the shares. Any loss realized
on a redemption, sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including through reinvestment of dividends) 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. If a shareholder holds Fund shares for
six months or less and during that period receives a distribution taxable to the
shareholder as long-term capital gain, any loss realized on the sale of such
shares during such six-month period would be a long-term loss to the extent of
such distribution.
If, within 90 days after purchasing Fund shares with a sales charge, a
shareholder exchanges the shares and acquires new shares at a reduced (or
without any) sales charge pursuant to a right acquired with the original shares,
then the shareholder may not take the original sales charge into account in
determining the shareholder's gain or loss on the disposition of the shares.
Gain or loss will generally be determined by excluding all or a portion of the
sales charge from the shareholder's tax basis in the exchanged shares, and the
amount excluded will be treated as an amount paid for the new shares.
<PAGE>
Backup Withholding
The Fund generally will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividends paid (other than
exempt-interest dividends), capital gain distributions, and redemption proceeds
to shareholders if: (1) the shareholder fails to furnish the Fund with the
shareholder's correct taxpayer identification number or social security number;
(2) the IRS notifies the shareholder or the Fund 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 or she is not subject to backup
withholding. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
Other Taxation
Distributions may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Non-U.S.
shareholders may be subject to U.S. tax rules that differ significantly from
those summarized above, including the likelihood that ordinary income dividends
to them would be subject to withholding of U.S. tax at a rate of 30% (or a lower
treaty rate, if applicable).
Tax Treatment of the Rebate Program
The proper federal income tax treatment of the rebate program is not
clear. Based upon analogous cases and administrative rulings, the Fund,
Stockback, and the Participating Merchants intend to take the following
approach. When a Member buys an item from a Participating Merchant, the Member
receives two things in exchange for his or her payment: (i) the item, and (ii)
the rebate amount. For federal income tax purposes, this will be treated as if
the Member bought these two things in exchange for the payment. The amount
allocated to the item purchased and the rebate amount is determined by reference
to their proportionate fair market values. For example, if a Member bought a
suitcase for $100 and received a $5 rebate, the allocation of the $100 would be
$95 to the suitcase and $5 to the rebate. If the rebate is used to buy Fund
shares, you will have an initial tax basis in the Fund shares that is equal to
the purchase price of those shares.
Fund Investments
Market Discount. If the Fund purchases a debt security at a price lower
than the stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is the "market discount". If the amount
of market discount is more than a de minimis amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by the Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligation
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
<PAGE>
Original Issue Discount. Certain debt securities acquired by the Fund
may be treated as debt securities that were originally issued at a discount.
Very generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by the Fund, original issue discount that accrues on a debt security in
a given year generally is treated for federal income tax purposes as interest
and, therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies. Some debt securities may be
purchased by the Fund at a discount that exceeds the original issue discount on
such debt securities, if any. This additional discount represents market
discount for federal income tax purposes (see above).
Options, Futures and Forward Contracts. Any regulated futures contracts
and certain options (namely, nonequity options and dealer equity options) in
which the Fund may invest may be "section 1256 contracts." Gains (or losses) on
these contracts generally are considered to be 60% long-term and 40% short-term
capital gains or losses. Also, section 1256 contracts held by the Fund at the
end of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by
the Fund may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Fund, and
losses realized by the Fund on positions that are 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 the losses are
realized. In addition, certain carrying charges (including interest expense)
associated with positions in a straddle may be required to be capitalized rather
than deducted currently. Certain elections that the Fund may make with respect
to its straddle positions may also affect the amount, character and timing of
the recognition of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have
been promulgated, the consequences of such transactions to the Fund are not
entirely clear. The straddle rules may increase the amount of short-term capital
gain realized by the Fund, which is taxed as ordinary income when distributed to
shareholders. 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 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 transactions.
<PAGE>
Constructive Sales. Under certain circumstances, the Fund may recognize
gain from a constructive sale of an "appreciated financial position" it holds if
it enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
UNDERWRITER
Distribution of Securities
Under a distribution agreement ("Distribution Agreement") with the
Fund, Stockback Capital acts as underwriter of the Fund's shares. The Fund pays
no compensation to Stockback Capital for its distribution services. Stockback
Capital has agreed to use its best efforts to market and sell Fund shares on a
continuous basis, but has no obligation to purchase Fund shares for its own
account.
The Fund is a no-load fund, therefore investors pay no sales charges
when buying, exchanging or selling shares of the Fund. The Distribution
Agreement further provides that the Distributor will bear any costs of printing
prospectuses and shareholder reports that are used for selling purposes, as well
as advertising and any other costs attributable to the distribution of the
Fund's shares. The Distribution Agreement is subject to the same termination and
renewal provisions as are described above with respect to the Investment
Advisory Agreement.
PERFORMANCE INFORMATION
The Fund may advertise a variety of types of performance information as
more fully described below. The Fund's performance is historical and past
performance does not guarantee the future performance of the Fund. From time to
time, the Adviser may agree to waive or reduce its management fee and/or to
reimburse certain operating expenses of the Fund. Waivers of management fees and
reimbursement of other expenses will have the effect of increasing the Fund's
performance.
<PAGE>
Average Annual Total Return. The Fund's average annual total return quotation
will be computed in accordance with a standardized method prescribed by rules of
the SEC. The average annual total return for the Fund for a specific period is
calculated as follows:
P(1+T)(To the power of n) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the applicable period at the end of the period.
The calculation assumes that all income and capital gains dividends paid by the
Fund have been reinvested at net asset value on the reinvestment dates during
the period and all recurring fees charges to all shareholder accounts are
included.
Total Return. Calculation of the Fund's total return is not subject to a
standardized formula. Total return performance for a specific period will be
calculated by first taking an investment (assumed below to be $1,000) ("initial
investment") in the Fund's shares on the first day of the period and computing
the "ending value" of that investment at the end of the period. The total return
percentage is then determined by subtracting the initial investment from the
ending value and dividing the remainder by the initial investment and expressing
the result as a percentage. The calculation assumes that all income and capital
gains dividends paid by the Fund have been reinvested at net asset value of the
Fund on the reinvestment dates during the period. Total return may also be shown
as the increased dollar value of the hypothetical investment over the period.
Cumulative Total Return. Cumulative total return represents the simple change in
value of an investment over a stated period and may be quoted as a percentage or
as a dollar amount. Total returns and cumulative total returns may be broken
down into their components of income and capital (including capital gains and
changes in share price) in order to illustrate the relationship between these
factors and their contributions to total return.
Distribution Rate. The distribution rate for the Fund would be computed,
according to a non-standardized formula by dividing the total amount of actual
distributions per share paid by the Fund over a twelve month period by the
Fund's net asset value on the last day of the period. The distribution rate
differs from the Fund's yield because the distribution rate includes
distributions to shareholders from sources other than dividends and interest,
such as short-term capital gains. Therefore, the Fund's distribution rate may be
substantially different than its yield. Both the Fund's yield and distribution
rate will fluctuate.
Yield. The yield would be calculated based on a 30-day (or one-month) period,
computed by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period and
annualizing the result, according to the following formula:
YIELD = 2[(a-b+1)(To the power of 6)-1],
cd
where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends;
d = the maximum offering price per share on the last day of the period.
<PAGE>
The net investment income of a Fund includes actual interest income, plus or
minus amortized purchase discount (which may include original issue discount) or
premium, less accrued expenses. Realized and unrealized gains and losses on
portfolio securities are not included in a Fund's net investment income.
Performance Comparisons:
Certificates of Deposit. Investors may want to compare the Fund's performance to
that of certificates of deposit offered by banks and other depositary
institutions. Certificates of deposit may offer fixed or variable interest rates
and principal is guaranteed and may be insured. Withdrawal of the deposits prior
to maturity normally will be subject to a penalty. Rates offered by banks and
other depositary institutions are subject to change at any time specified by the
issuing institution.
Money Market Funds. Investors may also want to compare performance of the Fund
to that of money market funds. Money market fund yields will fluctuate and
shares are not insured, but share values usually remain stable.
Lipper Analytical Services, Inc. ("Lipper") and Other Independent Ranking
Organizations. From time to time, in marketing and other fund literature, the
Fund's performance may be compared to the performance of other mutual funds in
general or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, may be
cited. Lipper performance figures are based on changes in net asset value, with
all income and capital gains dividends reinvested. Such calculations do not
include the effect of any sales charges imposed by other funds. The Fund may be
compared to Lipper's appropriate fund category, that is, by fund objective and
portfolio holdings. The Fund's performance may also be compared to the average
performance of its Lipper category.
Morningstar, Inc. The Fund's performance may also be compared to the performance
of other mutual funds by Morningstar, Inc., which rates funds on the basis of
historical risk and total return. Morningstar's ratings range from five stars
(highest) to one star (lowest) and represent Morningstar's assessment of the
historical risk level and total return of a fund as a weighted average for 3, 5,
and 10 year periods. Ratings are not absolute and do not represent future
results.
Independent Sources. Evaluations of fund performance made by independent sources
may also be used in advertisements concerning the Fund, including reprints of,
or selections from, editorials or articles about the Fund, especially those with
similar objectives. Sources for fund performance and articles about the Fund may
include publications such as Money, Forbes, Kiplinger's, Smart Money, Financial
World, Business Week, U.S. News and World Report, The Wall Street Journal,
Barron's, and a variety of investment newsletters.
<PAGE>
Indices. The Fund may compare its performance to a wide variety of indices.
There are differences and similarities between the investments that the Fund may
purchase and the investments measured by the indices.
Historical Asset Class Returns. From time to time, marketing materials may
portray the historical returns of various asset classes. Such presentations will
typically compare the average annual rates of return of inflation, U.S. Treasury
bills, bonds, common stocks, and small stocks. There are important differences
between each of these investments that should be considered in viewing any such
comparison. The market value of stocks will fluctuate with market conditions,
and small-stock prices generally will fluctuate more than large-stock prices.
Stocks are generally more volatile than bonds. In return for this volatility,
stocks have generally performed better than bonds or cash over time. Bond prices
generally will fluctuate inversely with interest rates and other market
conditions, and the prices of bonds with longer maturities generally will
fluctuate more than those of shorter-maturity bonds. Interest rates for bonds
may be fixed at the time of issuance, and payment of principal and interest may
be guaranteed by the issuer and, in the case of U.S. Treasury obligations,
backed by the full faith and credit of the U.S. Treasury.
Portfolio Characteristics. In order to present a more complete picture of the
Fund's portfolio, marketing materials may include various actual or estimated
portfolio characteristics, including but not limited to median market
capitalizations, earnings per share, alphas, betas, price/earnings ratios,
returns on equity, dividend yields, capitalization ranges, growth rates,
price/book ratios, top holdings, sector breakdowns, asset allocations, quality
breakdowns, and breakdowns by geographic region.
Measures of Volatility and Relative Performance. Occasionally statistics may be
used to specify Fund volatility or risk. The general premise is that greater
volatility connotes greater risk undertaken in achieving performance. Measures
of volatility or risk are generally used to compare the Fund's net asset value
or performance relative to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market as represented by
the Standard & Poor's 500 Stock Index. A beta of more than 1.00 indicates
volatility greater than the market, and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is a statistical tool that measures the
degree to which a fund's performance has varied from its average performance
during a particular time period.
Standard deviation is calculated using the following formula:
Standard deviation = the square root of S(xi - xm)2
---------
n-1
Where: S = "the sum of",
xi = each individual return during the time period,
xm = the average return over the time period, and
n = the number of individual returns during the time period.
<PAGE>
Statistics may also be used to discuss the Fund's relative performance. One such
measure is alpha. Alpha measures the actual return of a fund compared to the
expected return of a fund given its risk (as measured by beta). The expected
return is based on how the market as a whole performed, and how the particular
fund has historically performed against the market. Specifically, alpha is the
actual return less the expected return. The expected return is computed by
multiplying the advance or decline in a market representation by the Fund's
beta. A positive alpha quantifies the value that the fund manager has added, and
a negative alpha quantifies the value that the fund manager has lost. Other
measures of volatility and relative performance may be used as appropriate.
However, all such measures will fluctuate and do not represent future results.
Discussions of economic, social, and political conditions and their impact on
the Fund may be used in advertisements and sales materials. Such factors that
may impact the Fund include, but are not limited to, changes in interest rates,
political developments, the competitive environment, consumer behavior, industry
trends, technological advances, macroeconomic trends, and the supply and demand
of various financial instruments. In addition, marketing materials may cite the
portfolio management's views or interpretations of such factors.
<PAGE>
Financial Statement
The Stockback Fund
Assets
Cash $250,000
--------
Total Assets 250,000
-
Liabilities --------
Net Assets $250,000
(25,000 shares issued and outstanding;
unlimited number of shares authorzied;
no par value)
Net asset value, offering and redemption (*) price per share $ 10.00
($250,000 net assets/25,000 shares outstanding) --------
(*) Redemption price per share varies with length of time
shares are held.
The Stockback Fund
Statement of Assets and Liabilities
August 9, 2000
--------------------------------------------------------------------------------
1. Organization
The Stockback Trust (the "Trust"), a business trust formed under the laws
of the State of Delaware on September 16, 1999, is authorized to create any
number of separate and distinct series (each, a "Series") and to issue an
unlimited number of shares of each Series.
The Stockback Fund (the "Fund") is currently the only Series maintained by
the Trust, and is a diversified Series of the Trust. The Fund is classified
as a no load open-end, management investment company. The Fund will be
treated as a separate entity for purposes of Delaware law, for certain
purposes of the Investment Company Act of 1940, as amended, and for certain
other purposes. The Fund has had no significant operations other than the
issuance of 25,000 capital shares for $250,000 on August 9, 2000 to
Stockback Holdings, Inc. Stockback Holdings, Inc. has agreed to pay all of
the organization and initial offering expenses of the Fund.
2. Agreements
The Fund has entered into an investment advisory and administrative
services agreement with Stockback Advisers, LLC ("Adviser"), a Delaware
limited liability company. For its advisory services, the Fund pays the
Adviser a fee at an annual rate equal to 0.55% of the Fund's average daily
net assets. The Adviser has contractually agreed to waive its investment
advisory fee for a period of one year from the date of effectiveness of the
Fund's registration statement.
The Adviser also serves as the Fund's administrator. Pursuant to
administrative services agreement with the Fund, the Adviser receives a fee
equal to 0.25 % of the average daily net assets of the Fund.
The Adviser has entered into a sub-advisory agreement with Merrill Lynch
Investment Managers, L.P. ("Sub-Adviser"). Under the sub-advisory
agreement, the Sub-Adviser receives a fee from the Adviser at an annual
rate equal to 0.30% of the Fund's average daily net assets. However,
subject to renewal and termination provisions of the sub-advisory
agreement, the Sub-Adviser is entitled to receive from the Adviser the
following amounts if greater than 0.30% of the Fund's average daily net
assets during any such year: $25,000 in the first year, $50,000 in the
second year and $500,000 less aggregate fee paid to the Sub-Adviser by the
Adviser during the first two years in the third year.
<PAGE>
The Fund has entered into an administration and accounting services
agreement with American Data Services, Inc. (the "Transfer Agent"). For
services provided by it to the Fund, the Transfer Agent is entitled to
receive a fee pursuant to the administration and accounting services
agreement.
The Fund has entered into a custodian services agreement with The Bank of
New York (the "Custodian"). For services provided by it to the Fund, the
Custodian is entitled to receive a fee pursuant to a custodian services
agreement.
The Trust has entered into a distribution agreement with Stockback Capital,
LLC, a Delaware limited liability company, under which Stockback Capital,
LLC acts as the principal underwriter and distributor of Fund shares.
Stockback Capital, LLC receives no fees from the Fund for the services
provided by it to the Fund under the distribution agreement.
Report of Independent Accountants
To the Board of Trustees and Shareholders of The Stockback Fund:
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of The Stockback Fund
(the "Fund") at August 9, 2000, in conformity with accounting principles
generally accepted in the United States. This financial statement is the
responsibility of the Fund's management; our responsibility is to express an
opinion on this financial statement based on our audit. We conducted our audit
of this financial statement in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
August 9, 2000
<PAGE>
The Stockback Fund
11 Broadway
17th Floor
New York, New York 10004
Telephone: (212) 973-4000
Toll-Free (877) 506-2524
Internet: http://www.stockback.com
