As filed with the Securities and Exchange Commission on December 29, 1999
1933 Act File No. 333-_____
1940 Act File No. 811-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. ___ [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. ___
(Check appropriate box or boxes.)
POTOMAC INSURANCE TRUST
(Exact name of Registrant as Specified in Charter)
1311 Mamaroneck Avenue
White Plains, New York 10605
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (914) 614-6320
Daniel D. O'Neill
1311 Mamaroneck Avenue
White Plains, New York 10605
(Name and Address of Agent for Service)
Copy to:
Robert J. Zutz, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, D.C. 20036
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said section 8(a),
may determine.
Page 1 of __ Pages
Exhibit Index Appears on Page __
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THE POTOMAC INSURANCE TRUST
CONTENTS OF REGISTRATION STATEMENT
This registration document is comprised of the following:
Cover Sheet
Contents of Registration Statement
Prospectus for the Potomac Insurance Trust
Statement of Additional Information for the Potomac Insurance Trust
Part C of Form N-1A
Signature Page
Exhibits
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PROSPECTUS
THE POTOMAC INSURANCE TRUST
Enhanced Investment Strategies
100 South Royal Street
Alexandria, Virginia 22314
1311 Mamaroneck Avenue
White Plains, New York 10605
(800) 851-0511
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PLUS FUNDS SHORT FUNDS
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Potomac OTC Plus Fund Potomac OTC/Short Fund
Potomac 30 Plus Fund Potomac 30/Short Fund
Potomac Small Cap Plus Fund Potomac Small Cap/Short Fund
Potomac Internet Plus Fund Potomac Internet/Short Fund
Potomac U.S. Plus Fund Potomac U.S./Short Fund
Potomac Japan Plus Fund Potomac Japan/Short Fund
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MONEY MARKET FUND
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Potomac Money Market Fund
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EACH FUND OFFERS ITS CLASS A AND CLASS B SHARES TO INSURANCE COMPANY SEPARATE
ACCOUNTS THAT FUND VARIABLE ANNUITY CONTRACTS AND LIFE INSURANCE POLICIES.
THIS PROSPECTUS SHOULD BE READ TOGETHER WITH THE
PROSPECTUS FOR THOSE CONTRACTS AND POLICIES.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_______________, 2000
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TABLE OF CONTENTS
Page
OVERVIEW OF THE POTOMAC INSURANCE TRUST.......................................2
THE POTOMAC INSURANCE TRUST...................................................3
Potomac OTC Funds...........................................................3
Potomac 30 Funds............................................................4
Potomac Small Cap Funds.....................................................5
Potomac Internet Funds......................................................6
Potomac U.S. Funds..........................................................7
Potomac Japan Funds.........................................................8
Investment Techniques and Policies..........................................8
Risk Factors................................................................9
Potomac Money Market Fund..................................................12
Prior Performance of Related Funds.........................................13
ABOUT YOUR INVESTMENT........................................................13
Investing in the Funds.....................................................13
Classes of Shares..........................................................14
Rule 12b-1 Fees............................................................14
Share Prices...............................................................14
ADDITIONAL INFORMATION.......................................................15
Management of the Funds....................................................15
Distributions and Taxes....................................................15
MORE INFORMATION ON THE POTOMAC INSURANCE TRUST.....................BACK COVER
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OVERVIEW OF THE POTOMAC INSURANCE TRUST
This Prospectus describes each of the 13 Funds (Funds) of the Potomac
Insurance Trust. The Funds may be purchased through variable annuity contracts
and variable life insurance policies (Contracts). The Funds also may be
purchased through certain qualified pension and retirement plans.
The Potomac Insurance Trust consists primarily of pairs of funds. Each
pair consists of one "plus" fund and one "short" fund. Each "plus" fund is
designed to provide a return that is greater than the return provided by its
target index when the value of the target index rises. Unlike traditional index
funds, each "plus" fund (except for the Potomac U.S. Plus Fund) seeks to provide
a return that is equal to 125% of the return of its target index. The Potomac
U.S. Plus Fund seeks to provide a return that is equal to 150% of the return of
its target index. Each "short" fund is designed to provide investment results
that are opposite of the return of its target index.
As an example, each of the Potomac OTC Plus Fund and the Potomac OTC/Short
Fund is targeted to the Nasdaq 100 Index(TRADEMARK) (Nasdaq 100 Index). If, for
a given period of time, the Nasdaq 100 Index gains 20%, the OTC Plus Fund is
designed to gain approximately 25% (which is equal to 125% of 20%), while the
OTC/Short Fund is designed to lose 20%. Conversely, if the Nasdaq 100 Index
loses 10%, the OTC/Short Fund is designed to gain 10%, while the OTC Plus Fund
is designed to lose 12.5%.
To achieve these results, each "plus" fund and "short" fund uses
aggressive investment techniques such as engaging in futures and options
transactions. As a result, those Funds are designed principally for experienced
investors who intend to follow an asset allocation strategy. There is no
assurance that any Fund will achieve its objective.
The Potomac Insurance Trust also offers a money market fund that is
designed to provide stability of principal, liquidity and current income.
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THE POTOMAC INSURANCE TRUST
POTOMAC OTC FUNDS
OBJECTIVES:
The POTOMAC OTC PLUS FUND seeks to provide investment returns that
correspond to 125% of the performance of the Nasdaq 100 IndexTM. If it is
successful in meeting its objective, the net asset value of OTC Plus Fund shares
should increase approximately one and a quarter as much as the Nasdaq 100 Index
when the aggregate prices of the securities in that index rise on a given day.
Conversely, the net asset value of shares of the OTC Plus Fund should decrease
approximately one and a quarter as much when the aggregate prices of the
securities in the Nasdaq 100 Index decline on that day.
The POTOMAC OTC/SHORT FUND seeks to provide investment returns that
inversely correspond (opposite) to the performance of the Nasdaq 100 Index. If
it is successful in meeting its objective, the net asset value of OTC/Short Fund
shares should increase in direct proportion to any decrease in the level of the
Nasdaq 100 Index. Conversely, the net asset value of shares in the OTC/Short
Fund should decrease in direct proportion to any increase in the level of the
Nasdaq 100 Index.
CORE INVESTMENTS:
In attempting to achieve their objectives, the Potomac OTC Funds primarily
invest directly in the securities of the companies that comprise the Nasdaq 100
Index. In addition, the POTOMAC OTC PLUS FUND enters into long positions in
stock index futures contracts, options on stock index futures contracts and
options on securities and on stock indices to produce economically leveraged
investment results. The POTOMAC OTC/SHORT FUND also enters into short positions
in the securities of the companies that comprise the Nasdaq 100 Index, stock
index futures contracts, options on stock index futures contracts and options on
securities and on stock indices. On a day-to-day basis, the Funds hold U.S.
Government securities and repurchase agreements to collateralize these futures
and options contracts.
TARGET INDEX:
The NASDAQ 100 INDEX(TM) is a capitalization-weighted index composed of
100 of the largest non-financial domestic companies listed on the National
Market tier of The Nasdaq Stock Market (Nasdaq). All companies listed on the
index have a minimum market capitalization of $500 million and an average daily
trading volume of at least 100,000 shares. The Nasdaq 100 Index was created in
1985. The Nasdaq Stock Market is not a sponsor of, or in any way affiliated
with, the Potomac Funds.
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POTOMAC 30 FUNDS
OBJECTIVES:
The POTOMAC 30 PLUS FUND seeks daily investment results that correspond to
125% of the performance of the Dow Jones Industrial Average(SERVICEMARK) (Dow).
If it is successful in meeting its objective, the net asset value of Dow 30 Plus
Fund shares should increase approximately one and a quarter as much as the Dow
when the aggregate prices of the securities that comprise the Dow rise on a
given day. Conversely, the net asset value of shares of the Dow 30 Plus Fund
should decrease approximately one and a quarter as much when the aggregate
prices of the securities in the Dow decline on that day.
The POTOMAC 30/SHORT FUND seeks to provide investment returns that
inversely correspond (opposite) to the performance of the Dow. If it is
successful in meeting its objective, the net asset value of the Dow 30/Short
Fund shares should increase in direct proportion to any decrease in the level of
the Dow. Conversely, the net asset value of shares in the Dow 30/Short Fund
should decrease in direct proportion to any increase in the level of the Dow.
The POTOMAC 30 FUNDS' investment objectives are not fundamental policies
and may be changed by the Potomac Insurance Trust's Board of Trustees without
shareholder approval.
CORE INVESTMENTS:
In attempting to achieve their objectives, the Potomac 30 Funds primarily
invest directly in the securities of the companies that comprise the Dow. In
addition, the POTOMAC 30 PLUS FUND enters into long positions in stock index
futures contracts, options on stock index futures contracts and options on
securities and on stock indices to produce economically leveraged investment
results. The Fund also may invest in DIAMONDS, which are publicly traded index
securities based on the Dow. This allows the Fund to invest in a portfolio of
securities consisting of all of the component common stocks of the Dow. The
POTOMAC 30/SHORT FUND also enters into short positions in the securities of the
companies that comprise the Dow, stock index futures contracts, options on stock
index futures contracts and options on securities and on stock indices. On a
day-to-day basis, the Funds hold U.S. Government securities and repurchase
agreements to collateralize these futures and options contracts.
The POTOMAC 30/SHORT FUND also enters into short positions in the
securities of the companies that comprise the Dow, stock index futures
contracts, options on stock index futures contracts and options on securities
and on stock indices. On a day-to-day basis, the Funds hold U.S. Government
securities and repurchase agreements to collateralize these futures and options
contracts.
TARGET INDEX:
The DOW JONES INDUSTRIAL AVERAGE(SERVICEMARK) consists of 30 of the most
widely held and actively traded stocks listed on the U.S. stock markets. The
stocks in the Dow represent companies that typically are dominant firms in their
respective industries. Dow Jones, Dow Jones Industrial Average(SERVICEMARK),
DJIA(SERVICEMARK), and Dow 30(SERVICEMARK) are service marks of Dow Jones &
Company, Inc. Dow Jones has no relationship to the Potomac Insurance Trust
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and does not sponsor, endorse, sell or promote any of the Funds.
POTOMAC SMALL CAP FUNDS
OBJECTIVES:
The POTOMAC SMALL CAP PLUS FUND seeks to provide investment returns that
correspond to 125% of the performance of the Russell 2000(REGISTERED) Index
(Russell 2000 Index). If it is successful in meeting its objective, the net
asset value of Small Cap Plus Fund shares should increase approximately one and
a quarter as much as the Russell 2000 Index when the aggregate prices of the
securities in that index rise on a given day. Conversely, the net asset value of
shares of the Small Cap Plus Fund should decrease approximately one and a
quarter as much when the aggregate prices of the securities in the Russell 2000
Index decline on that day.
The POTOMAC SMALL CAP/SHORT FUND seeks to provide investment returns that
inversely correspond (opposite) to the performance of the Russell 2000 Index. If
it is successful in meeting its objective, the net asset value of Small
Cap/Short Fund shares should increase in direct proportion to any decrease in
the level of the Russell 2000 Index. Conversely, the net asset value of shares
in the Small Cap/Short Fund should decrease in direct proportion to any increase
in the level of the Russell 2000 Index.
The Potomac Small Cap Funds' investment objectives are not fundamental
policies and may be changed by the Potomac Insurance Trust's Board of Trustees
without shareholder approval.
CORE INVESTMENTS:
In attempting to achieve their objectives, the Potomac Small Cap Funds
primarily invest directly in the securities of the companies that comprise the
Russell 2000 Index. In addition, POTOMAC SMALL CAP PLUS FUND enters into long
positions in stock index futures contracts, options on stock index futures
contracts and options on securities and on stock indices to produce economically
leveraged investment results. The POTOMAC SMALL CAP/SHORT FUND also enters into
short positions in the securities of the companies that comprise the Russell
2000, stock index futures contracts, options on stock index futures contracts
and options on securities and on stock indices. On a day-to-day basis, the Funds
hold U.S. Government securities and repurchase agreements to collateralize these
futures and options contracts.
TARGET INDEX:
The RUSSELL 2000(REGISTERED) INDEX is comprised of the smallest 2000
companies in the Russell 3000 Index. As of May 31, 1999, the average market
capitalization of the companies included in the Russell 2000 was approximately
$526.4 million. That compares to $4.4 billion for the Russell 3000. The smallest
2000 companies represent approximately 8% of the total market capitalization of
the Russell 3000. The Frank Russell Company is not a sponsor of, or in any way
affiliated with, the Potomac Insurance Trust.
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POTOMAC INTERNET FUNDS
OBJECTIVES:
The POTOMAC INTERNET PLUS FUND seeks to provide investment results that
correspond to 125% of the performance of the Dow Jones Composite Internet
Index(SERVICEMARK) (Internet Index). If it is successful in meeting its
objective, the net asset value of Internet Plus Fund shares should increase
approximately one and a quarter as much as the Internet Index when the aggregate
prices of the securities in that index rise on a given day. Conversely, the net
asset value of shares of the Internet Plus Fund should decrease approximately
one and a quarter as much when aggregate prices of the securities in the
Internet Index decline on that day.
The POTOMAC INTERNET/SHORT FUND seeks to provide investment returns that
inversely correspond (opposite) to the performance of the Internet Index. If it
is successful in meeting its objective, the net asset value of Internet/Short
Fund shares should increase in direct proportion to any decrease in the level of
the Internet Index. Conversely, the net asset value of shares in the
Internet/Short Fund should decrease in direct proportion to any increase in the
level of the Internet Index.
The Potomac Internet Funds' investment objectives are not fundamental
policies and may be changed by the Potomac Insurance Trust's Board of Trustees
without shareholder approval.
CORE INVESTMENTS:
In attempting to achieve their objectives, the Potomac Internet Funds
primarily invest directly in the securities of the companies that comprise the
Internet Index. In addition, POTOMAC INTERNET PLUS FUND enters into long
positions in stock index futures contracts, options on stock index futures
contracts and options on securities and on stock indices to produce economically
leveraged investment results. The POTOMAC INTERNET/SHORT FUND also enters into
short positions in the securities of the companies that comprise the Internet
Index, stock index futures contracts, options on stock index futures contracts
and options on securities and on stock indices. On a day-to-day basis, the Funds
hold U.S. Government securities and repurchase agreements to collateralize these
futures and options contracts.
TARGET INDEX:
The DOW JONES COMPOSITE INTERNET INDEX(SERVICEMARK) is a modified
capitalization-weighted index designed to track the performance of companies
that are involved in Internet related activities. The Internet Index tracks 40
e-commerce and Internet services companies that generate at least 50% of their
revenues from the Internet and have a three-month average market capitalization
of at least $100 million. Dow Jones and Dow Jones Composite Internet IndexSM are
service marks of Dow Jones & Company, Inc. Dow Jones has no relationship to the
Potomac Insurance Trust and does not sponsor, endorse, sell or promote any of
the Funds of the Potomac Insurance Trust.
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POTOMAC U.S. FUNDS
OBJECTIVES:
The POTOMAC U.S. PLUS FUND seeks to provide investment returns that
correspond to 150% of the performance of the Standard & Poor's 500 Composite
Stock Price Index(TRADEMARK) (S&P 500 Index). If it is successful in meeting its
objective, the net asset value of U.S. Plus Fund shares should increase
approximately one and a half as much as the S&P 500 Index when the aggregate
prices of the securities in that index rise on a given day. Conversely, the net
asset value of shares of the U.S. Plus Fund should decrease approximately one
and a half as much when the aggregate prices of the securities in the S&P 500
Index decline on that day.
The POTOMAC U.S./SHORT FUND seeks to provide investment returns that
inversely correspond (opposite) to the performance of the S&P 500 Index. If it
is successful in meeting its objective, the net asset value of U.S./Short Fund
shares should increase in direct proportion to any decrease in the level of the
S&P 500 Index. Conversely, the net asset value of shares in the U.S./Short Fund
should decrease in direct proportion to any increase in the level of the S&P 500
Index.
CORE INVESTMENTS:
Unlike traditional index funds, the Potomac U.S. Funds do not invest
directly in the securities of the companies that comprise the S&P 500 Index.
Rather, the POTOMAC U.S. PLUS FUND invests significantly in Standard & Poor's
Depositary Receipts (SPDRs), which are publicly-traded index securities based on
the S&P 500 Index. This allows the Fund to invest in a portfolio of securities
consisting of all of the component common stocks of the S&P 500 Index. The Fund
also enters into long positions in stock index futures contracts, options on
stock index futures contracts and options on securities and on stock indices to
produce economically leveraged investment results. The POTOMAC U.S./SHORT FUND
enters into short positions in SPDRs, options on stock index futures contracts
and options on securities and on stock indices. On a day-to-day basis, the Funds
hold U.S. Government securities and repurchase agreements to collateralize these
futures and options contracts.
TARGET INDEX:
The STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX(TRADEMARK) is a
capitalization-weighted index composed of 500 common stocks. Standard & Poor's
selects the 500 stocks comprising the S&P 500 Index on the basis of market
values and industry diversification. Most of the stocks in the S&P 500 Index are
issued by the 500 largest companies, in terms of the aggregate market value of
their outstanding stock, and generally are listed on the New York Stock Exchange
(NYSE). Standard & Poor's is not a sponsor of, or in any way affiliated with,
the Potomac Insurance Trust.
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POTOMAC JAPAN FUNDS
OBJECTIVES:
The POTOMAC JAPAN PLUS FUND seeks to provide investment returns that
correspond to 125% of the performance of the Nikkei 225 Stock Average (Nikkei
Index). If it is successful in meeting its objective, the net asset value of
Japan Plus Fund shares should increase approximately one and a quarter as much
as the Nikkei Index when the aggregate prices of the securities in that index
rise on a given day. Conversely, the net asset value of shares of the Japan Plus
Fund should decrease approximately one and a quarter as much when the aggregate
prices of the securities in the Nikkei Index decline on that day.
The POTOMAC JAPAN/SHORT FUND seeks to provide investment returns that
inversely correspond (opposite) to the performance of the Nikkei Index. If it is
successful in meeting its objective, the net asset value of Japan/Short Fund
shares should increase in direct proportion to any decrease in the level of the
Nikkei Index. Conversely, the net asset value of shares in the Japan/Short Fund
should decrease in direct proportion to any increase in the level of the Nikkei
Index.
The Potomac Japan Funds' investment objectives are not fundamental
policies and may be changed by the Potomac Insurance Trust's Board of Trustees
without shareholder approval.
CORE INVESTMENTS:
In attempting to achieve their objectives, the Potomac Japan Funds will
not invest directly in the securities of the companies that comprise the Nikkei
Index. Rather, the Potomac Japan Funds intend to invest in American Depositary
Receipts (ADRs) of such companies and other securities that the investment
advisor believes would provide a return that approximates the Nikkei Index. The
Potomac Japan Funds also will enter into long and short positions, respectively,
in stock index futures contracts, options on stock index futures contracts and
options on securities and on stock indices. On a day-to-day basis, the Funds
intend to hold U.S. Government securities to collateralize these futures and
options contracts. In addition, the Funds will enter into repurchase agreements.
TARGET INDEX:
The NIKKEI 225 STOCK AVERAGE is a price-weighted index of the 225 largest
Japanese companies listed on the Tokyo Stock Exchange. The Nikkei Index was
first published in 1949 and is generally considered as a proxy for the Japanese
large-capitalization equity market.
INVESTMENT TECHNIQUES AND POLICIES
Rafferty Asset Management, LLC (Rafferty), the investment advisor to the
Potomac Insurance Trust, uses a number of investment techniques in an effort to
achieve the stated goal for each Fund. For the Plus Funds, Rafferty attempts to
magnify the returns of each Fund's target index, while the Short Funds are
managed to provide returns inverse (opposite) of each Short Fund's target index.
Rafferty generally does not use fundamental securities analysis to accomplish
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such correlation. Rather, Rafferty primarily uses statistical and quantitative
analysis to determine the investments each Fund makes and techniques it employs.
As a consequence, if a Fund is performing as designed, the return of the target
index will dictate the return for that Fund.
Each Plus Fund invests significantly in futures contracts on stock
indexes, options on futures contracts and financial instruments such as options
on securities and stock indexes options. Rafferty uses these types of
investments to produce economically "leveraged" investment results. Leveraging
allows Rafferty to generate a return that is larger than what would be generated
on the invested capital without leverage, thus changing small market movements
into larger changes in the value of the investments of a Plus Fund.
While Rafferty attempts to minimize any "tracking error" (the statistical
measure of the difference between the investment results of the Fund and the
performance of its benchmark), certain factors will tend to cause a Fund's
investment results to vary from the stated objective. Rafferty, however, does
not expect that a Fund's total returns will vary from its objective by more than
10% over a twelve-month period.
It is the policy of each Fund to pursue its investment objective
regardless of market conditions and not to take defensive positions. A Fund will
not adopt defensive positions by investing in cash or other instruments in
anticipation of an adverse climate for its target index. However, because it may
be difficult for a Fund to achieve its' stated investment objective with a low
level of assets, Rafferty may invest the assets of the Potomac 30 Funds, the
Potomac Small Cap/Short Fund, the Potomac Japan Funds, the Potomac Internet
Funds and the Potomac Japan Funds in short-term U.S. Government securities until
the level of net assets is sufficient to permit investment in the appropriate
investments. As a result, those Funds may not achieve their investment
objectives during this period. To find out if a Fund has sufficient assets to
invest to attempt to meet its objective, you may call (888) 976-8662.
RISK FACTORS
An investment in the Funds entails risks. A Fund could lose money, or
their performance could trail that of other investment alternatives. Rafferty
cannot guarantee that any of the Funds will achieve its objective. In addition,
the Funds present some risks not traditionally associated with most mutual
funds. It is important that investors closely review and understand these risks
before making an investment in the Funds. These and other risks are described
below.
RISKS OF INVESTING IN EQUITY SECURITIES AND DERIVATIVES:
The Funds may invest in publicly issued equity securities, including
common stocks, as well as instruments that attempt to track the price movement
of stock indices. Investments in common stocks and derivatives in general are
subject to market risks that may cause their prices to fluctuate over time.
Fluctuations in the value of common stocks in which the Funds invest will cause
the net asset value of the Funds to fluctuate.
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RISKS OF AGGRESSIVE INVESTMENT TECHNIQUES:
The Funds use investment techniques that may be considered aggressive.
Risks associated with the use of futures contracts, and options on securities,
securities indices, and on futures contracts include potentially dramatic price
changes (losses) in the value of the instruments and imperfect correlations
between the price of the contract and the underlying security or index. These
instruments may increase the volatility of the Funds and may involve a small
investment of cash relative to the magnitude of the risk assumed. Investors
should be aware that while index futures and options contracts closely correlate
with the applicable indices over long periods, shorter-term deviations occur. As
a result, a Fund's short-term performance will reflect such deviation from its
benchmark.
LEVERAGE RISK:
Each Plus Fund employs leveraged investment techniques. Use of leverage
can magnify the effects of changes in the value of these Plus Funds and makes
them more volatile. The leveraged investment techniques that these Funds employ
should cause investors in these Funds to lose more money in adverse
environments.
INVERSE CORRELATION RISK:
Each Short Fund is negatively correlated to its target index and should
lose money when its target index rises - a result that is the opposite from
traditional equity mutual funds.
RISK OF POOR TRACKING:
While Rafferty does not expect that the return of any of the Funds will
deviate adversely from their respective investment objectives by more than 10%,
several factors may affect a Fund's ability to achieve its target. As a
consequence, there can be no guarantee that the Funds will be able to achieve
this level of correlation. A failure to achieve a high degree of correlation may
prevent a Fund from achieving its investment goal.
RISK OF TRADING HALTS:
In certain circumstances, an exchange may halt trading in securities held
by a Fund. If such trading halts are instituted at the close of a trading day, a
Fund will not be able to execute purchase or sales transactions in the specific
option or futures contracts affected. In such an event, a Fund also may be
unable to accurately price its outstanding contracts. If a Fund is affected by
such a halt, it may reject investors' orders for purchases, redemptions, or
exchanges received earlier during the business day.
RISK OF EARLY CLOSING:
The normal close of trading of securities listed on the Nasdaq and NYSE is
4:00 p.m. Eastern time. Unanticipated early closings may result in a Fund being
unable to sell or buy securities on that day. If an exchange closes early on a
day when one or more of the Funds needs to execute a high volume of securities
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trades late in the trading day a Fund might incur substantial trading losses.
HIGH PORTFOLIO TURNOVER:
Rafferty expects a significant portion of the Funds' assets to come from
professional money managers and investors who use the Funds as part of "asset
allocation" and "market timing" investment strategies. These strategies often
call for frequent trading to take advantage of anticipated changes in market
conditions. Frequent trading could increase the rate of the Funds' portfolio
turnover and increasing transaction expenses. In addition, while Rafferty does
not expect it, large movements of assets into and out of the Funds may
negatively impact their abilities to achieve their investment objectives or
their level of operating expenses.
RISK OF NON-DIVERSIFICATION:
Each Fund (except the Money Market Fund) is non-diversified, which means
that it may invest a high percentage of its assets in a limited number of
securities. Since the Funds' are non-diversified, their net asset values and
total returns may fluctuate more or fall greater in times of weaker markets than
a diversified mutual fund.
RISKS OF INVESTING IN INTERNET COMPANIES:
The Potomac Internet Funds concentrate their investments in Internet
companies. In addition, the OTC Funds may invest a substantial portion of their
assets in Internet companies listed on the Nasdaq 100 Index. The market prices
of Internet-related stocks tend to exhibit a greater degree of market risk and
sharp price fluctuations than other types of investments. These stocks may fall
in and out of favor with investors rapidly, which may cause sudden selling and
dramatically lower market prices. Internet stocks also may be affected adversely
by changes in technology, consumer and business purchasing patterns, government
regulation and/or obsolete products or services. In addition, a rising interest
rate environment tends to negatively affect Internet companies. Those Internet
companies having high market valuations may appear less attractive to investors,
which may cause sharp decreases in the companies' market prices. Further, those
Internet companies seeking to finance their expansion would have increased
borrowing costs, which may negatively impact their earnings. As a result, these
factors may negatively affect the performance of the Internet Index and the
Nasdaq 100 Index.
RISKS OF INVESTING IN SMALL CAPITALIZATION COMPANIES:
Investing in the securities of small capitalization companies involves
greater risks and the possibility of greater price volatility than investing in
larger capitalization and more established companies. Smaller companies may have
limited operating history, product lines, and financial resources, and the
securities of these companies may lack sufficient market liquidity. Any of these
factors may negatively impact the performance of the Russell 2000 Index.
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RISKS OF INVESTING IN JAPANESE COMPANIES:
The Potomac Japan Funds may invest without limit indirectly in Japanese
securities through ADRs. Investments in Japanese securities involve greater
risks than investing in domestic securities. As result, the Funds' returns and
net asset values may be affected to a large degree by fluctuations in currency
exchange rates, political, diplomatic or economic conditions and regulatory
requirements in Japan. Japanese laws and accounting, auditing, and financial
reporting standards typically are not as strict as they are in the U.S., and
there may be less public information available about foreign companies.
POTOMAC MONEY MARKET FUND
OBJECTIVE:
The POTOMAC MONEY MARKET FUND seeks to provide security of principal,
current income and liquidity.
CORE INVESTMENTS:
The POTOMAC MONEY MARKET FUND seeks to achieve these objectives by
investing in high quality, U.S. dollar-denominated short-term obligations that
have been determined by the Trustees or by Rafferty to present minimal credit
risk. The Fund invests exclusively in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase agreements
that are fully collateralized by such obligations.
INVESTMENT TECHNIQUES AND POLICIES:
In order to maintain a stable share price, the Fund maintains an average
dollar-weighted maturity of 90 days or less. Securities purchased by the Fund
generally have remaining maturities of 397 days or less, although instruments
subject to repurchase agreements may bear longer final maturities. The average
dollar-weighted maturity of the Fund will not exceed 90 days.
RISK FACTORS:
o The yield paid by the Fund is subject to changes in interest rates. As
a result, there is risk that a decline in short-term interest rates
would lower its yield and the overall return on your investment.
o Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
o Your investment in the Fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government institution.
12
<PAGE>
PRIOR PERFORMANCE OF RELATED FUNDS
Because the Funds of the Potomac Insurance Trust are new funds, their
performance history has not been included. Performance history will be available
after the Funds have been operating for one year . However, the Funds are
modeled after other funds managed by Rafferty (Related Funds). The investment
objectives, policies and strategies of the Funds and the Related Funds are
substantially similar. The Related Funds are not sold through Contracts or
qualified pension or retirement plans and do not have any sales charges. The
Funds, however, only may be purchased through Contracts or qualified pension or
retirement plans. In most instances, Contracts impose certain additional
insurance expenses, and redemption charges. These charges and fees may lower the
performance of the Funds compared to the performance of the Related Funds. In
addition, there may be other differences between the Funds and the Related Funds
including asset sizes, cash flows and restrictions relating to purchase, sale
and exchange of the Funds through Contracts or qualified pension or retirement
plans.
The chart below provides the performance of four of the Related Funds (not
the Funds of the Potomac Insurance Trust) for the period ended December 31,
1999. The performance is net of advisory fees and other expenses and includes
fee waivers or expense reimbursements. The performance is historical and does
not guarantee future results.
RELATED FUNDS MANAGED AVERAGE ANNUAL CUMULATIVE RETURN OFFERING
BY RAFFERTY RETURN SINCE OFFERING DATE
- --------------------------------------------------------------------------------
POTOMAC OTC PLUS FUND ____% ____%
POTOMAC OTC/SHORT FUND ____% ____%
POTOMAC U.S./PLUS FUND ____% ____%
POTOMAC U.S./SHORT FUND ____% ____%
ABOUT YOUR INVESTMENT
INVESTING IN THE FUNDS
The Potomac Insurance Trust offers shares of its Funds to insurance
company separate accounts that serve as investment vehicles for variable annuity
contracts and variable life insurance policies. The Trust also offers shares of
the Funds to certain qualified pension and retirement plans. The separate
accounts and plan sponsors are the shareholders of the Funds and not the
individual contract owners or plan beneficiaries. However, the separate accounts
and plan sponsors may pass through voting rights to the Contract owners or
plan beneficiaries.
13
<PAGE>
Contract owners and plan beneficiaries that desire to purchase, sell or
exchange shares in the Funds should consult with the insurance company that
issued their Contracts, the accompanying variable Contract prospectus or their
plan sponsor. An insurance company or plan sponsor may not make available all
Funds and there may be other restrictions and costs for purchases, sales or
exchanges.
CLASSES OF SHARES
Each Fund offers two classes of shares that are sold and redeemed at net
asset value. An insurance company or plan sponsor may not make available both
classes in its Contracts or qualified pension and retirement plans.
o Class A shares are made available only with respect to Contracts
and qualified pension and retirement plans where the insurance
company or plan sponsor receives no payments from the Funds for
its services in selling the Funds' shares or servicing shareholder
account.
o Class B shares are made available with respect to Contracts and
qualified pension and retirement plans where the insurance company
or plan sponsor receives payments at an annual rate of up to
0.25% of that class' average daily net assets for distribution and
servicing activities. As a result, Class B shares have higher
ongoing expenses than Class A shares of the same Fund.
The Trust reserves the right to reject any purchase order or suspend the
offering of Fund shares.
RULE 12B-1 FEES
The Funds have adopted a Class B share distribution plan under Rule 12b-1.
The plan allows the Funds to pay distribution and sales fees for the sale of the
Funds' shares and for other shareholder services. Because these fees are paid
out of the Funds' assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges. Under the plan, the fees may amount up to 0.25% of that
class' average daily net assets.
SHARE PRICES
A Fund's share price is known as its net asset value per share (NAV). For
all of the Funds except the Money Market Fund, the share prices are calculated
fifteen minutes after the close of regular trading, usually at 4:15 pm Eastern
time, each day the NYSE is open for business. The Money Market Fund's share
price is calculated at 1:15 pm Eastern time each day the NYSE and Federal
Reserve Bank of New York are open. Share price is calculated by dividing a
class' net assets by its shares outstanding. The Funds use the following methods
to price securities held in their portfolios:
o equity securities, OTC securities, options and futures are valued at
their last sales price, or if not available, the average of the last bid
and ask
14
<PAGE>
o options on futures are valued at their closing price
o short-term debt securities and money market securities are valued using
the "amortized" cost method
o securities for which a price is unavailable will be valued at fair value
estimates by the investment advisor under the supervision of the Board
of Trustees
ADDITIONAL INFORMATION
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISOR:
Rafferty Asset Management, LLC (Rafferty) provides investment services to
the Funds. Rafferty attempts to manage the investment of the Funds' assets
consistent with their investment objectives, policies and limitations. Rafferty
has been managing mutual funds since June 1997 and has approximately $___
million assets under management as of ________ __, 1999. Rafferty is located at
1311 Mamaroneck Avenue, White Plains, New York 10605.
Under an investment advisory agreement between the Potomac Insurance Trust
and Rafferty, the Funds pay Rafferty the following fees at an annualized rate
based on a percentage of the Funds' daily net assets. For the Plus Funds, the
Short Funds and the Money Market Fund the advisory fees charged 0.75%, 0.90% and
0.50%, respectively.
PORTFOLIO MANAGEMENT:
An investment committee of Rafferty employees has the day-to-day
responsibility for managing the Funds.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS:
Each Fund, except the Money Market Fund, distributes dividends from net
investment income annually. The Money Market Fund usually declares dividends
from its net investment income daily and distributes them monthly. Net
investment income generally consists of interest income and dividends received
on investments, less expenses. Each Fund, except the Money Market Fund, also
distributes any realized net capital gains annually. A Fund has capital gains
when it sells its portfolio assets for a profit.
Dividends and net capital gain distributions will be reinvested
automatically at NAV in shares of the distributing Fund on which the dividend or
distribution was declared unless you request otherwise in writing.
15
<PAGE>
TAXES:
Each Fund intends to qualify for treatment as a regulated investment
company under the Internal Revenue Code of 1986, as amended (Code), so that it
will not have to pay federal income tax on that part of its investment company
taxable income and net capital gain (I.E., the excess of net long-term capital
gain over net short-term capital loss) that it distributes to its shareholders.
Fund shares are offered only to insurance company separate accounts that
fund the Contracts. Under the Code, no tax is imposed on an insurance company
with respect to income of a qualifying separate account properly allocable to
the value of eligible variable annuity or variable life insurance contracts. See
the applicable Contract prospectus for a discussion of the federal income tax
status of (1) the insurance company separate accounts that purchase and hold
Fund shares (Separate Accounts) and (2) the holders of Contracts funded through
the Separate Accounts.
The foregoing is only a summary of some of the important federal income
tax considerations generally affecting the Funds and their shareholders; see the
Statement of Additional Information for a more detailed discussion. See the
applicable Contract prospectus for information regarding the federal income tax
treatment of distributions to the Separate Accounts. Prospective shareholders
are urged to consult their tax advisers.
16
<PAGE>
MORE INFORMATION ON THE
POTOMAC INSURANCE TRUST
This Prospectus is intended only for use
when accompanied by a Separate Account
prospectus or qualified pension or
retirement plan document. P R O S P E C T U S
__________, 2000
STATEMENT OF ADDITIONAL INFORMATION
(SAI): The Insurance Trusts's SAI
contains more information on the Funds
and their investment policies. The SAI
is incorporated in this Prospectus by
reference (it is legally part of this
Prospectus). A current SAI is on file
with the Securities and Exchange
Commission (SEC).
ANNUAL AND SEMI-ANNUAL REPORTS TO
SHAREHOLDERS: The Insurance Trust's
reports provide additional information
on the Funds' investment holdings,
performance data and a letter discussing
data and a letter discussing the market
conditions and investment strategies
that significantly affected the
Insurance Trust's Funds performance
during that period.
CALL OR WRITE TO OBTAIN THE SAI OR
INSURANCE TRUST'S REPORTS FREE OF
CHARGE:
THE POTOMAC INSURANCE TRUST
Write to: Enhanced Investment Strategies
Potomac Insurance Trust
P.O. Box 1993
Milwaukee, Wisconsin 53201-1993
Call: (800) 851-0511
Copies of these documents and other
information about the Insurance Trust
are available from the SEC Public
Reference Room in Washington, D.C. The
Public Reference Room can be reached at
(800) 732-0330 or by mailing a request,
including a duplicating fee to: SEC's
Public Reference Section, 450 Fifth
Street NW, Washington, D.C. 20549-6009.
You also may find information on the
Funds at the SEC's Internet website at
http://www.sec.gov.
No person has been authorized to give
any information or to make any
representation not contained in this
Prospectus, or in the SAI incorporated
herein by reference, in connection with
the offering made by this Prospectus
and, if given or made, such information
or representations must not be relied
upon as having been authorized by the 1311 Mamaroneck Avenue
Funds or their distributor. This White Plains, New York 10605
Prospectus does not constitute an
offering by the Insurance Trust in any 100 South Royal Street
jurisdiction in which such an offering Alexandria, Virginia 22314
may not lawfully be made.
SEC File Number: 811-____
<PAGE>
POTOMAC INSURANCE TRUST
STATEMENT OF ADDITIONAL INFORMATION
100 South Royal Street
Alexandria, Virginia 22314
1311 Mamaroneck Avenue
White Plains, New York 10605
(800) 851-0511
The Potomac Insurance Trust (the "Trust") is a management investment company, or
mutual fund, that offers thirteen separate investment portfolios (the "Funds")
through variable annuity contracts and variable life insurance policies of
certain insurance companies (collectively "Contracts") and qualified pension
and retirement plans ("Qualified Plans"). The Funds are designed principally
for experienced investors who intend to follow an asset allocation strategy. The
Funds are not designed for inexperienced or less sophisticated investors. An
important feature of the Trust is that it primarily consists of pairs of Funds,
each of which attempts to provide results correlating to a specific index. Each
"plus" Fund attempts to provide investment results that correlate to its target
index, while each "short" Fund attempts to provide investment results that are
opposite of the return of its target index. In particular, the following Funds
seek investment results that correspond over time to the following target
indices:
<TABLE>
<CAPTION>
FUND TARGET INDEX
<S> <C>
Potomac U.S. Plus Fund 150% of the performance of the Standard & Poor's
500 Composite Stock Price IndexTM
Potomac U.S./Short Fund Inverse (opposite) of the Standard & Poor's 500
Composite Stock Price IndexTM
Potomac OTC Plus Fund 125% of the performance of the Nasdaq 100 Stock IndexTM
Potomac OTC/Short Fund Inverse (opposite) of the Nasdaq 100 Stock IndexTM
Potomac 30 Plus Fund 125% of the performance of the Dow Jones Industrial
AverageSM
Potomac 30/Short Fund Inverse (opposite) of the Dow Jones Industrial AverageSM
Potomac Internet Plus Fund 125% of the performance of the Dow Jones Composite
Internet IndexSM
Potomac Internet/Short Fund Inverse (opposite) of the Dow Jones Composite Internet
IndexSM
Potomac Japan Plus Fund 125% of the performance of the Nikkei 225 Stock Average
Potomac Japan/Short Fund Inverse (opposite) of the Nikkei 225 Stock Average
Potomac Small Cap Plus Fund 125% of the performance of the Russell 2000 Index
Potomac Small Cap/Short Fund Inverse (opposite) of the Russell 2000 Index
</TABLE>
The Trust also offers the Potomac Money Market Fund, which seeks security of
principal, current income and liquidity by investing primarily in money market
instruments issued or guaranteed, as to principal and interest, by the U.S.
Government, its agencies or instrumentalities. THE FUND SEEKS TO MAINTAIN A
CONSTANT $1.00 NET ASSET VALUE PER SHARE, ALTHOUGH THIS CANNOT BE ASSURED.
SHARES OF THIS FUND ARE NOT DEPOSITS OR OBLIGATIONS, OR GUARANTEED OR ENDORSED
BY, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER AGENCY. AN INVESTMENT IN THIS FUND IS NEITHER INSURED NOR GUARANTEED BY
THE UNITED STATES GOVERNMENT.
<PAGE>
TABLE OF CONTENTS
PAGE
----
THE POTOMAC INSURANCE TRUST..................................................3
CLASSIFICATION OF THE FUNDS..................................................3
INVESTMENT POLICIES AND TECHNIQUES...........................................4
American Depositary Receipts ("ADRs").....................................4
Foreign Securities........................................................4
Illiquid Investments and Restricted Securities............................5
Indexed Securities........................................................5
Investments in Other Investment Companies.................................6
Options, Futures and Other Strategies.....................................7
Repurchase Agreements....................................................14
Short Sales..............................................................14
U.S. Government Securities...............................................15
Other Investment Risks and Practices.....................................16
INVESTMENT RESTRICTIONS.....................................................18
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................22
MANAGEMENT OF THE TRUST.....................................................23
Trustees and Officers....................................................23
Investment Advisor.......................................................25
Fund Administrator, Fund Accountant, Transfer Agent and Custodian........26
Distributor..............................................................27
Distribution Plan........................................................27
Independent Accountants..................................................27
DETERMINATION OF NET ASSET VALUE............................................27
PURCHASES AND REDEMPTIONS...................................................29
Redemption in Kind.......................................................29
Receiving Payment........................................................29
PERFORMANCE INFORMATION.....................................................30
Comparative Information..................................................31
Total Return Computations................................................31
Yield Computations.......................................................32
SHAREHOLDER AND OTHER INFORMATION...........................................33
Shareholder Information..................................................33
Other Information........................................................33
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES....................................34
Dividends and Other Distributions........................................34
Taxes....................................................................34
2
<PAGE>
THE POTOMAC INSURANCE TRUST
The Trust is a Massachusetts business trust organized on December 29, 1999 and
is registered with the Securities and Exchange Commission ("SEC") as an open-end
management investment company under the Investment Company Act of 1940, as
amended ("1940 Act"). The Trust currently consists of thirteen separate series:
the Potomac U.S. Plus Fund ("U.S. Plus Fund"), the Potomac U.S./Short Fund
("U.S. Sort Fund"), the Potomac OTC Plus Fund ("OTC Plus Fund"), the Potomac
OTC/Short Fund ("OTC/Short Fund"), the Potomac 30 Plus Fund ("30 Plus Fund"),
the Potomac 30/Short Fund ("30/Short Fund"), the Potomac Internet Plus Fund
("Internet Plus Fund"), the Potomac Internet/Short Fund ("Internet Short Fund"),
the Potomac Japan Plus Fund ("Japan Plus Fund"), the Potomac Japan/Short Fund
("Japan Short Fund"), the Potomac Small Cap Plus Fund ("Small Cap Plus"), the
Potomac Small Cap/Short Fund ("Small Cap Short") and the Potomac Money Market
Fund ("Money Market Fund") (collectively, the "Funds"). The Trust may offer
additional series in the future.
Each Fund offers two classes of shares: Class A shares and Class B shares. Class
A shares are made available only with respect to the Contracts and Qualified
Plans where the insurance company or Qualified Plan sponsor receives no
payments from the Funds with respect to its services in connection with the
distribution of Fund shares or servicing of shareholder accounts. Class B shares
are made available with respect to the Contracts and Qualified Plans where the
insurance company or Qualified Plan sponsor receives payments at an annual
rate of up to 0.25% of that class' average daily net assets for related
distribution and shareholder services. Each Class also may be subject to other
charges as described in the Contracts' prospectuses or Qualified Plan
documents.
The Funds are designed principally for experienced investors seeking an asset
allocation vehicle. Except for the Money Market Fund, the Funds provide
investment exposure to various securities markets. Each Fund seeks investment
results that correspond over time to a specific target index. The terms "plus"
and "short" in the Funds' names are not intended to refer to the duration of the
Funds' investment portfolios. The Funds may be used independently or in
combination with each other as part of an overall strategy.
CLASSIFICATION OF THE FUNDS
Each Fund (other than the Money Market Fund) is a "non-diversified" series of
the Trust pursuant to the 1940 Act. A Fund is considered "non-diversified"
because a relatively high percentage of its assets may be invested in the
securities of a limited number of issuers. To the extent that a Fund assumes
large positions in the securities of a small number of issuers, the fund's net
asset value may fluctuate to a greater extent than that of a diversified company
as a result of changes in the financial condition or in the market's assessment
of the issuers, and the Fund may be more susceptible to any single economic,
political or regulatory occurrence than a diversified company.
A Fund's classification as a "non-diversified" investment company means that the
proportion of its assets that may be invested in the securities of a single
issuer is not limited by the 1940 Act. Each Fund, however, intends to meet
certain diversification standards at the end of each quarter of its tax year.
3
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
The Funds may engage in the investment strategies discussed below. There is no
assurance that any of these strategies or any other strategies and methods of
investment available to a Fund will result in the achievement of the Fund's
objective.
AMERICAN DEPOSITARY RECEIPTS ("ADRS")
- -------------------------------------
The OTC Plus Fund, OTC/Short Fund, Small Cap Plus Fund, Small Cap/Short Fund,
Internet Plus Fund, Internet/Short Fund, Japan Plus Fund and Japan/Short Fund
may invest in ADRs. The OTC/Short Fund, Small Cap/Short Fund, Internet/Short
Fund and Japan/Short Fund may sell ADRs short.
ADRs are U.S. dollar-denominated receipts representing interests in the
securities of a foreign issuer, which securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by U.S. banks and trust companies
that evidence ownership of underlying securities issued by a foreign
corporation. ADRs include ordinary shares and New York shares. ADRs may be
purchased through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the underlying security and a
depository, whereas a depository may establish an unsponsored facility without
participation by the issuer of the depository security. Holders of unsponsored
depository receipts generally bear all the costs of such facilities and the
depository of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through voting rights to the holders of such receipts of the
deposited securities. ADRs are not necessarily denominated in the same currency
as the underlying securities to which they may be connected. Generally, ADRs in
registered form are designed for use in the U.S. securities market and ADRs in
bearer form are designed for used outside the United States.
FOREIGN SECURITIES
- ------------------
The Japan Plus Fund and the Japan/Short Fund (each, a "Japan Fund" and
collectively, the "Japan Funds") may invest in ADRs of companies that comprise
the Nikkei 225 Stock Average ("Nikkei Index"). The Japan Funds also may have
indirect exposure to foreign securities through investments in stock index
futures contracts, options on stock index futures contracts and options on
securities and on stock indices.
Investing in foreign securities carries political and economic risks distinct
from those associated with investing in the United States. Foreign investments
may be affected by actions of foreign governments adverse to the interests of
U.S. investors, including the possibility of expropriation or nationalization of
assets, confiscatory taxation, restrictions on U.S. investment or on the ability
to repatriate assets or to convert currency into U.S. dollars. There may be a
greater possibility of default by foreign governments or foreign-government
sponsored enterprises. Investments in foreign countries also involve a risk of
local political, economic or social instability, military action or unrest or
adverse diplomatic developments.
4
<PAGE>
ILLIQUID INVESTMENTS AND RESTRICTED SECURITIES
- ----------------------------------------------
Each Fund may purchase and hold illiquid investments, No Fund will purchase or
otherwise acquire any security if, as a result, more than 15% (10% for the Money
Market Fund) of its net assets (taken at current value) would be invested in
investments that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale. This policy does not
include restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933, as amended ("1933 Act"), which the Trust's Board of
Trustees ("Board" or "Trustees") or Rafferty Asset Management, LLC ("Rafferty")
has determined under Board-approved guidelines are liquid. None of the Funds,
however, currently anticipates investing in such restricted securities.
The term "illiquid investments" for this purpose means investments that cannot
be disposed of within seven days in the ordinary course of business at
approximately the amount at which a Fund has valued the investments. Investments
currently considered to be illiquid include: (1) repurchase agreements not
terminable within seven days, (2) securities for which market quotations are not
readily available, (3) over-the-counter ("OTC") options and their underlying
collateral, (4) bank deposits, unless they are payable at principal amount plus
accrued interest on demand or within seven days after demand and (5) restricted
securities not determined to be liquid pursuant to guidelines established by the
Board. The assets used as cover for OTC options written by a Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
A Fund may not be able to sell illiquid investments when Rafferty considers it
desirable to do so or may have to sell such investments at a price that is lower
than the price that could be obtained if the investments were liquid. In
addition, the sale of illiquid investments may require more time and result in
higher dealer discounts and other selling expenses than does the sale of
investments that are not illiquid. Illiquid investments also may be more
difficult to value due to the unavailability of reliable market quotations for
such investments, and investment in illiquid investments may have an adverse
impact on net asset value.
Rule 144A establishes a "safe harbor" from the registration requirements of the
1933 Act for resales of certain securities to qualified institutional buyers.
Institutional markets for restricted securities that have developed as a result
of Rule 144A provide both readily ascertainable values for certain restricted
securities and the ability to liquidate an investment to satisfy share
redemption orders. An insufficient number of qualified institutional buyers
interested in purchasing Rule 144A-eligible securities held by a Fund, however,
could affect adversely the marketability of such portfolio securities and a Fund
may be unable to dispose of such securities promptly or at reasonable prices.
INDEXED SECURITIES
- ------------------
Each Fund (other than the Money Market Fund) may purchase indexed securities,
which are securities the value of which varies positively or negatively in
relation to the value of other securities, securities indices or other financial
indicators, consistent with its investment objective. Indexed securities may be
5
<PAGE>
debt securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. Recent issuers of indexed
securities have included banks, corporations and certain U.S. Government
agencies.
The performance of indexed securities depends to a great extent on the
performance of the security or other instrument to which they are indexed and
also may be influenced by interest rate changes in the United States and abroad.
At the same time, indexed securities are subject to the credit risks associated
with the issuer of the security, and their values may decline substantially if
the issuer's creditworthiness deteriorates. Indexed securities may be more
volatile than the underlying instruments. Certain indexed securities that are
not traded on an established market may be deemed illiquid. See "Illiquid
Investments and Restricted Securities" above.
The U.S. Plus Fund may invest in Standard & Poor's Depositary Receipts
("SPDRs"). SPDRs represent ownership in the SPDR Trust, a unit investment trust
that holds a portfolio of common stocks designed to track the price performance
and dividend yield of the Standard & Poor's 500 Composite Stock Price IndexTM
("S&P 500 Index") and whose shares trade on the American Stock Exchange
("AMEX"). The value of SPDRs fluctuates in relation to changes in the value of
the underlying portfolio of common stocks. The market price of SPDRs, however,
may not be equivalent to the pro rata value of the S&P 500 Index. SPDRs are
subject to the risks of an investment in a broadly based portfolio of common
stocks.
The 30 Plus Fund may invest in DIAMONDSSM. DIAMONDS represent an investment in a
unit investment trust ("DIAMONDS Trust") that owns shares in proportion to the
weightings of the stocks comprising the Dow Jones Industrial AverageSM ("DJIA").
The DIAMONDS Trust is structured so that its shares trade at approximately 1/100
(one one-hundredth) of the value of the DJIA. The DIAMONDS Trust's shares trade
on the AMEX. An investment in DIAMONDS is subject to risks similar to those of
other diversified stock portfolios, including market volatility and that the
general level of stock prices may decline. Although DIAMONDS are designed to
provide investment results that generally correspond to the price and yield
performance of the DJIA, the DIAMONDS Trust may not be able to exactly replicate
the performance of the DJIA because of trust expenses and other factors.
Investments in SPDRs and DIAMONDS are considered investments in other investment
companies discussed below.
The Japan Funds may invest in currency-indexed securities. These securities
typically are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of one more
specified foreign currencies and may offer higher yields than U.S.
Dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the value of a specified foreign currency increases, resulting in
a security that performs similarly to a foreign-denominated instrument, or their
maturity value may decline when the value of a specified foreign currency
increases, resulting in a security whose price characteristics are similar to a
put on the underlying currency.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
- -----------------------------------------
Each Fund may invest in the securities of other investment companies to the
extent that such an investment would be consistent with the requirements of the
6
<PAGE>
1940 Act. The Money Market Fund will invest only in those investment companies
that invest in the same quality of investments as the Money Market Fund.
Investments in the securities of other investment companies may involve
duplication of advisory fees and certain other expenses. By investing in another
investment company, a Fund becomes a shareholder of that investment company. As
a result, Fund shareholders indirectly will bear a Fund's proportionate share of
the fees and expenses paid by shareholders of the other investment company, in
addition to the fees and expenses Fund shareholders directly bear in connection
with the Fund's own operations.
OPTIONS, FUTURES AND OTHER STRATEGIES
- -------------------------------------
GENERAL. Each Fund (other than the Money Market Fund) may use certain options
(both traded on an exchange and OTC), futures contracts (sometimes referred to
as "futures") and options on futures contracts (collectively, "Financial
Instruments") as a substitute for a comparable market position in the underlying
security, to attempt to hedge or limit the exposure of a Fund's position, to
create a synthetic money market position, for certain tax-related purposes and
to effect closing transactions.
The use of Financial Instruments is subject to applicable regulations of the
SEC, the several exchanges upon which they are traded and the Commodity Futures
Trading Commission (the "CFTC"). In addition, a Fund's ability to use Financial
Instruments will be limited by tax considerations. See "Dividends, Other
Distributions and Taxes."
In addition to the instruments, strategies and risks described below and in the
Prospectus, Rafferty may discover additional opportunities in connection with
Financial Instruments and other similar or related techniques. These new
opportunities may become available as Rafferty develops new techniques, as
regulatory authorities broaden the range of permitted transactions and as new
Financial Instruments or other techniques are developed. Rafferty may utilize
these opportunities to the extent that they are consistent with a Fund's
investment objective and permitted by a Fund's investment limitations and
applicable regulatory authorities. The Funds' Prospectus or SAI will be
supplemented to the extent that new products or techniques involve materially
different risks than those described below or in the Prospectus.
SPECIAL RISKS. The use of Financial Instruments involves special considerations
and risks, certain of which are described below. Risks pertaining to particular
Financial Instruments are described in the sections that follow.
(1) Successful use of most Financial Instruments depends upon Rafferty's
ability to predict movements of the overall securities markets, which requires
different skills than predicting changes in the prices of individual securities.
The ordinary spreads between prices in the cash and futures markets, due to the
differences in the natures of those markets, are subject to distortion. Due to
the possibility of distortion, a correct forecast of stock market trends by
Rafferty may still not result in a successful transaction. Rafferty may be
incorrect in its expectations as to the extent of market movements or the time
span within which the movements take place which, thus, may result in the
strategy being unsuccessful.
(2) Options and futures prices can diverge from the prices of their
underlying instruments. Options and futures prices are affected by such factors
as current and anticipated short-term interest rates, changes in volatility of
the underlying instrument and the time remaining until expiration of the
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contract, which may not affect security prices the same way. Imperfect or no
correlation also may result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, and from imposition of daily
price fluctuation limits or trading halts.
(3) As described below, a Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Financial Instruments involving obligations to third parties (E.G.,
Financial Instruments other than purchased options). If a Fund were unable to
close out its positions in such Financial Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair a Fund's ability to
sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that a Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to close out a position in
a Financial Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of the other party to the transaction (the "counterparty") to
enter into a transaction closing out the position. Therefore, there is no
assurance that any position can be closed out at a time and price that is
favorable to a Fund.
(4) Losses may arise due to unanticipated market price movements, lack of a
liquid secondary market for any particular instrument at a particular time or
due to losses from premiums paid by a Fund on options transactions.
COVER. Transactions using Financial Instruments, other than purchased options,
expose a Fund to an obligation to another party. A Fund will not enter into any
such transactions unless it owns either (1) an offsetting ("covered") position
in securities or other options or futures contracts or (2) cash and liquid
assets with a value, marked-to-market daily, sufficient to cover its potential
obligations to the extent not covered as provided in (1) above. Each Fund will
comply with SEC guidelines regarding cover for these instruments and will, if
the guidelines so require, set aside cash or liquid assets in an account with
its custodian, Firstar Bank Milwaukee, N.A. ("Custodian"), in the prescribed
amount as determined daily.
Assets used as cover or held in an account cannot be sold while the position in
the corresponding Financial Instrument is open, unless they are replaced with
other appropriate assets. As a result, the commitment of a large portion of a
Fund's assets to cover or accounts could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.
OPTIONS. The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment and general market conditions. Options that expire
unexercised have no value. Options currently are traded on the Chicago Board
Options Exchange ("CBOE"), the AMEX and other exchanges, as well as the OTC
markets.
By buying a call option on a security, a Fund has the right, in return for the
premium paid, to buy the security underlying the option at the exercise price.
By writing (selling) a call option and receiving a premium, a Fund becomes
obligated during the term of the option to deliver securities underlying the
option at the exercise price if the option is exercised. By buying a put option,
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a Fund has the right, in return for the premium, to sell the security underlying
the option at the exercise price. By writing a put option, a Fund becomes
obligated during the term of the option to purchase the securities underlying
the option at the exercise price.
Because options premiums paid or received by a Fund are small in relation to the
market value of the investments underlying the options, buying and selling put
and call options can be more speculative than investing directly in securities.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit a Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
RISKS OF OPTIONS ON SECURITIES. Exchange-traded options in the United States are
issued by a clearing organization affiliated with the exchange on which the
option is listed that, in effect, guarantees completion of every exchange-traded
option transaction. In contrast, OTC options are contracts between a Fund and
its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a Fund purchases an OTC option, it relies on
the counterparty from whom it purchased the option to make or take delivery of
the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the Fund
as well as the loss of any expected benefit of the transaction.
A Fund's ability to establish and close out positions in exchange-traded options
depends on the existence of a liquid market. However, there can be no assurance
that such a market will exist at any particular time. Closing transactions can
be made for OTC options only by negotiating directly with the counterparty, or
by a transaction in the secondary market if any such market exists. There can be
no assurance that a Fund will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency of
the counterparty, a Fund might be unable to close out an OTC option position at
any time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
OPTIONS ON INDICES. An index fluctuates with changes in the market values of the
securities included in the index. Options on indices give the holder the right
to receive an amount of cash upon exercise of the option. Receipt of this cash
amount will depend upon the closing level of the index upon which the option is
based being greater than (in the case of a call) or less than (in the case of
put) the exercise price of the option. Some stock index options are based on a
broad market index such as the S&P 500 Index, the NYSE Composite Index or the
Amex Major Market Index, or on a narrower index such as the Philadelphia Stock
Exchange Over-the-Counter Index.
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Each of the exchanges has established limitations governing the maximum number
of call or put options on the same index that may be bought or written by a
single investor, whether acting alone or in concert with others (regardless of
whether such options are written on the same or different exchanges or are held
or written on one or more accounts or through one or more brokers). Under these
limitations, option positions of all investment companies advised by Rafferty
are combined for purposes of these limits. Pursuant to these limitations, an
exchange may order the liquidation of positions and may impose other sanctions
or restrictions. These positions limits may restrict the number of listed
options that a Fund may buy or sell.
Puts and calls on indices are similar to puts and calls on securities or futures
contracts except that all settlements are in cash and gain or loss depends on
changes in the index in question rather than on price movements in individual
securities or futures contracts. When a Fund writes a call on an index, it
receives a premium and agrees that, prior to the expiration date, the purchaser
of the call, upon exercise of the call, will receive from the Fund an amount of
cash if the closing level of the index upon which the call is based is greater
than the exercise price of the call. The amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
call times a specified multiple ("multiplier"), which determines the total value
for each point of such difference. When a Fund buys a call on an index, it pays
a premium and has the same rights to such call as are indicated above. When a
Fund buys a put on an index, it pays a premium and has the right, prior to the
expiration date, to require the seller of the put, upon the Fund's exercise of
the put, to deliver to the Fund an amount of cash if the closing level of the
index upon which the put is based is less than the exercise price of the put,
which amount of cash is determined by the multiplier, as described above for
calls. When a Fund writes a put on an index, it receives a premium and the
purchaser of the put has the right, prior to the expiration date, to require the
Fund to deliver to it an amount of cash equal to the difference between the
closing level of the index and the exercise price times the multiplier if the
closing level is less than the exercise price.
RISKS OF OPTIONS ON INDICES. If a Fund has purchased an index option and
exercises it before the closing index value for that day is available, it runs
the risk that the level of the underlying index may subsequently change. If such
a change causes the exercised option to fall out-of-the-money, the Fund will be
required to pay the difference between the closing index value and the exercise
price of the option (times the applicable multiplier) to the assigned writer.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with respect
to the underlying instrument, expiration date, contract size and strike price,
the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows a Fund great flexibility to tailor the
option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
OTC FOREIGN CURRENCY OPTIONS. OTC foreign currency options that may be used by
the Japan Plus Fund and the Japan Short Fund are European-style options. This
means that the option is exercisable only immediately prior to its expiration.
This is in contrast to American-style options, which are exercisable at any time
prior to the expiration date of the option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A futures contract obligates
the seller to deliver (and the purchaser to take delivery of) the specified
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security on the expiration date of the contract. An index futures contract
obligates the seller to deliver (and the purchaser to take) an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific index at the close of the last trading day of the contract and the
price at which the agreement is made. No physical delivery of the underlying
securities in the index is made.
When a Fund writes an option on a futures contract, it becomes obligated, in
return for the premium paid, to assume a position in the futures contract at a
specified exercise price at any time during the term of the option. If a Fund
writes a call, it assumes a short futures position. If it writes a put, it
assumes a long futures position. When the Fund purchases an option on a futures
contract, it acquires the right in return for the premium it pays to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put).
Whether a Fund realizes a gain or loss from futures activities depends upon
movements in the underlying security or index. The extent of a Fund's loss from
an unhedged short position in futures contracts or from writing unhedged call
options on futures contracts is potentially unlimited. The Funds only purchase
and sell futures contracts and options on futures contracts that are traded on a
U.S. exchange or board of trade.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin also
must be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin does not represent a borrowing, but rather is in
the nature of a performance bond or good-faith deposit that is returned to the
Fund at the termination of the transaction if all contractual obligations have
been satisfied. Under certain circumstances, such as periods of high volatility,
the Fund may be required by an exchange to increase the level of its initial
margin payment, and initial margin requirements might be increased generally in
the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
commission merchant daily as the value of the futures position varies, a process
known as "marking-to-market." Variation margin does not involve borrowing, but
rather represents a daily settlement of the Fund's obligations to or from a
futures commission merchant. When a Fund purchases an option on a futures
contract, the premium paid plus transaction costs is all that is at risk. In
contrast, when a Fund purchases or sells a futures contract or writes a call or
put option thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If the Fund has
insufficient cash to meet daily variation margin requirements, it might need to
sell securities at a time when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can enter
into offsetting closing transactions, similar to closing transactions in
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures
contracts may be closed only on an exchange or board of trade that provides a
secondary market. However, there can be no assurance that a liquid secondary
market will exist for a particular contract at a particular time. In such event,
it may not be possible to close a futures contract or options position.
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Under certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a futures contract or an option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures contract or an option on a futures
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain cash or liquid
assets in an account.
To the extent that a Fund enters into futures contracts or options on futures
contracts, in each case other than for BONA FIDE hedging purposes (as defined by
the Commodity Futures Trading Commission ("CFTC")), the aggregate initial margin
and the premiums required to establish those positions (excluding the amount by
which options are "in-the-money" at the time of purchase) will not exceed 5% of
the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any contracts the Fund has entered
into. (In general, a call option on a futures contract is "in-the-money" if the
value of the underlying futures contract exceeds the strike, I.E., exercise,
price of the call. A put option on a futures contract is "in-the-money" if the
value of the underlying futures contract is exceeded by the strike price of the
put.) This policy does not limit to 5% the percentage of a Fund's assets that
are at risk in futures contracts and options on futures contracts.
RISKS OF FUTURES CONTRACTS AND OPTIONS THEREON. The ordinary spreads between
prices in the cash and futures markets (including the options on futures
markets), due to differences in the natures of those markets, are subject to the
following factors, which may create distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationships between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions.
FOREIGN CURRENCY STRATEGIES - RISK FACTORS. Each Japan Fund may use options and
futures contracts on Japanese Yen, as described above, and forward contracts on
Japanese Yen, as described below.
The value of Financial Instruments on foreign currencies depends on the value of
the underlying currency relative to the U.S. Dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such Financial Instruments,
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each Japan Fund could be disadvantaged by having to deal in the odd-lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Quotation information
generally is representative of very large transactions in the interbank market
and thus might not reflect odd-lot transactions where rates might be less
favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Financial Instruments until they reopen.
Settlement of transactions involving foreign currencies might be required to
take place within the country issuing the underlying currency. Thus, each Japan
Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. Each Japan Fund may enter into forward currency
contracts to purchase or sell Japanese Yen for a fixed amount of U.S. Dollars. A
forward currency contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days (term) from the
date of the forward currency contract agreed upon by the parties, at a price set
at the time of the forward currency contract. These forward currency contracts
are traded directly between currency traders (usually large commercial banks)
and their customers.
The cost to each Japan Fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When a Japan Fund enters into a forward currency contract, it relies
on the counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result in
the loss of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that a Japan Fund would in fact be able to close out a forward
currency contract at a favorable price prior to maturity. In addition, in the
event of insolvency of the counterparty, a Japan Fund may be unable to close out
a forward currency contract at any time prior to maturity. In either event, a
Japan Fund would continue to be subject to market risk with respect to the
position, and would continue to be required to maintain a position in securities
denominated in the foreign currency or to maintain cash or liquid assets in a
segregated account.
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The precise matching of forward currency contract amounts and the value of the
securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, a Japan Fund might need to
purchase or sell foreign currencies in the spot (cash) market to the extent such
foreign currencies are not covered by forward currency contracts.
COMBINED POSITIONS. A Fund may purchase and write options in combination with
each other. For example, a Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
REPURCHASE AGREEMENTS
- ---------------------
Each Fund may enter into repurchase agreements with banks that are members of
the Federal Reserve System or securities dealers who are members of a national
securities exchange or are primary dealers in U.S. Government Securities
(defined below). Repurchase agreements generally are for a short period of time,
usually less than a week. Under a repurchase agreement, a Fund purchases a U.S.
Government Security and simultaneously agrees to sell the security back to the
seller at a mutually agreed-upon future price and date, normally one day or a
few days later. The resale price is greater than the purchase price, reflecting
an agreed-upon market interest rate during the Fund's holding period. While the
maturities of the underlying securities in repurchase agreement transactions may
be more than one year, the term of each repurchase agreement always will be less
than one year. Repurchase agreements with a maturity of more than seven days are
considered to be illiquid investments. No Fund may enter into such a repurchase
agreement if, as a result, more than 15% (10% in the case of the Money Market
Fund) of the value of its net assets would then be invested in such repurchase
agreements and other illiquid investments. See "Illiquid Investments and
Restricted Securities" above.
Each Fund will always receive, as collateral, securities whose market value,
including accrued interest, at all times will be at least equal to 100% of the
dollar amount invested by the Fund in each repurchase agreement. In the event of
default or bankruptcy by the seller, the Fund will liquidate those securities
(whose market value, including accrued interest, must be at least 100% of the
amount invested by the Fund) held under the applicable repurchase agreement,
which securities constitute collateral for the seller's obligation to repurchase
the security. If the seller defaults, a Fund might incur a loss if the value of
the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy or similar proceedings are commenced with respect to the seller of
the security, realization upon the collateral by a Fund may be delayed or
limited.
SHORT SALES
- -----------
The U.S./Short Fund, the OTC/Short Fund, the 30/Short Fund, the Internet/Short
Fund, the Small Cap/Short Fund and the Japan/Short Fund may engage in short sale
transactions under which the Fund sells a security it does not own. To complete
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such a transaction, the Fund must borrow the security to make delivery to the
buyer. The Fund then is obligated to replace the security borrowed by purchasing
the security at the market price at the time of replacement. The price at such
time may be more or less than the price at which the security was sold by the
Fund. Until the security is replaced, the Fund is required to pay to the lender
amounts equal to any dividends that accrue during the period of the loan. The
proceeds of the short sale will be retained by the broker, to the extent
necessary to meet the margin requirements, until the short position is closed
out.
Until a Fund closes its short position or replaces the borrowed stock, the Fund
will: (1) maintain an account containing cash or liquid assets at such a level
that (a) the amount deposited in the account plus that amount deposited with the
broker as collateral will equal the current value of the stock sold short and
(b) the amount deposited in the account plus the amount deposited with the
broker as collateral will not be less than the market value of the stock at the
time the stock was sold short; or (2) otherwise cover the Fund's short position.
The U.S. Plus Fund, the OTC Plus Fund, the 30 Plus Fund, the Internet Plus Fund,
the Small Cap Plus Fund and the Japan Plus Fund each also may engage in short
sales if, at the time of the short sale, the Fund owns or has the right to
acquire an equal amount of the stock being sold at no additional cost ("selling
short against the box").
U.S. GOVERNMENT SECURITIES
- --------------------------
The Money Market Fund invests in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities ("U.S. Government Securities")
in pursuit of its investment objectives. The other Funds may invest in U.S.
Government Securities in order to deposit such securities as initial or
variation margin, as "cover" for the investment techniques they employ, as part
of a cash reserve and for liquidity purposes.
U.S. Government Securities are high-quality instruments issued or guaranteed as
to principal or interest by the U.S. Treasury or by an agency or instrumentality
of the U.S. Government. Not all U.S. Government Securities are backed by the
full faith and credit of the United States. Some are backed by the right of the
issuer to borrow from the U.S. Treasury; others are backed by discretionary
authority of the U.S. Government to purchase the agencies' obligations; while
others are supported only by the credit of the instrumentality. In the case of
securities not backed by the full faith and credit of the United States, the
investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment.
U.S. Government Securities include Treasury Bills (which mature within one year
of the date they are issued), Treasury Notes (which have maturities of one to
ten years) and Treasury Bonds (which generally have maturities of more than 10
years). All such Treasury securities are backed by the full faith and credit of
the United States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include the Federal Housing Administration, the Federal National
Mortgage Association ("Fannie Mae"), the Farmers Home Administration, the
Export-Import Bank of the United States, the Small Business Administration, the
Government National Mortgage Association ("Ginnie Mae"), the General Services
Administration, the Central Bank for Cooperatives, the Federal Home Loan Banks,
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the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Farm Credit
Banks, the Maritime Administration, the Tennessee Valley Authority, the
Resolution Funding Corporation and the Student Loan Marketing Association
("Sallie Mae").
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by Fannie Mae, are supported only by
the credit of the instrumentality and by a pool of mortgage assets. If the
securities are not backed by the full faith and credit of the United States, the
owner of the securities must look principally to the agency issuing the
obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment. The Money Market Fund will invest in securities of agencies and
instrumentalities only if Rafferty is satisfied that the credit risk involved is
acceptable.
Yields on short-, intermediate- and long-term U.S. Government Securities are
dependent on a variety of factors, including the general conditions of the money
and bond markets, the size of a particular offering and the maturity of the
obligation. Debt securities with longer maturities tend to produce higher
capital appreciation and depreciation than obligations with shorter maturities
and lower yields. The market value of U.S. Government Securities generally
varies inversely with changes in the market interest rates. An increase in
interest rates, therefore, generally would reduce the market value of a Fund's
portfolio investments in U.S. Government Securities, while a decline in interest
rates generally would increase the market value of a Fund's portfolio
investments in these securities.
OTHER INVESTMENT RISKS AND PRACTICES
- ------------------------------------
BORROWING. The U.S. Plus Fund, OTC Plus Fund, the Internet Plus Fund, the 30
Plus Fund, the Japan Plus Fund and the Small Cap Plus Fund may borrow money for
investment purposes, which is a form of leveraging. Leveraging investments, by
purchasing securities with borrowed money, is a speculative technique that
increases investment risk while increasing investment opportunity. Leverage will
magnify changes in a Fund's net asset value and on a Fund's investments.
Although the principal of such borrowings will be fixed, a Fund's assets may
change in value during the time the borrowing is outstanding. Leverage also
creates interest expenses for a Fund. To the extent the income derived from
securities purchased with borrowed funds exceeds the interest a Fund will have
to pay, that Fund's net income will be greater than it would be if leverage were
not used. Conversely, if the income from the assets obtained with borrowed funds
is not sufficient to cover the cost of leveraging, the net income of a Fund will
be less than it would be if leverage were not used, and therefore the amount
available for distribution to shareholders as dividends will be reduced. The use
of derivatives in connection with leverage creates the potential for significant
loss.
The Funds may borrow money to facilitate management of the Fund's portfolio by
enabling the Fund to meet redemption requests when the liquidation of portfolio
instruments would be inconvenient or disadvantageous. Such borrowing is not for
investment purposes and will be repaid by the borrowing Fund promptly.
As required by the 1940 Act, a Fund must maintain continuous asset coverage
(total assets, including assets acquired with borrowed funds, less liabilities
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exclusive of borrowings) of 300% of all amounts borrowed. If at any time the
value of the required asset coverage declines as a result of market fluctuations
or other reasons, a Fund may be required to sell some of its portfolio
investments within three days to reduce the amount of its borrowings and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell portfolio instruments at that time.
In addition to the foregoing, each Fund may borrow money from a bank as a
temporary measure for extraordinary or emergency purposes in amounts not in
excess of 5% of the value of its total assets. This borrowing is not subject to
the foregoing 300% asset coverage requirement. Each Fund may pledge portfolio
securities as Rafferty deems appropriate in connection with any borrowings.
LENDING PORTFOLIO SECURITIES. Each Fund may lend portfolio securities with a
value not exceeding 33 1/3% (15% in the case of the Money Market Fund) of its
total assets to brokers, dealers, and financial institutions. Borrowers are
required continuously to secure their obligations to return securities on loan
from a Fund by depositing any combination of short-term government securities
and cash as collateral with the Fund. The collateral must be equal to at least
100% of the market value of the loaned securities, which will be marked to
market daily. While a Fund's portfolio securities are on loan, the Fund
continues to receive interest on the securities loaned and simultaneously earns
either interest on the investment of the collateral or fee income if the loan is
otherwise collateralized. The Fund may invest the interest received and the
collateral, thereby earning additional income. Loans would be subject to
termination by the lending Fund on four business days' notice or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities that
occurs during the term of the loan inures to the lending Fund and that Fund's
shareholders. A lending Fund may pay reasonable finders, borrowers,
administrative and custodial fees in connection with a loan. Each Fund currently
has no intention of lending its portfolio securities.
PORTFOLIO TURNOVER. The Trust anticipates that investors in the Funds, as part
of an asset allocation investment strategy, frequently will redeem Fund shares,
as well as exchange their Fund shares for shares of other Funds. A Fund may have
to dispose of certain portfolio investments to maintain sufficient liquid assets
to meet such redemption and exchange requests, thereby causing a high portfolio
turnover. Because each Fund's portfolio turnover rate depends largely on the
purchase, redemption and exchange activity of its investors, it is difficult to
estimate each Fund's actual turnover rate.
A Fund's portfolio turnover rate is calculated by the value of the securities
purchased or securities sold, excluding all securities whose maturities at the
time of acquisition were one year or less, divided by the average monthly value
of such securities owned during the year. Based on this calculation, instruments
with remaining maturities of less than one year are excluded from the portfolio
turnover rate. Such instruments generally would include futures contracts and
options, since such contracts generally have a remaining maturity of less than
one year. In any given period, all of a Fund's investments may have a remaining
maturity of less than one year; in which case, the portfolio turnover rate for
that period would be equal to zero. However, each Fund's portfolio turnover
rate, except for the Money Market Fund, calculated with all securities whose
maturities were one year or less is anticipated to be unusually high. If, for
example, options and futures were included in the calculation, then each Fund's
portfolio turnover rate, except for the Money Market Fund, would be
approximately 500%.
17
<PAGE>
TRACKING ERROR
- --------------
While the Funds do not expect their returns over a twelve-month period to
deviate adversely from their respective investment objectives by more than 10%,
several factors may affect a Fund's ability to achieve this correlation. Among
these factors are: (1) Fund expenses, including brokerage expenses and
commissions (which may be increased by high portfolio turnover); (2) less than
all of the securities in the target index being held by a Fund and securities
not included in the target index being held by a Fund; (3) an imperfect
correlation between the performance of instruments held by a Fund, such as
futures contracts and options, and the performance of the underlying securities
in the cash market comprising an index; (4) bid-ask spreads (the effect of which
may be increased by portfolio turnover); (5) a Fund holding instruments that are
illiquid or the market for which becomes disrupted; (6) the need to conform a
Fund's portfolio holdings to comply with its investment restrictions or
policies, or regulatory or tax law requirements; and (7) market movements that
run counter to a leveraged Fund's investments (which will cause divergence
between the Fund and its target index over time due to the mathematical effects
of leveraging).
While index futures and options contracts closely correlate with the applicable
indices over long periods, shorter-term deviation, such as on a daily basis,
does occur with these instruments. As a result, a Fund's short-term performance
will reflect such deviation from its target index.
In the case of the Funds whose net asset values move inversely from their target
indices (the U.S./Short Fund, OTC/Short Fund, 30/Short Fund, Internet/Short
Fund, Japan/Short Fund, the Small Cap/Short Fund) the factor of compounding also
may lead to tracking error. Even if there is a perfect inverse correlation
between a Fund and the return of its applicable target index on a daily basis,
the symmetry between the changes in the benchmark and the changes in the Fund's
net asset value can be altered significantly over time by a compounding effect.
For example, if a Fund achieved a perfect inverse correlation with its target
index on every trading day over an extended period and the level of returns of
that index significantly decreased during that period, a compounding effect for
that period would result, causing an increase in the Fund's net asset value by a
percentage that is somewhat greater than the percentage that the index's returns
decreased. Conversely, if a Fund maintained a perfect inverse correlation with
its target index over an extended period and if the level of returns of that
index significantly increased over that period, a compounding effect would
result, causing a decrease of the Fund's net asset value by a percentage that
would be somewhat less than the percentage that the index returns increased.
INVESTMENT RESTRICTIONS
In addition to the investment policies and limitations described above and
described in the Prospectus, each Fund has adopted the following investment
limitations, which are fundamental policies and may not be changed without the
vote of a majority of the outstanding voting securities of that Fund. Under the
1940 Act, a "vote of the majority of the outstanding voting securities" of a
Fund means the affirmative vote of the lesser of: (1) more than 50% of the
outstanding shares of a Fund or (2) 67% or more of the shares of a Fund present
at a shareholders meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy.
18
<PAGE>
For purposes of the following limitations, all percentage limitations apply
immediately after a purchase or initial investment. Except with respect to
borrowing money, if a percentage limitation is adhered to at the time of the
investment, a later increase or decrease in the percentage resulting from any
change in value or net assets will not result in a violation of such
restrictions. If at any time a Fund's borrowings exceed its limitations due to a
decline in net assets, such borrowings will be reduced promptly to the extent
necessary to comply with the limitation.
EACH FUND, EXCEPT THE MONEY MARKET FUND, HAS ADOPTED THE FOLLOWING INVESTMENT
LIMITATIONS:
A Fund shall not:
1. Lend any security or make any other loan if, as a result, more than 33
1/3% of the value of the Fund's total assets would be lent to other parties,
except (1) through the purchase of a portion of an issue of debt securities
in accordance with the Fund's investment objective, policies and limitations,
or (2) by engaging in repurchase agreements with respect to portfolio
securities.
2. Underwrite securities of any other issuer.
3. Purchase, hold, or deal in real estate or oil and gas interests.
4. Issue any senior security (as such term is defined in Section 18(f) of the
1940 Act) (including the amount of senior securities issued by excluding
liabilities and indebtedness not constituting senior securities), except (1)
that the Fund may issue senior securities in connection with transactions in
options, futures, options on futures and forward contracts, swaps, caps,
floors, collars and other similar investments, (2) as otherwise permitted
herein and in Investment Limitations Nos. 5, 7, and 8, and (3) the U.S./Short
Fund, OTC/Short Fund, 30/Short Fund, Internet/Short Fund, Japan/Short Fund
and Small Cap Plus/Short Fund may make short sales of securities.
5. Pledge, mortgage, or hypothecate the Fund's assets, except (1) to the
extent necessary to secure permitted borrowings, (2) in connection with the
purchase of securities on a forward-commitment or delayed-delivery basis or
the sale of securities on a delayed-delivery basis, and (3) in connection
with options, futures contracts, options on futures contracts, forward
contracts, swaps, caps, floors, collars and other financial instruments.
6. Invest in physical commodities, except that the Fund may purchase and sell
foreign currency, options, futures contracts, options on futures contracts,
forward contracts, swaps, caps, floors, collars, securities on a
forward-commitment or delayed-delivery basis, and other financial
instruments.
EACH FUND, EXCEPT THE U.S. PLUS FUND, OTC PLUS FUND, 30 PLUS FUND, JAPAN PLUS
FUND, SMALL CAP PLUS FUND AND THE INTERNET PLUS FUND, HAS ADOPTED THE FOLLOWING
INVESTMENT LIMITATION:
A Fund shall not:
19
<PAGE>
7. Borrow money, except (1) as a temporary measure for extraordinary or
emergency purposes and then only in amounts not to exceed 5% of the value of
the Fund's total assets, (2) in an amount up to 33 1/3% of the value of the
Fund's total assets, including the amount borrowed, in order to meet
redemption requests without immediately selling portfolio securities, (3) to
enter into reverse repurchase agreements, and (4) to lend portfolio
securities. For purposes of this investment limitation, the purchase or sale
of options, futures contracts, options on futures contracts, forward
contracts, swaps, caps, floors, collars and other financial instruments shall
not constitute borrowing.
THE U.S. PLUS FUND, OTC PLUS FUND, 30 PLUS FUND, INTERNET PLUS FUND, JAPAN PLUS
FUND AND SMALL CAP PLUS FUND HAVE ADOPTED THE FOLLOWING INVESTMENT LIMITATION:
A Fund shall not:
8. Make short sales of portfolio securities or purchase any portfolio
securities on margin but may make short sales "against the box," obtain such
short-term credits as are necessary for the clearance of transactions, and
make margin payments in connection with options, futures contracts, options
on futures contracts, forward contracts, swaps, caps, floors, collars and
other financial instruments.
THE U.S. PLUS FUND, OTC PLUS FUND, 30 PLUS FUND, JAPAN PLUS FUND, INTERNET PLUS
FUND AND SMALL CAP PLUS FUND HAVE ADOPTED THE FOLLOWING INVESTMENT LIMITATION:
A Fund shall not:
9. Borrow money, except (1) to the extent permitted under the 1940 Act (which
currently limits borrowing to no more than 33 1/3% of the value of the Fund's
total assets), (2) as a temporary measure and then only in amounts not to
exceed 5% of the value of the Fund's total assets, (3) to enter into reverse
repurchase agreements, and (4) to lend portfolio securities. For purposes of
this investment limitation, the purchase or sale of options, futures
contracts, options on futures contracts, forward contracts, swaps, caps,
floors, collars and other financial instruments shall not constitute
borrowing.
EACH FUND, EXCEPT THE OTC PLUS FUND AND OTC/SHORT FUND, HAS ADOPTED THE
FOLLOWING INVESTMENT LIMITATION:
A Fund shall not:
10. Invest more than 25% of the value of its total assets in the securities of
issuers in any single industry, provided that there shall be no limitation
on the purchase of obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities.
THE OTC PLUS FUND AND THE OTC/SHORT FUND HAVE ADOPTED THE FOLLOWING INVESTMENT
LIMITATION:
A Fund shall not:
20
<PAGE>
11. Invest more than 25% of the value of its total assets in the securities of
issuers in any single industry, except for the software and hardware
industries when the percentage of the securities of either industry
constitutes more than 25% of the Nasdaq 100 Stock Index ("Nasdaq Index").
There shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
THE MONEY MARKET FUND HAS ADOPTED THE FOLLOWING INVESTMENT LIMITATIONS:
The Money Market Fund shall not:
1. Make loans, except through the purchase of qualified debt
obligations, loans of portfolio securities and entry into repurchase
agreements.
2. Lend the Fund's portfolio securities in excess of 15% of its total assets.
Any loans of the Fund's portfolio securities will be made according to
guidelines established by the Trustees, including the maintenance of cash
collateral of the borrower equal at all times to the current market value of
the securities loaned.
3. Underwrite securities of any other issuer.
4. Purchase, hold, or deal in real estate or oil and gas interests.
5. Issue senior securities, except as permitted by the Fund's investment
objective and policies.
6. Purchase or sell physical commodities; PROVIDED, HOWEVER, that this
investment limitation does not prevent the Fund from purchasing and selling
options, futures contracts, options on futures contracts, forward contracts,
swaps, caps, floors, collars and other financial instruments.
7. Invest in securities of other investment companies, except to the extent
permitted under the 1940 Act.
8. Mortgage, pledge, or hypothecate the Money Market Fund's assets except to
secure permitted borrowings or in connection with options, futures
contracts, options on futures contracts, forward contracts, swaps, caps,
floors, collars and other financial instruments. In those cases, the Money
Market Fund may mortgage, pledge, or hypothecate assets having a market
value not exceeding the lesser of the dollar amount borrowed or 15% of the
value of total assets of the Money Market Fund at the time of the borrowing.
9. Make short sales of portfolio securities or purchase any portfolio
securities on margin, except to obtain such short-term credits as are
necessary for the clearance of purchases and sales of securities; provided,
HOWEVER, that this investment limitation does not prevent the Fund from
purchasing and selling options, futures contracts, options on futures
contracts, forward contracts, swaps, caps, floors, collars and other
financial instruments.
In addition, the Money Market Fund does not presently intend to purchase and
sell foreign currency, options, futures contracts, options on futures contracts,
forward contracts, swaps, caps, floors and collars.
21
<PAGE>
EACH FUND HAS ADOPTED THE FOLLOWING NON-FUNDAMENTAL POLICY WHICH MAY BE CHANGED
BY THE VOTE OF THE BOARD WITHOUT SHAREHOLDER APPROVAL:
A Fund shall not hold assets of any issuers, at the end of any calendar
quarter (or within 30 days thereafter), to the extent such holdings would cause
the fund to fail to comply with the diversification requirements imposed by
section 817(h) of the Internal Revenue Code and the Treasury regulations issued
thereunder on segregated asset accounts used to fund variable annuity contracts
and/or variable life insurance policies.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Board, Rafferty is responsible for
decisions to buy and sell securities for each Fund, the selection of
broker-dealers to effect the transactions, and the negotiation of brokerage
commissions, if any. Rafferty expects that the Funds may execute brokerage or
other agency transactions through registered broker-dealers, for a commission,
in conformity with the 1940 Act, the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
When selecting a broker or dealer to execute portfolio transactions, Rafferty
considers many factors, including the rate of commission or the size of the
broker-dealer's "spread," the size and difficulty of the order, the nature of
the market for the security, operational capabilities of the broker-dealer and
the research, statistical and economic data furnished by the broker-dealer to
Rafferty.
In effecting portfolio transactions for the Funds, Rafferty seeks best execution
of trades either (1) at the most favorable price and efficient execution of
transactions or (2) with respect to agency transactions, at a higher rate of
commission if reasonable in relation to brokerage and research services provided
to the Funds or Rafferty. Such services may include the following: information
as to the availability of securities for purchase or sale; statistical or
factual information or opinions pertaining to investment; wire services; and
appraisals or evaluations of portfolio securities. Each Fund believes that the
requirement always to seek the lowest possible commission cost could impede
effective portfolio management and preclude the Fund and Rafferty from obtaining
a high quality of brokerage and research services. In seeking to determine the
reasonableness of brokerage commissions paid in any transaction, Rafferty relies
upon its experience and knowledge regarding commissions generally charged by
various brokers and on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction.
Rafferty may use research and services provided to it by brokers in servicing
all the Funds; however, not all such services may be used by Rafferty in
connection with a Fund. While the receipt of such information and services is
useful in varying degrees and generally would reduce the amount of research or
services otherwise performed by Rafferty, this information and these services
are of indeterminable value and would not reduce Rafferty's investment advisory
fee to be paid by the Funds.
Purchases and sales of U.S. Government Securities normally are transacted
through issuers, underwriters or major dealers in U.S. Government Securities
acting as principals. Such transactions are made on a net basis and do not
involve payment of brokerage commissions. The cost of securities purchased from
22
<PAGE>
an underwriter usually includes a commission paid by the issuer to the
underwriters; transactions with dealers normally reflect the spread between bid
and asked prices.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
- ---------------------
The business affairs of each Fund are managed by or under the direction of the
Board. The Trustees are responsible for managing the Funds' business affairs and
for exercising all the Funds' powers except those reserved to the shareholders.
A Trustee may be removed by the other Trustees or by a two-thirds vote of the
outstanding Trust shares.
The following table lists the Initial Trustee and officers of the Trust, their
age, business address and principal occupation during the past five years.
Unless otherwise noted, an individual's business address is 1311 Mamaroneck
Avenue, White Plains, New York 10605.
Position With Principal Occupation
NAME (AGE) THE TRUST DURING PAST FIVE YEARS
--------- --------- ----------------------
Lawrence C. Rafferty* Chief Executive Chief Executive Officer and
(57) Officer, Trustee Initial Chairman of the Board
of Trustees of The Potomac Funds,
1997-present; Chairman and Chief
Executive Officer of Rafferty,
1997-present; Chief Executive
Officer of Rafferty Companies,
LLC, 1996-present; Chief
Executive Officer of Cohane
Rafferty Securities, Inc.,
1987-present (investment
banking); Chief Executive
Officer of Rafferty Capital
Markets, Inc., 1995-present;
Trustee of Fairfield University.
Timothy P. Hagan (57) Chief Financial Chief Financial Officer of The
100 S. Royal Street Officer Potomac Funds, 1997-present;
Alexandria, VA 22314 Vice President of Rafferty,
1997-present; Vice President of
PADCO Advisors, 1993-1997, Vice
President of Money Management
Associates, 1981-1993.
Daniel D. O'Neill (31) President and Chief Co-President of The Potomac
Operating Officer Funds, 1999-present; Managing
Director of the Adviser,
1999-present; Portfolio Manager,
Hermitage Capital Management,
1998-1999; Associate, Akin, Gump,
Stauss, Hauer & Feld, LLP,
1995-1998.
23
<PAGE>
Position With Principal Occupation
NAME (AGE) THE TRUST DURING PAST FIVE YEARS
--------- --------- ----------------------
Philip A. Harding (56) Senior Vice Co-President of The Potomac
President and Funds, 1997-present; Vice
Director of Sales President of the Rafferty,
1997-present; Vice President of
Commerzbank (USA), 1995-1997;
Senior Vice President of Sanwa
Bank (USA), 1992-1995.
Mark D. Edwards (42) Vice President Vice President of the Potomac
100 S. Royal Street Funds, 1997-present; Vice
Alexandria, VA 22314 President of Rafferty, 1997 to
present; President & Co-Founder
of Systems Management Group,
1990-1997.
Stephen P. Sprague (50) Treasurer, Treasurer, Controller and
Controller and Assistant Secretary of the
Assistant Secretary Potomac Funds, 1997-present;
Vice President and Chief
Financial Officer of Rafferty,
1997-present; Chief Financial
Officer of Rafferty Companies,
LLC, 1994-present; Chief
Accountant--International Sub.,
Goldman Sachs & Co., 1983-1993.
Robert J. Zutz (46) Secretary Partner, Kirkpatrick & Lockhart
1800 Massachusetts Ave. LLP (law firm).
Washington, DC 20036
Eric W. Falkeis (26) Assistant Secretary Assistant Secretary of the
615 East Michigan Street Potomac Funds, 1997-present;
Milwaukee, WI 53202 Compliance Officer, Firstar
Mutual Fund Services LLC,
1997-present; Audit Senior with
PricewaterhouseCoopers LLP,
1995-1997.
- -----------------
* Mr. Rafferty is deemed to be "interested persons" of the Trust, as defined
by the 1940 Act.
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
The Trust pays the Trustees, except Mr. Rafferty, $______ per meeting of the
Board. Trustees also are reimbursed for any expenses incurred in attending Board
meetings. No officer, director or employee of Rafferty receives any compensation
24
<PAGE>
from the Trust for acting as a Trustee or officer of the Trust. The following
table shows the estimated compensation expected to be paid to each Trustee for
the Trust's fiscal year ended August 31, 2000.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Pension or Aggregate
Retirement Estimated Compensation
Aggregate Benefits Accrued Annual From the
Name of Person, Compensation As Part of the Benefits Upon Complex Paid
POSITION FROM THE Trust's EXPENSES RETIREMENT to THE
TRUST TRUSTEES(1)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lawrence C. $0 $0 $0 $0
Rafferty, Trustee
____________, $_____ $0 $0 $_____
Trustee
____________, $_____ $0 $0 $_____
Trustee
____________, $_____ $0 $0 $_____
Trustee
- ------------------------------------------------------------------------------------
</TABLE>
(1) The Complex consists of the Trust and the Potomac Funds, a separately
registered investment company.
INVESTMENT ADVISOR
- ------------------
Rafferty Asset Management, LLC, 1311 Mamaroneck Avenue, White Plains, New York
10605, provides investment advice to the Funds. Rafferty was organized as a New
York limited liability corporation in June 1997.
Under an Investment Advisory Agreement between the Trust, on behalf of the
Funds, and Rafferty ("Advisory Agreement"), Rafferty provides a continuous
investment program for each Fund's assets in accordance with its investment
objectives, policies and limitations, and oversees the day-to-day operations of
the Funds, subject to the supervision of the Trustees. Rafferty bears all costs
associated with providing these advisory services and the expenses of the
Trustees who are affiliated with or interested persons of Rafferty. The Trust
bears all other expenses that are not assumed by Rafferty. The Trust also is
liable for nonrecurring expenses as may arise, including litigation to which a
Fund may be a party. The Trust also may have an obligation to indemnify its
Trustees and officers with respect to any such litigation.
Pursuant to the Advisory Agreement, each Fund pays Rafferty the following fee at
an annual rate based on its average daily net assets of:
Plus Funds 0.75%
Short Funds 0.90%
Money Market Fund 0.50%
25
<PAGE>
For the Plus Funds, Rafferty has agreed to waive its fees to the extent that
Fund expenses exceed 1.50% of average daily net assets. For the Short Funds,
Rafferty has agreed to waive its fees to the extent that Fund expenses exceed
1.65% of average daily net assets. For Money Market Fund, Rafferty has agreed to
waive its fees to the extent that Fund expenses exceed 1.00% of average daily
net assets.
The Advisory Agreement was approved by the Trustees (including all Independent
Trustees) and Rafferty, as sole shareholder of each Fund, in compliance with the
1940 Act. The Advisory Agreement will continue in force for a period of two
years after the date of its approval. The Agreement is renewable thereafter from
year to year with respect to each Fund, so long as its continuance is approved
at least annually (1) by the vote, cast in person at a meeting called for that
purpose, of a majority of those Trustees who are not "interested persons" of
Rafferty or the Trust, and (2) by the majority vote of either the full Board or
the vote of a majority of the outstanding shares of a Fund. The Advisory
Agreement automatically terminates on assignment and is terminable on 60 days'
written notice either by the Trust or Rafferty.
FUND ADMINISTRATOR, FUND ACCOUNTANT, TRANSFER AGENT AND CUSTODIAN
- -----------------------------------------------------------------
Firstar Mutual Fund Services, LLC, 615 East Michigan Street, Milwaukee,
Wisconsin 53202, provides administrative, fund accounting and transfer agent
services to the Funds. Firstar Bank Milwaukee, N.A., 615 East Michigan Street,
Milwaukee, Wisconsin 53202, provides custodian services to the Funds.
Pursuant to an Administration Servicing Agreement ("Service Agreement") between
the Trust and Firstar Mutual Fund Services, LLC ("Administrator"), the
Administrator provides the Trust with administrative and management services
(other than investment advisory services). As compensation for these services,
the Trust pays the Administrator a fee based on each current Fund's average
daily net assets of .06% of the first $200 million, .05% of the next $300
million of the average daily net assets, and .03% of the remaining balance,
subject to an overriding minimum of $150,000. For each new Fund, the
Administrator receives a fee based on average daily net assets of .07% of the
first $200 million, .06% of the next $500 million, and .04% of the remaining
balance.
Pursuant to a Fund Accounting Servicing Agreement between the Trust and Firstar
Mutual Fund Services, LLC ("Fund Accountant"), the Fund Accountant provides the
Trust with accounting services, including portfolio accounting services, tax
accounting services and furnishing financial reports. For these services, the
Trust pays the Fund Accountant the following fees:
For the U.S. Plus Fund, U.S./Short Fund and OTC Plus Fund, the fees are $22,000
for the first $40 million of average daily net assets per Fund, .01% on the next
$200 million and .005% on the balance.
For the OTC/Short Fund and the Small Cap Plus Fund, the fees are $25,000 for the
first $40 million of average daily net assets per Fund, .02% on the next $200
million and .01% on the balance.
For the Money Market Fund, the fees are $25,000 for the first $40 million of
average daily net assets, .01% on the next $200 million and .005% on the
balance.
For all other Funds, the fees are .065% up to $50 million of average daily net
assets per Fund, .025% on the next $200 million and .0125% on the balance.
26
<PAGE>
The Fund Accountant also is entitled to certain out-of-pocket expenses,
including pricing expenses.
Pursuant to a Custodian Agreement, Firstar Bank Milwaukee, N.A. also serves
as the Custodian of the Funds' assets. Under the terms of the Custodian
Agreement, the Custodian holds and administers the assets in the Funds'
portfolios.
DISTRIBUTOR
- -----------
Rafferty Capital Markets, Inc., 1311 Mamaroneck Avenue, White Plains, New York
10605, serves as the distributor ("Distributor") in connection with the offering
of each Fund's shares on a no-load basis. The Distributor and participating
dealers with whom it has entered into dealer agreements offer shares of the
Funds as agents on a best efforts basis and are not obligated to sell any
specific amount of shares.
DISTRIBUTION PLAN
- -----------------
Rule 12b-1 under the 1940 Act provides that an investment company may bear
expenses of distributing its shares only pursuant to a plan adopted in
accordance with the Rule. The Trustees have adopted a plan for the Class B
shares ("Class B Plan") of each Fund pursuant to which each Fund may pay certain
expenses incurred in the distribution of that Class' shares and the servicing
and maintenance of existing Class shareholder accounts. Pursuant to the Class B
Plan, a Fund may pay 0.25% of its average daily net assets to insurance
companies in connection with the distribution of Class B shares and other
service activities. The insurance companies' services may include printing and
mailing of fund prospectuses, statements of additional information, shareholder
reports, sales brochures, compensation of insurance company sales personnel,
account maintenance services, or other activities that the Board determines are
primarily intended to result in the sale of Class B shares.
The Class B Plan was approved by the Trustees and the Independent Trustees of
the Funds. In approving the Class B Plan, the Trustees determined that there is
a reasonable likelihood that the Class B Plan will benefit each Fund and its
shareholders. The Trustees will review quarterly and annually a written report
provided by the Treasurer of the amounts expended under the Plan and the
purposes for which such expenditures were made.
INDEPENDENT ACCOUNTANTS
- -----------------------
______________ serve as the auditors and the independent accountants for the
Trust.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Funds (except the Money
Market Fund) is determined separately daily, Monday through Friday, as of the
close of regular trading (normally 4:00 p.m., Eastern time) on the New York
Stock Exchange ("NYSE"), each day the NYSE is open for business. The NYSE is not
27
<PAGE>
open on New Year's Day, Presidents' Day, Martin Luther King's Birthday, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. The net asset value per share of the Money Market Fund is
determined each day that both the NYSE and the Federal Reserve Bank of New York
are open for business.
It is the policy of the Money Market Fund to attempt to maintain a constant
price per share of $1.00. There can be no assurance that a $1.00 net asset value
per share will be maintained. The portfolio instruments held by the Money Market
Fund are valued based on the amortized cost valuation method pursuant to Rule
2a-7 under the 1940 Act. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, even though the portfolio security may increase or decrease in market
value. Such fluctuations generally are in response to changes in interest rates.
Use of the amortized cost valuation method requires the Money Market Fund to
purchase instruments having remaining maturities of 397 days or less, to
maintain a dollar-weighted average portfolio maturity of 90 days or less, and to
invest only in securities determined by the Trustees to be of high quality with
minimal credit risks. The Money Market Fund may invest in issuers or instruments
that at the time of purchase have received the highest short-term rating by any
two nationally recognized statistical rating organizations ("NRSROs").
Rule 2a-7 requires the Trustees to establish procedures reasonably designed to
stabilize the net asset value per share as computed for purposes of distribution
and redemption. The Board's procedures include monitoring the relationship
between the amortized cost value per share and a net asset value per share based
upon available indications of market value. The Board will decide what, if any,
steps should be taken if there is a difference of more than .5% between the two
methods. The Board will take any steps they consider appropriate (such as
redemption in kind or shortening the average portfolio maturity) to minimize any
material dilution or other unfair results arising from differences between the
two methods of determining net asset value.
A security listed or traded on an exchange, domestic or foreign, or the Nasdaq
Stock Market ("Nasdaq"), is valued at its last sales price on the principal
exchange on which it is traded prior to the time when assets are valued. If no
sale is reported at that time, the mean of the last bid and asked prices is
used. When market quotations for options and futures positions held by a Fund
are readily available, those positions will be valued based upon such
quotations. Securities and other assets for which market quotations are not
readily available, or for which the Adviser has reason to question the validity
of quotations received, are valued at fair value as determined in good faith by
the Board. For valuation purposes, quotations of foreign securities or other
assets denominated in foreign currencies are translated to U.S. Dollar
equivalents using the net foreign exchange rate in effect at the close of the
stock exchange in the country where the security is issued. Short-term
investments having a maturity of 60 days or less are valued at amortized cost,
which approximates market value.
For purposes of determining net asset value per share of a Fund, options and
futures contracts are valued at the closing prices of the exchanges on which
they trade. The value of a futures contract equals the unrealized gain or loss
on the contract that is determined by marking the contract to the current
settlement price for a like contract acquired on the day on which the futures
contract is being valued. The value of options on futures contracts is
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<PAGE>
determined based upon the current settlement price for a like option acquired on
the day on which the option is being valued. A settlement price may not be used
for the foregoing purposes if the market makes a limited move with respect to a
particular commodity.
OTC securities held by a Fund will be valued at the last sales price or, if no
sales price is reported, the mean of the last bid and asked price is used. The
portfolio securities of a Fund that are listed on national exchanges are valued
at the last sales price of such securities; if no sales price is reported, the
mean of the last bid and asked price is used. Dividend income and other
distributions are recorded on the ex-distribution date.
Illiquid securities, securities for which reliable quotations or pricing
services are not readily available, and all other assets not valued in
accordance with the foregoing principles will be valued at their respective fair
value as determined in good faith by, or under procedures established by, the
Trustees, which procedures may include the delegation of certain
responsibilities regarding valuation to the Adviser or the officers of the
Trust. The officers of the Trust report, as necessary, to the Trustees regarding
portfolio valuation determinations. The Trustees, from time to time, will review
these methods of valuation and will recommend changes that may be necessary to
assure that the investments of the Funds are valued at fair value.
PURCHASES AND REDEMPTIONS
The insurance company separate accounts may purchase and redeem shares of the
Funds on each day the NYSE is open for trading. Purchases and redemptions may be
effected based on the amount of premium payments to be invested or surrendered
and transfer requests, among other things. No fees are charged the separate
accounts when they purchase or redeem shares of the Funds.
REDEMPTION IN KIND
- ------------------
A Fund is obligated to redeem shares for any shareholder for cash during any
90-day period up to $250,000 or 1% of that Fund's net asset value, whichever is
less. Any redemption beyond this amount also will be in cash unless the Trustees
determine that further cash payments will have a material adverse effect on
remaining shareholders. In such a case, a Fund will pay all or a portion of the
remainder of the redemption in portfolio instruments, valued in the same way as
each fund determines net asset value. The portfolio instruments will be selected
in a manner that the Trustees deem fair and equitable. A redemption in kind is
not as liquid as a cash redemption. If a redemption is made in kind, a
shareholder receiving portfolio instruments could receive less than the
redemption value thereof and could incur certain transaction costs.
RECEIVING PAYMENT
- -----------------
Payment of redemption proceeds will be made within seven days following a Fund's
receipt of your request (if received in good order as described below) for
redemption. For investments that have been made by check, payment on redemption
requests may be delayed until the Transfer Agent is reasonably satisfied that
the purchase payment has been collected by the Trust (which may require up to 10
business days). To avoid redemption delays, purchases may be made by cashiers or
certified check or by direct wire transfers.
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<PAGE>
A redemption request will be considered to be received in "good order" if:
o the number or amount of shares and the class of shares to be redeemed and
shareholder account number have been indicated;
o any written request is signed by a shareholder and by all co-owners of the
account with exactly the same name or names used in establishing the account;
o any written request is accompanied by certificates representing the shares
that have been issued, if any, and the certificates have been endorsed
for transfer exactly as the name or names appear on the certificates or
an accompanying stock power has been attached; and
o the signatures on any written redemption request of $100,000 or more and
on any certificates for shares (or an accompanying stock power) have been
guaranteed by a national bank, a state bank that is insured by the Federal
Deposit Insurance Corporation, a trust company or by any member firm of
the New York, American, Boston, Chicago, Pacific or Philadelphia Stock
Exchanges. Signature guarantees also will be accepted from savings banks
and certain other financial institutions that are deemed acceptable by
Firstar Mutual Funds Services, LLC, as transfer agent, under its current
signature guarantee program.
The right of redemption may be suspended or the date of payment postponed for
any period during which the NYSE, the Nasdaq, the CME, or the CBOE, or the
Federal Reserve Bank of New York, as appropriate, is closed (other than
customary weekend or holiday closings) or trading on the NYSE, the Nasdaq, the
CME, the CBOE, as appropriate, is restricted. In addition, the rights of
redemption may be suspended or the date of payment postponed for any Fund for a
period during which an emergency exists so that disposal of the Fund's
investments or the determination of its net asset value is not reasonably
practicable or for such periods as the SEC, by order, may permit for protection
of a Fund's investors.
The Trust reserves the right to reject any order to acquire its shares through
exchange or otherwise to restrict or terminate the exchange privilege at any
time. In addition, the Trust may terminate this exchange privilege upon 60 days'
notice.
PERFORMANCE INFORMATION
From time to time, each Fund may advertise its average annual total return and
compare its performance to that of other mutual funds with similar investment
objectives and to relevant indices. Performance information is computed
separately for those Funds in accordance with the methods discussed below.
Each Fund may include the total return of its classes in advertisements or other
written material. When a Fund advertises the total return of its shares, it will
be calculated for the one-, five-, and ten-year periods or, if such periods have
not yet elapsed, the period since the establishment of that Fund. Each Fund's
performance data quoted in reports, advertising and other promotional materials
represents past performance and is not intended to indicate future performance.
The investment return and principal value for each Fund, except for the Money
Market Fund, will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original costs.
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<PAGE>
COMPARATIVE INFORMATION
- -----------------------
From time to time, each Fund's performance may be compared with recognized stock
and other indices, such as the S&P 500 Index, the Dow Jones Industrial AverageSM
DJIA, the Nasdaq Index, the Nasdaq Composite IndexTM ("Nasdaq Composite"), the
Nikkei Index, the Russell 2000 Index ("Russell 2000"), Dow Jones Composite
Internet IndexSM ("Internet Index") and various other domestic, international or
global indices. The S&P 500 Index is a broad index of common stock prices, while
the DJIA represents a narrower segment of industrial companies. Each assumes
reinvestment of distributions and is calculated without regard to tax
consequences or operating expenses. The Nasdaq Composite comparison may be
provided to show how the OTC/Plus and the OTC/Short Funds' total returns compare
to the record of a broad average of OTC stock prices over the same period. The
OTC/Plus and the OTC/Short Funds have the ability to invest in securities not
included in the Nasdaq Index or the Nasdaq Composite, and the OTC/Plus and the
OTC/Short Funds' investment portfolio may or may not be similar in composition
to the Nasdaq Index or the Nasdaq Composite.
In addition, a Fund's total return may be compared to the performance of broad
groups of comparable mutual funds with similar investment objectives, as such
performance is tracked and published by such independent organizations as Lipper
Analytical Services, Inc. ("Lipper"), and CDA Investment Technologies, Inc. When
Lipper's tracking results are used, the Fund will be compared to Lipper's
appropriate fund category, that is, by fund objective and portfolio holdings.
Since the assets in all mutual funds are always changing, a Fund may be ranked
within one Lipper asset-size class at one time and in another Lipper asset-size
class at some other time. Footnotes in advertisements and other marketing
literature will include the time period and Lipper asset-size class, as
applicable, for the ranking in question. Performance figures are based on
historical results and are not intended to indicate future performance.
TOTAL RETURN COMPUTATIONS
- -------------------------
For purposes of quoting and comparing the performance of a Fund to that of other
mutual funds and to other relevant market indices in advertisements or in
reports to shareholders, performance for the Fund may be stated in terms of
total return. Such average annual total return quotes for the Funds are
calculated according to the following formula:
P(1+T)n=ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (either 1, 5 or 10)
ERV = ending redeemable
value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods, as applicable,
at the end of that period
Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication, and will cover 1, 5 and
10 year periods or a shorter period dating from the commencement of a Fund's
operations. In calculating the ending redeemable value, all dividends and
distributions by a Fund are assumed to have been reinvested at net asset value
31
<PAGE>
on the reinvestment dates during the period. Additionally, in calculating the
ending redeemable value for the Broker Class shares, the applicable CDSC will be
deducted. Total return, or "T" in the formula above, is computed by finding the
average annual compounded rates of return over the 1, 5 and 10 year periods (or
fractional portion thereof) that would equate the initial amount invested to the
ending redeemable value.
From time to time, each Fund also may include in such advertising a total return
figure that is not calculated according to the formula set forth above in order
to compare more accurately the performance of a Fund with other measures of
investment return. For example, in comparing the total return of a Fund with
data published by Lipper or with market indices, each Fund calculates its
aggregate total return for the specified periods of time by assuming an
investment of $10,000 in Fund shares and assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value.
YIELD COMPUTATIONS
- ------------------
The Money Market Fund's annualized current yield, as may be quoted from time to
time in advertisements and other communications to shareholders and potential
investors, is computed for a seven-day period by determining the net change,
exclusive of capital changes and including the value of additional shares
purchased with dividends and any dividends declared therefrom (which reflect
deductions of all expenses of the Fund such as advisory fees), in the value of a
hypothetical preexisting account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing the difference by the value of the account at
the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7).
The Money Market Fund's annualized effective yield, as may be quoted from time
to time in advertisements and other communications to shareholders and potential
investors, is computed by determining (for the same stated seven-day period as
the current yield) the net change, exclusive of capital changes and including
the value of additional shares purchased with dividends and any dividends
declared therefrom (which reflect deductions of all expenses of the Fund such as
advisory fees), in the value of a hypothetical preexisting account having a
balance of one share at the beginning of the period, and dividing the difference
by the value of the account at the beginning of the base period to obtain the
base period return, and then compounding the base period return by adding 1,
raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the
result, according to the following formula:
Effective Yield = [(Base Period Return + 1) 365/7] - 1
The yields quoted in any advertisement or other communication represents past
performance and should not be considered a representation of the yields of the
Money Market Fund in the future since the yield is not fixed. Actual yields will
depend not only on the type, quality, and maturities of the investments held by
the Money Market Fund and changes in interest rates on such investments, but
also on changes in the Money Market Fund's expenses during the period.
Yield information may be useful in reviewing the performance of the Money Market
Fund and for providing a basis for comparison with other investment
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<PAGE>
alternatives. However, unlike bank deposits or other investments, which
typically pay a fixed yield for a stated period of time, the Money Market Fund's
yield will fluctuate.
SHAREHOLDER AND OTHER INFORMATION
SHAREHOLDER INFORMATION
- -----------------------
The insurance companies' separate accounts [or Qualified Plan sponsors], and not
the individual Contract or Plan owners are the shareholders of the Funds.
However, the Contracts [or Qualified Plans] may pass through voting rights to
the contract owners. Each share of a Fund gives the shareholder one vote in
matters submitted to shareholders for a vote. Each Class of each Fund have equal
voting rights, except that, in matters affecting only a particular Class or
series, only shares of that Class or series are entitled to vote. Share voting
rights are not cumulative, and shares have no preemptive or conversion rights.
Share are not transferable. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in a Trust's or a Fund's operation and for the
election of Trustees under certain circumstances. Trustees may be removed by the
Trustees or by shareholders at a special meeting. A special meeting of
shareholders shall be called by the Trustees upon the written request of
shareholders owning at least 10% of a Trust's outstanding shares.
OTHER INFORMATION
- -----------------
POTENTIAL CONFLICTS. Shares of the Funds may serve as the underlying investments
for the separate accounts of unaffiliated insurance companies as well as for
both annuity contracts and life insurance policies. Due to differences in tax
treatment or other considerations, the interests of various contract owners
might at some time be in conflict. The Trust does not presently foresee any
conflict. However, the Board intends to monitor events to identify any material
irreconcilable conflict that may arise and to determine what action, if any,
should be taken in response to such conflict. If such conflict were to occur,
one or more insurance companies' separate accounts might be required to withdraw
its investments in one or more of the Funds. This may require a Fund to sell
securities at unfavorable prices.
MASTER/FEEDER STRUCTURE OPTION. The Funds may in the future operate under a
master/feeder structure. This means that each Fund would be a "feeder" fund that
attempts to meet its objective by investing all its investable assets in a
"master" fund with the same investment objective. The "master" fund would
purchase securities for investment. It is expected that any such investment
company would be managed by Rafferty in substantially the same manner as the
Funds. If permitted by law at that time, the Board of Trustees may approve the
implementation of such a structure for the Funds without seeking shareholder
approval. However, the Trustees' decision will be made only if the investments
in the master funds are in the best interests of the Funds and their
shareholders. In making that determination, the Trustees will consider, among
other things, the benefits to shareholders and/or the opportunity to reduce
costs and achieve operational efficiencies. You also will receive 30 days notice
prior to the implementation of the master/feeder structure. Under the Internal
Revenue Code of 1986, as amended ("Code"), the Funds may not presently operate
under a master/feeder structure.
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<PAGE>
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS
- ---------------------------------
Dividends from net investment income and any distributions of realized net
capital gains are as described in the Prospectus under "Distributions and
Taxes." All distributions from a Fund normally are automatically reinvested
without charge in additional shares of that Fund.
The Money Market Fund ordinarily declares dividends daily from net investment
income and distributes such dividends monthly. Net investment income, for these
purposes, includes accrued interest and accretion of original issue and market
discounts, less amortization of market premium and estimated expenses, and is
calculated immediately prior to the determination of the Fund's net asset value
per share. The Fund distributes its net short-term capital gain, if any,
annually but may make more frequent distributions thereof if necessary to
maintain its net asset value per share at $1.00 or to avoid income or excise
taxes. The Fund does not expect to realize net long-term capital gain and thus
does not anticipate payment of any distributions of net capital gain (I.E., the
excess of net long-term capital gain over net short-term capital loss). The
Trustees may revise this dividend policy, or postpone the payment of dividends,
if the Fund has or anticipates any large unexpected expense, loss or fluctuation
in net assets that, in the Trustees' opinion, might have a significant adverse
effect on its shareholders.
TAXES
- -----
REGULATED INVESTMENT COMPANY STATUS. Each Fund is treated as a separate
corporation for Federal income tax purposes and will seek to qualify as a
regulated investment company ("RIC") under Subchapter M of the Code. Because of
the investment strategies of each Fund other than the Money Market Fund, there
can be no assurance that any such Fund will qualify as a RIC. If a Fund so
qualifies and satisfies the distribution requirement under the Code (described
in the following paragraph) for a taxable year, the Fund will not be subject to
Federal income tax on the part of its investment company taxable income
(generally consisting of net investment income, net short-term capital gains and
net gains from certain foreign currency transactions) and net capital gain it
distributes to its shareholders for that year. If a Fund fails to qualify as a
RIC for any taxable year, (a) its taxable income, including net capital gain,
will be taxed at corporate income tax rates (up to 35%) and it will not receive
a deduction for distributions to its shareholders, (b) the shareholders would
treat all those distributions, including distributions of net capital gain, as
dividends (that is, ordinary income) to the extent of the Fund's earnings and
profits and (c) most importantly, each insurance company separate account
invested therein would fail to satisfy the diversification requirements of
section 817(h) of the code (described below), with the result that the Contracts
supported by that account would no longer be eligible for tax deferral.
To qualify for treatment as a RIC under the Code, each Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income ("Distribution Requirement") and must meet several additional
requirements. For each Fund, these requirements include the following: (1) the
Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of securities or foreign currencies, or other
34
<PAGE>
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies ("Income
Requirement"); and (2) at the close of each quarter of the Fund's taxable year,
(i) at least 50% of the value of its total assets must be represented by cash
and cash items, U.S. Government Securities, securities of other RICs, and other
securities, with those other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities, and (ii) not more than 25% of the value of its total assets may be
invested in securities (other than U.S. Government Securities or the securities
of other RICs) of any one issuer (collectively, "Diversification Requirements").
Although each Fund intends to satisfy all the foregoing requirements, there is
no assurance that each Fund will be able to do so. The investment by a Fund
other than the Money Market Fund primarily in options and futures positions
entails some risk that such a Fund might fail to satisfy the Diversification
Requirements. There is some uncertainty regarding the valuation of such
positions for purposes of those requirements; accordingly, it is possible that
the method of valuation used by those Funds, pursuant to which each of them
would be treated as satisfying the Diversification Requirements, would not be
accepted in an audit by the Internal Revenue Service, which might apply a
different method resulting in disqualification of one or more of those Funds.
ADDITIONAL DIVERSIFICATION REQUIREMENTS. Each Fund intends to comply with the
diversification requirements imposed by section 817(h) of the Code and the
regulations thereunder. These requirements, which are in addition to the
diversification requirements imposed on the Funds by Subchapter M of the Code,
place certain limitations on the assets of each Separate Account -- and, because
section 817(h) and those regulations treat the assets of each Fund as assets of
the related Separate Account, of each Fund -- that may be invested in securities
of a single issuer. Specifically, the regulations require that, except as
permitted by the "safe harbor" described below, as of the end of each calendar
quarter or within thirty days thereafter no more than 55% of the total assets of
a Fund may be represented by any one investment, no more than 70% by any two
investments, no more than 80% by any three investments, and no more than 90% by
any four investments. For this purpose, all securities of the same issuer are
considered a single investment, and each U.S. government agency and
instrumentality is considered a separate issuer. Section 817(h) provides, as a
safe harbor, that a separate account will be treated as being adequately
diversified if the diversification requirements under Subchapter M are satisfied
and no more than 55% of the value of the account's total assets are cash and
cash items, government securities, and securities of other regulated investment
companies. Failure of a Fund to satisfy the section 817(h) requirements would
result in taxation of the insurance company issuing the Contracts and treatment
of the holders other than as described in the applicable Contract prospectus.
INCOME FROM FOREIGN SECURITIES. Dividends and interest received by a Fund, and
gains realized by a Fund, may be subject to income, withholding or other taxes
imposed by foreign countries and U.S. possessions that would reduce the yield
and/or total return on its securities. Tax conventions between certain countries
and the United States may reduce or eliminate these foreign taxes, however, and
many foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors.
A Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is any foreign corporation (with certain exceptions) that, in
general, meets either of the following tests: (1) at least 75% of its gross
35
<PAGE>
income is passive or (2) an average of at least 50% of its assets produce, or
are held for the production of, passive income. Under certain circumstances, a
Fund will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition of
the stock (collectively, "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent it
distributes that income to its shareholders. If a Fund invests in a PFIC and
elects to treat the PFIC as a "qualified electing fund" ("QEF"), then, in lieu
of the foregoing tax and interest obligation, the Fund would be required to
include in income each year its PRO RATA share of the QEF's annual ordinary
earnings and net capital gain -- which probably would have to be distributed by
the Fund to satisfy the Distribution Requirement -- even if those earnings and
gain were not received by the Fund from the QEF. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
A Fund may elect to "mark to market" its stock in any PFIC. "Marking-to-market,"
in this context, means including in ordinary income each taxable year the
excess, if any, of the fair market value of the PFIC's stock over the Fund's
adjusted basis therein as of the end of that year. Pursuant to the election, the
Fund also would be allowed to deduct (as an ordinary, not capital, loss) the
excess, if any, of its adjusted basis in PFIC stock over the fair market value
thereof as of the taxable year-end, but only to the extent of any net
mark-to-market gains with respect to that stock included by the Fund for prior
taxable years under the election. The Fund's adjusted basis in each PFIC's stock
with respect to which it makes this election would be adjusted to reflect the
amounts of income included and deductions taken there under.
Gains or losses (1) from the disposition of foreign currencies, including
forward currency contracts, (2) on the disposition of each
foreign-currency-denominated debt security that are attributable to fluctuations
in the value of the foreign currency between the date of acquisition and
disposition of the security, and (3) that are attributable to fluctuations in
exchange rates that occur between the time a Fund accrues dividends, interest or
other receivables, or expenses or other liabilities, denominated in a foreign
currency and the time the Fund actually collects the receivables or pays the
liabilities, generally will be treated as ordinary income or loss. These gains
or losses, referred to under the Code as "section 988" gains or losses, will
increase or decrease the amount of a Fund's investment company taxable income to
be distributed to its shareholders.
DERIVATIVES STRATEGIES. The use of derivatives strategies, such as writing
(selling) and purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for income tax
purposes the amount, character and timing of recognition of the gains and losses
a Fund realizes in connection therewith. Gain from the disposition of foreign
currencies (except gains that may be excluded by future regulations), and gains
from options, futures and forward currency contracts derived by a Fund with
respect to its business of investing in securities or foreign currencies, will
be treated as qualifying income under the Income Requirement.
Certain futures and foreign currency contracts in which the Funds will invest
may be "section 1256 contracts." Section 1256 contracts held by a Fund at the
end of each taxable year, other than section 1256 contracts that are part of a
"mixed straddle" with respect to which the Fund has made an election not to have
the following rules apply, must be "marked-to-market" (that is, treated as sold
36
<PAGE>
for their fair market value) for Federal income tax purposes, with the result
that unrealized gains or losses will be treated as though they were realized.
Sixty percent of any net gain or loss recognized on these deemed sales, and 60%
of any net realized gain or loss from any actual sales of section 1256
contracts, will be treated as long-term capital gain or loss, and the balance
will be treated as short-term capital gain or loss.
Code section 1092 (dealing with straddles) also may affect the taxation of
derivatives in which the Funds may invest. That section defines a "straddle" as
offsetting positions with respect to actively traded personal property; for
these purposes, options, futures and forward contracts are personal property.
Under that section, any loss from the disposition of a position in a straddle
may be deducted only to the extent the loss exceeds the unrealized gain on the
offsetting position(s) of the straddle. In addition, these rules may postpone
the recognition of loss that otherwise would be recognized under the
mark-to-market rules discussed above. The regulations under section 1092 also
provide certain "wash sale" rules, which apply to transactions where a position
is sold at a loss and a new offsetting position is acquired within a prescribed
period, and "short sale" rules applicable to straddles. If a Fund makes certain
elections, the amount, character and timing of recognition of gains and losses
from the affected straddle positions would be determined under rules that vary
according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences to
the Funds of straddle transactions are not entirely clear.
If a call option written by a Fund lapses (I.E., terminates without being
exercised), the amount of the premium it received for the option will be
short-term capital gain. If a Fund enters into a closing purchase transaction
with respect to a written call option, it will have a short-term capital gain or
loss based on the difference between the premium it received for the option it
wrote and the premium it pays for the option it buys. If such an option is
exercised and a Fund thus sells the securities or futures contract subject to
the option, the premium the Fund received will be added to the exercise price to
determine the gain or loss on the sale. If a call option purchased by a Fund
lapses, it will realize short-term or long-term capital loss, depending on its
holding period for the security or futures contract subject thereto. If a Fund
exercises a purchased call option, the premium it paid for the option will be
added to the basis of the subject securities or futures contract.
If a Fund has an "appreciated financial position" -- generally, an interest
(including an interest through an option, futures or forward contract or short
sale) with respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis
- -- and enters into a "constructive sale" of the position, the Fund will be
treated as having made an actual sale thereof, with the result that it will
recognize gain at that time. A constructive sale generally consists of a short
sale, an offsetting notional principal contract, or a futures or forward
contract entered into by a Fund or a related person with respect to the same or
substantially identical property. In addition, if the appreciated financial
position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to any transaction by
a Fund during any taxable year that otherwise would be treated as a constructive
sale if the transaction is closed within 30 days after the end of that year and
the Fund holds the appreciated financial position unhedged for 60 days after
that closing (I.E., at no time during that 60-day period is the Fund's risk of
loss regarding that position reduced by reason of certain specified transactions
with respect to substantially identical or related property, such as having an
option to sell, being contractually obligated to sell, making a short sale or
granting an option to buy substantially identical stock or securities).
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THE POTOMAC INSURANCE TRUST
PART C OTHER INFORMATION
------------------------
Item 23. EXHIBITS
--------
(a) Declaration of Trust - filed herewith
(b) By-Laws - filed herewith
(c) Voting trust agreement - None
(d)(i) Form of Investment Advisory Agreement between the
Potomac Insurance Trust and Rafferty Asset Management,
LLC*
(ii) Form of Fund Administration Servicing Agreement between
the Potomac Insurance Trust and Firstar Mutual Fund
Services, LLC*
(e)(i) Form of Distribution Agreement between the Potomac
Insurance Trust and Rafferty Capital Markets, Inc.*
(ii) Form of Dealer Agreement-None
(f) Bonus, profit sharing contracts - None
(g)(i) Form of Custodian Agreement between the Potomac
Insurance Trust and Firstar Bank Milwaukee, NA*
(h)(i) Form of Transfer Agent Agreement between the Potomac
Insurance Trust and Firstar Mutual Fund Services, LLC*
(ii) Form of Fund Accounting Servicing Agreement between the
Potomac Insurance Trust and Firstar Mutual Fund
Services, LLC*
(iii) Form of Fulfillment Servicing Agreement between the
Potomac Insurance Trust and Firstar Mutual Fund
Services, LLC*
(i) Opinion and consent of counsel*
(j) Consent of Independent Auditors*
(k) Financial statements omitted from prospectus - None
(l) Letter of investment intent*
(m) Class B Plan pursuant to Rule 12b-1*
(n) Plan pursuant to Rule 18f-3*
<PAGE>
- ------
* To be filed by subsequent amendment.
Item 24. Persons Controlled by or under
COMMON CONTROL WITH REGISTRANT
------------------------------
None.
Item 25. INDEMNIFICATION
---------------
Article XI, Section 2 of the Trust's Declaration of Trust provides that:
(a) Subject to the exceptions and limitations contained in paragraph (b)
below:
(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as a "Covered Person") shall be indemnified by
the Trust and/or by the appropriate Series to the fullest extent permitted by
law against liability and against all expenses reasonably incurred or paid by
him or her in connection with any claim, action, suit or proceeding in which he
or she becomes involved as a party or otherwise by virtue of his or her being or
having been a Covered Person and against amounts paid or incurred by him or her
in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened while a Covered Person is in office or
thereafter, and the words "liability" and "expenses" shall include, without
limitation, attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office or (B) not to have
acted in good faith in the reasonable belief that his or her action was in the
best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Covered Person did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office, (A) by the court or other body approving the
settlement; (B) by at least a majority of those Trustees who are neither
Interested Persons of the Trust nor parties to the matter based upon a review of
readily available facts (as opposed to a full trial-type inquiry or full
investigation); or (C) by written opinion of independent legal counsel based
upon a review of readily available facts (as opposed to a full trial-type
inquiry); provided, however, that any Shareholder may, by appropriate legal
proceedings, challenge any such determination by the Trustees, or by independent
legal counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not be exclusive
of or affect any other rights to which any Covered Person may now or hereafter
be entitled, shall continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
C-2
<PAGE>
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the Trust from time to time prior
to final disposition thereof upon receipt of an undertaking by or on behalf of
such Covered Person that such amount will be paid over by him or her to the
Trust if it is ultimately determined that he or she is not entitled to
indemnification under this Section 2; provided, however, that:
(i) such Covered Person shall have provided appropriate security for
such undertaking,
(ii) the Trust is insured against losses arising out of any such
advance payments, or
(iii) either a majority of the Trustees who are neither interested
persons of the Trust nor parties to the matter, or independent legal counsel in
a written opinion, shall have determined, based upon a review of readily
available facts (as opposed to a trial-type inquiry or full investigation), that
there is reason to believe that such Covered Person will be found entitled to
indemnification under this Section 2.
According to Article XII, Section 1 of the Declaration of Trust, the Trust
is a trust and not a partnership. Trustees are not liable personally to any
person extending credit to, contracting with or having any claim against the
Trust, a particular Series or the Trustees. A Trustee, however, is not protected
from liability due to willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Article XII, Section 2 provides that, subject to the provisions of Section
1 of Article XII and to Article XI, the Trustees are not liable for errors of
judgment or mistakes of fact or law, or for any act or omission in accordance
with advice of counsel or other experts or for failing to follow such advice.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
----------------------------------------------------
Rafferty Asset Management, LLC (the "Adviser"), 1311 Mamaroneck Avenue,
White Plains, New York 10605, offers investment advisory services. Information
as to the officers and directors of the Adviser is included in its current Form
ADV filed with the Securities and Exchange Commission (Registration Number
801-54679) and is incorporated herein by reference.
Item 27. PRINCIPAL UNDERWRITER
---------------------
(a) Rafferty Capital Markets, Inc., 1311 Mamaroneck Avenue, White Plains,
New York 10605, serves as principal underwriter for the Potomac Insurance Trust,
Potomac Funds, Badgley Funds, Homestate Group and Texas Capital Value Funds.
(b) The director and officers of Rafferty Capital Markets, Inc. are:
<TABLE>
<CAPTION>
Positions and Offices with Position and Offices
Name Underwriter With Registrant
---- ----------- ---------------
<S> <C> <C>
Thomas A. Mulrooney President Chief Operating Officer
Derek B. Park Senior Vice President, None
Equity
C-3
<PAGE>
Lawrence C. Rafferty Director Chief Executive Officer,
Chairman of the Board
of Trustees
Stephen P. Sprague CFO/FINOP Treasurer, Controller,
and Assistant Secretary
</TABLE>
The principal business address of each of the persons listed above is 1311
Mamaroneck Avenue, White Plains, New York 10605.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
The books and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 are maintained in the physical possession of the
Potomac Funds' investment adviser, administrator, custodian, subcustodian, or
transfer agent.
Item 29. MANAGEMENT SERVICES
-------------------
Not applicable.
Item 30. UNDERTAKINGS
------------
Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered a copy of its latest annual report to Shareholders, upon request
and without charge.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Registration Statement on Form N-1A to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of White Plains and the
State of New York, on December 28, 1999.
POTOMAC INSURANCE TRUST
By: /s/ Lawrence C. Rafferty
------------------------------
Lawrence C. Rafferty
Chief Executive Officer
Attest:
/s/ Timothy P. Hagan
- ------------------------
Timothy P. Hagan
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Lawrence C. Rafferty Trustee and Chief December 28, 1999
- --------------------------- Executive Officer
Lawrence C. Rafferty
/s/ Timothy P. Hagan Chief Financial December 28, 1999
- ---------------------- Officer
Timothy P. Hagan
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
- ------ ----------- ----
(a) Declaration of Trust - filed herewith
(b) By-Laws - filed herewith
(c) Voting trust agreement - None
(d)(i) Form of Investment Advisory Agreement between the Potomac Insurance
Trust and Rafferty Asset Management, LLC*
(ii) Form of Fund Administration Servicing Agreement between the Potomac
Insurance Trust and Firstar Mutual Fund Services, LLC*
(e)(i) Form of Distribution Agreement between the Potomac Insurance Trust
and Rafferty Capital Markets, Inc.*
(ii) Form of Dealer Agreement-None
(f) Bonus, profit sharing contracts - None
(g)(i) Form of Custodian Agreement between the Potomac Insurance Trust
and Firstar Bank Milwaukee, NA*
(h)(i) Form of Transfer Agent Agreement between the Potomac Insurance Trust
and Firstar Mutual Fund Services, LLC*
(ii) Form of Fund Accounting Servicing Agreement between the Potomac
Insurance Trust and Firstar Mutual Fund Services, LLC*
(iii) Form of Fulfillment Servicing Agreement between the Potomac
Insurance Trust and Firstar Mutual Fund Services, LLC*
(i) Opinion and consent of counsel*
(j) Consent of Independent Auditors*
(k) Financial statements omitted from prospectus - None
(l) Letter of investment intent*
(m) Class B Plan pursuant to Rule 12b-1*
(n) Plan pursuant to Rule 18f-3*
- -------
* To be filed by subsequent amendment.
POTOMAC INSURANCE TRUST
A MASSACHUSETTS BUSINESS TRUST
DECLARATION OF TRUST
DECEMBER 28, 1999
<PAGE>
POTOMAC INSURANCE TRUST
DECLARATION OF TRUST
TABLE OF CONTENTS
PAGE
ARTICLE I -NAME, PRINCIPAL PLACE OF BUSINESS AND DEFINITIONS................1
Section 1: Name..........................................................1
Section 2: Principal Place of Business...................................1
Section 3: Resident Agent................................................1
Section 4: Definitions....................................................2
ARTICLE II - PURPOSE OF TRUST...............................................3
ARTICLE III - BENEFICIAL INTEREST...........................................3
Section 1: Shares of Beneficial Interest.................................3
Section 2: Ownership of Shares...........................................3
Section 3: Investment in the Trust.......................................3
Section 4: Assets and Liabilities of the Trust...........................4
Section 5: No Preemptive Rights..........................................4
Section 6: Limitation on Personal Liability..............................4
ARTICLE IV -THE TRUSTEES....................................................5
Section 1: Management of the Trust.......................................5
Section 2: Election of Trustees..........................................5
Section 3: Term of Office of Trustees....................................5
Section 4: Resignation and Appointment of Trustees.......................5
Section 5: Temporary Absence of Trustee..................................6
Section 6: Number of Trustees............................................6
Section 7: Effect of Death, Resignation, Etc. of a Trustee...............6
Section 8: Ownership of Trust Assets.....................................6
ARTICLE V - POWERS OF THE TRUSTEES..........................................7
Section 1: Powers........................................................7
Section 2: Trustees and Officers as Shareholders.........................9
Section 3: Action by the Trustees........................................9
Section 4: Chairman of the Trustees.....................................10
ARTICLE VI -- EXPENSES OF THE TRUST........................................10
ARTICLE VII - INVESTMENT ADVISER, PRINCIPAL UNDERWRITER AND TRANSFER
AGENT........................................................11
Section 1: Investment Advisers and Subadvisers..........................11
Section 2: Principal Underwriter........................................11
Section 3: Transfer Agent...............................................11
Section 4: Parties to Contract..........................................12
ARTICLE VIII - SHAREHOLDERS' VOTING POWERS AND MEETINGS....................12
Section 1: Voting Power.................................................12
<PAGE>
Section 2: Meetings.....................................................13
Section 3: Quorum and Required Vote.....................................13
ARTICLE IX - CUSTODIAN.....................................................14
Section 1: Appointment and Duties.......................................14
Section 2: Employment of Sub-Custodians.................................14
Section 3: Central Depository System....................................14
ARTICLE X - DISTRIBUTIONS AND REDEMPTIONS..................................15
Section 1: Distributions................................................15
Section 2: Redemptions..................................................15
Section 3: Determination of Net Asset Value and Valuation of
Portfolio Assets.............................................16
Section 4: Suspension of the Right of Redemption........................16
ARTICLE XI - LIMITATION OF LIABILITY AND INDEMNIFICATION...................17
Section 1: Limitation of Liability......................................17
Section 2: Indemnification..............................................17
Section 3: Shareholders.................................................19
ARTICLE XII - MISCELLANEOUS................................................19
Section 1: Trust Not A Partnership......................................19
Section 2: Trustees' Good Faith Action, Expert Advice, No Bond or
Surety.......................................................19
Section 3: Establishment of Record Dates................................19
Section 4: Termination of Trust.........................................20
Section 5: Filing of Copies, References, Headings.......................21
Section 6: Applicable Law...............................................21
Section 7: Amendments...................................................22
Section 8: Fiscal Year..................................................22
Section 9: Notice to Other Parties......................................22
ii
POTOMAC INSURANCE TRUST
DECLARATION OF TRUST
This DECLARATION OF TRUST is made on December 28, 1999, by the undersigned
Trustee and by the holders of Shares of beneficial interest to be issued
hereunder as hereinafter provided.
WITNESSETH that
WHEREAS, the Trustee has agreed to manage all property coming into their
hands as a trustee of a Massachusetts voluntary association with transferable
Shares in accordance with the provisions hereinafter set forth; and
WHEREAS, the Trustee hereby desires to establish a trust for the
investment and reinvestment of funds contributed thereto;
NOW, THEREFORE, the Trustee hereby declares that he will hold all cash,
securities and other assets, which he may from time to time acquire in any
manner as a Trustee hereunder IN TRUST to manage and dispose of the same upon
the following terms and conditions for the pro rata benefit of the holders from
time to time of Shares in this Trust as hereinafter set forth.
ARTICLE I
NAME, PRINCIPAL PLACE OF BUSINESS AND DEFINITIONS
NAME
SECTION 1. This Trust shall be known as the "Potomac Insurance Trust" and
the Trustees shall conduct the business of the Trust under that name or any
other name as they may from time to time determine.
PRINCIPAL PLACE OF BUSINESS
SECTION 2. The principal place of business of the Trust shall be 1311
Mamaroneck Avenue, White Plains, New York 10605 or such other place of business
as the Trustees may designate.
RESIDENT AGENT
SECTION 3. The resident agent for the Trust in Massachusetts shall be CT
Corporation System, 2 Oliver Street, Boston, Massachusetts, or such other person
as the Trustees may from time to time designate.
<PAGE>
DEFINITIONS
SECTION 4. Wherever used herein, unless otherwise required by the context
or specifically provided:
(a) The "1940 Act" refers to the Investment Company Act of 1940, as
amended from time to time;
(b) The terms "Affiliated Person," "Assignment," "Commission,"
"Interested Person," "Majority Shareholder Vote" (the 67% or 50%
requirement of the third sentence of Section 2(a)(42) of the 1940 Act,
whichever may be applicable) and "Principal Underwriter" shall have the
meanings given them in the 1940 Act, as amended from time to time;
(c) "By-Laws" shall mean the By-Laws of the Trust, as amended from
time to time;
(d) "Class" refers to the class of Shares of a Series of the Trust
established in accordance with the provisions of Article III;
(e) "Declaration of Trust" shall mean this Declaration of Trust, as
amended or restated from time to time;
(f) "Net Asset Value" means the net asset value of each Trust series
as determined in the manner provided in Article X, Section 3;
(g) "Series" refers to series of Shares of the Trust established in
accordance with the provisions of Article III;
(h) "Shareholder" means a record owner of Shares of the Trust;
(i) "Shares" means the equal proportionate transferable units of
interest into which the beneficial interest of the Trust or any series or
class thereof shall be divided from time to time, and includes fractions
of shares as well as whole shares (all of the transferable units of a
series or of a single class may be referred to as "Shares" as the context
may require) consistent with the requirements of federal and/or other
securities laws;
(j) The "Trust" refers to the Potomac Insurance Trust; and
(k) The "Trustees" refers to the individual trustees in their
capacity as trustees duly elected or appointed, qualified hereunder and
serving as trustees of the Trust and their successor or successors for the
time being in office as such trustee or trustees.
2
<PAGE>
ARTICLE II
PURPOSE OF TRUST
The purpose of the Trust is to provide investors, through one or more
Series or Classes thereof as designated by the Trustees, with a continuous
source of managed investments in securities.
ARTICLE III
BENEFICIAL INTEREST
SHARES OF BENEFICIAL INTEREST
SECTION 1. The Shares of the Trust shall be issued in one or more Series
and/or Classes as the Trustees may, without Shareholder approval, authorize.
Each Series shall be preferred over all other Series in respect of the assets
allocated to that Series. The beneficial interest in each Series shall at all
times be divided into Shares, with or without par value as the Trustees may
specify, each of which shall represent an equal proportionate interest in the
Series with each other Share of the same Series, none having priority or
preference over another. Each Series shall be represented by one or more Classes
of Shares, with each Class possessing such rights (including, notwithstanding
any contrary provision herein, voting rights) as the Trustees may, without
Shareholder approval, authorize. Shares of each Series, when issued, shall be
fully paid and non-assessable. The number of Shares authorized shall be
unlimited, and the Shares so authorized may be represented in part by fractional
Shares. The Trustees may from time to time and without Shareholder approval
divide or combine the Shares of any Series or Class into a greater or lesser
number without thereby changing the proportionate beneficial interests in the
Series or Class.
OWNERSHIP OF SHARES
SECTION 2. The ownership of Shares shall be recorded in the books of the
Trust. The Trustees may make such rules as they consider appropriate for the
transfer of Shares and similar matters. The record books of the Trust shall be
conclusive as to who are the holders of Shares and as to the number of Shares
held from time to time by each Shareholder.
INVESTMENT IN THE TRUST
SECTION 3. The Trustees shall accept investments in the Trust from such
persons and on such terms as they may from time to time authorize. As determined
by guidelines established by the Trustees, such investments may be in the form
of cash or securities in which the Trust (or each designated Series) is
authorized to invest, valued as provided in Article X, Section 3. Investments in
the Trust shall be credited to each Shareholder's account in the form of full or
fractional Shares at the Net Asset Value per Share next determined after the
investment is received; provided, however, that the Trustees may, in their sole
discretion: (a) impose a sales charge upon investments in the Trust or Series or
3
<PAGE>
any Classes thereof and (b) issue fractional Shares. The Trustees shall have, in
their sole discretion, the right to refuse to accept investments in the Trust at
any time.
ASSETS AND LIABILITIES OF THE TRUST
SECTION 4. All consideration received by the Trust for the issue or sale
of Shares of a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall be
referred to as "assets belonging to" that Series and shall be held by the
Trustees in Trust for the benefit of the Shareholders of that Series. The assets
belonging to each particular Series shall be charged with the liabilities of
that Series and all expenses, costs, charges and reserves attributable to that
Series, except that liabilities and expenses allocated solely to a particular
Class shall be borne by that Class. In addition, any assets, income, earnings,
profits, and proceeds thereof, funds, or payments or any general liabilities,
expenses, costs, charges or reserves of the Trust that are not readily
identifiable as belonging to or chargeable to any particular Series or Class
shall be allocated by the Trustees between and among one or more of the Series
or Classes in such manner as they, in their sole discretion, deem fair and
equitable. Each such allocation shall be conclusive and binding upon the
Shareholders of all Series or Classes for all purposes, and shall be referred to
as assets belonging to that Series or Class. Any creditor of any Series may look
only to the assets of that Series to satisfy such creditor's debt.
NO PREEMPTIVE RIGHTS
SECTION 5. Shareholders shall have no preemptive or other right to
subscribe to any additional Shares or other securities issued by the Trust.
LIMITATION ON PERSONAL LIABILITY
SECTION 6. The Trustees shall have no power to bind any Shareholder
personally or to call upon any Shareholder for the payment of any sum of money
or assessment whatsoever other than such as the Shareholder may at any time
personally agree to pay by way of subscription for any Shares or otherwise.
Every note, bond, contract or other undertaking issued by or on behalf of the
Trust or the Trustees relating to the Trust shall include a recitation limiting
the obligation represented thereby to the Trust and its assets (but the omission
of such a recitation shall not operate to bind any Shareholder).
4
<PAGE>
ARTICLE IV
THE TRUSTEES
MANAGEMENT OF THE TRUST
SECTION 1. The business and affairs of the Trust shall be managed by the
Trustees, and they shall have all powers necessary and desirable to carry out
that responsibility.
ELECTION OF TRUSTEES
SECTION 2. On a date fixed by the Trustees, the Shareholders shall elect
not less than three (3) Trustees. A Trustee shall not be required to be a
Shareholder of the Trust. Until such election, the Trustee shall be Lawrence
Rafferty and such other individuals as the Board of Trustees shall appoint
pursuant to Section 4 of Article IV.
TERM OF OFFICE OF TRUSTEES
SECTION 3. The Trustees shall hold office during the lifetime of the
Trust, and until its termination as hereinafter provided, except that: (a) any
Trustee may resign his or her trust by written instrument signed by him or her
and delivered to the Trust's President or the other Trustees, which resignation
shall take effect upon such delivery or upon such later date as is specified
therein; (b) any Trustee may be removed at any time by written instrument,
signed by at least two-thirds of the number of Trustees prior to such removal,
specifying the date when such removal shall become effective; and (c) a Trustee
may be removed at any special meeting of Shareholders of the Trust by a vote of
two-thirds of the outstanding Shares. Upon the resignation or removal of a
Trustee, or his or her otherwise ceasing to be a Trustee, he or she shall
execute and deliver such documents as the remaining Trustees shall require for
the purpose of conveying to the Trust or the remaining Trustees any Trust
property held in the name of the resigning or removed Trustee. Upon the
incapacity or death of any Trustee, his legal representative shall execute and
deliver on his or her behalf such documents as the remaining Trustees shall
require as provided in the preceding sentence.
RESIGNATION AND APPOINTMENT OF TRUSTEES
SECTION 4. Any vacancy on the Board of Trustees that results from an
increase in the number of Trustees may be filled by a majority of the entire
Board of Trustees, provided that a quorum is present, and any other vacancy that
shall exist for any reason, including, but not limited to, declination to assume
office, death, resignation, or removal, the remaining Trustees shall fill such
vacancy by appointing such other person as they in their discretion shall see
fit, consistent with the limitations under the 1940 Act. Such appointment shall
be evidenced by a written instrument signed by a majority of the Trustees then
in office or by recording in the records of the Trust, whereupon the appointment
shall take effect. An appointment of a Trustee may be made by the Trustees then
in office in anticipation of a vacancy to occur by reason of retirement,
5
<PAGE>
resignation or increase in number of Trustees effective at a later date,
provided that said appointment shall become effective only at or after the
effective date of said retirement, resignation or increase in number of
Trustees. As soon as any Trustee so appointed shall have accepted this trust,
the trust estate shall vest in the new Trustee or Trustees, together with the
continuing Trustees, without any further act or conveyance, and he or she shall
be deemed a Trustee hereunder. The power of appointment of Trustees is subject
to the provisions of Section 16(a) of the 1940 Act.
TEMPORARY ABSENCE OF TRUSTEE
SECTION 5. Any Trustee may, by power of attorney, delegate his or her
power for a period not exceeding six months at any one time to any other Trustee
or Trustees, provided that in no case shall less than two Trustees personally
exercise the other powers hereunder, except as herein otherwise expressly
provided.
NUMBER OF TRUSTEES
SECTION 6. The number of Trustees serving hereunder at any time shall be
determined by the Trustees themselves and shall not be less than three (3) nor
more than twelve (12). Whenever a vacancy in the Board of Trustees shall occur,
until such vacancy is filled, or while any Trustee is physically or mentally
incapacitated by reason of disease or otherwise, the other Trustees shall have
all the powers hereunder and the certificate of the other Trustees of such
vacancy, absence or incapacity, shall be conclusive.
EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE
SECTION 7. The death, declination, resignation to assume office,
retirement, removal, incapacity or inability of the Trustees, or any one of
them, shall not operate to annul the Trust or to revoke any existing agency
created pursuant to the terms of this Declaration of Trust.
OWNERSHIP OF TRUST ASSETS
SECTION 8. The assets of the Trust shall be held separate and apart from
any assets now or hereafter held in any capacity other than as Trustee hereunder
by the Trustees or any successor Trustees. All of the assets of the Trust shall
at all times be considered as vested in the Trustees. No Shareholder shall be
deemed to have a severable ownership in any individual asset of the Trust or any
right of partition or possession thereof, but each Shareholder shall have a
proportionate undivided beneficial interest in the Trust.
6
<PAGE>
ARTICLE V
POWERS OF THE TRUSTEES
POWERS
SECTION 1. The Trustees in all instances shall act as principals, and are
and shall be free from the control of the Shareholders. The Trustees shall have
full power and authority to do any and all acts and to make and execute any and
all contracts and instruments that they may consider necessary or appropriate in
connection with the management of the Trust. The Trustees shall not in any way
be bound or limited by present or future laws or customs in regard to trust
investments, but shall have full authority and power to make any and all
investments that they, in their sole discretion, shall deem proper to accomplish
the purpose of this Trust. Without limiting the foregoing, but subject to any
applicable limitation in this Declaration of Trust or the By-Laws of the Trust,
the Trustees shall have power and authority:
(a) To invest and reinvest cash and other property, and to hold cash
or other property uninvested, without in any event being bound or limited
by any present or future law or custom in regard to investments by
Trustees, and to sell, exchange, lend, pledge, mortgage, hypothecate,
write options on and lease any or all of the assets of the Trust; to
purchase and sell options on securities, currencies, indices, futures
contracts and other financial instruments and enter into closing
transactions in connection therewith; to enter into all types of
commodities contracts, including without limitation the purchase and sale
of futures contracts and forward contracts on securities, indices,
currencies, and other financial instruments; to engage in forward
commitment, "when issued" and delayed delivery transactions; to enter into
repurchase agreements and reverse repurchase agreements; and to employ all
types of hedging techniques and investment management strategies.
(b) To adopt By-Laws not inconsistent with this Declaration of Trust
providing for the conduct of the business of the Trust and to amend and
repeal them to the extent that the rights of amendment and repeal are not
reserved to Shareholders.
(c) To elect and remove such officers and appoint and terminate such
agents as they consider appropriate.
(d) To employ a bank, trust company or other entity permitted by the
Commission to serve as custodian ("Custodian") of any assets of the Trust
subject to any conditions set forth in this Declaration of Trust or in the
By-Laws, if any.
(e) To retain a transfer agent and shareholder servicing agent, or
both.
(f) To provide for the distribution of Shares either through a
principal underwriter in the manner hereinafter provided for or by the
Trust itself, or both.
7
<PAGE>
(g) To set record dates in the manner hereinafter provided.
(h) To delegate such authority as they consider desirable to any
officers of the Trust and to any agent, independent contractor, Custodian
or underwriter.
(i) To sell or exchange any or all of the assets of the Trust,
subject to the provisions of Article XII, Section 4(b) hereof.
(j) To vote or give assent, or exercise any rights of ownership with
respect to stock or other securities or property; and to execute and
deliver powers of attorney to such person or persons as the Trustees shall
deem proper, granting to such person or persons such power and discretion
with relation to securities or property as the Trustees shall deem proper.
(k) To exercise powers and rights of subscription or otherwise which
in any manner arise out of ownership of securities.
(l) To hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form; or in its
own name or in the name of a Custodian or a nominee or nominees, subject
in whichever case to proper safeguards according to the usual practice of
Massachusetts trust companies or investment companies.
(m) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern, any security of
which is held in the Trust; to consent to any contract, lease, mortgage,
purchase, or sale of property by such corporation or concern; and to pay
calls or subscriptions with respect to any security held in the Trust.
(n) To compromise, arbitrate, or otherwise adjust claims in favor of
or against the Trust or any matter in controversy including, but not
limited to, claims for taxes.
(o) To make distributions of income and of capital gains to
Shareholders in the manner hereinafter provided.
(p) To borrow money.
(q) To establish, from time to time, a minimum total investment for
Shareholders, and to require redemption of the Shares of any Shareholders
whose investment is less than such minimum upon giving notice to such
Shareholder. No one dealing with the Trustees shall be under any
obligation to make any inquiry concerning the authority of the Trustees,
or to see to the application of any payments made or property transferred
to the Trustees or upon their order.
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(r) To retain an administrator, manager, investment advisers and/or
investment subadvisers.
(s) To establish separate and distinct Series with separately
defined investment objectives, policies and purposes, and to allocate
assets, liabilities and expenses of the Trust to a particular series of
Shares or to apportion the same among two or more Series, provided that
any liability or expense incurred by a particular Series of Shares shall
be payable solely out of the assets of that Series.
(t) To establish separate and distinct Classes for one or more
Series, with each Class having such rights and differences as determined
by the Trustees and to allocate assets, liabilities and expenses of a
particular Class or to apportion the same among or between two or more
Classes, provided that any liabilities or expenses incurred by a
particular Class shall be payable solely out of the assets belonging to
that Class.
(u) To purchase and pay for entirely out of Trust property such
insurance as they may deem necessary or appropriate for the conduct of the
business, including, without limitation, insurance policies insuring the
assets of the Trust and payment of distributions and principal on its
portfolio investments, and insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, investment advisers or managers,
principal underwriters, or independent contractors of the Trust
individually against all claims and liabilities of every nature arising by
reason of holding, being or having held any such office or position, or by
reason of any action alleged to have been taken or omitted by any such
person as Shareholder, Trustee, officer, employee, agent, investment
adviser or manager, principal underwriter, or independent contractor,
including any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify
such person against such liability.
TRUSTEES AND OFFICERS AS SHAREHOLDERS
SECTION 2. Subject only to the general limitations herein contained as to
the sale and purchase of Trust Shares and any restrictions that may be contained
in the By-Laws:
(a) Any Trustee, officer or other agent of the Trust may acquire,
own and dispose of Shares to the same extent as if he or she were not a
Trustee, officer or agent;
(b) The Trustees may issue and sell or cause to be issued and sold
Shares to (and buy such Shares from) any Interested Person.
ACTION BY THE TRUSTEES
SECTION 3. The Trustees shall act by majority vote at a meeting duly
called or by unanimous written consent without a meeting or by telephone consent
provided a quorum of Trustees participate in any such telephonic meeting, unless
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the 1940 Act requires that a particular action be taken only at an in-person
meeting of the Trustees. At any meeting of the Trustees, a majority of the
Trustees shall constitute a quorum. Meetings of the Trustees may be called
orally or in writing by the Chairman of the Trustees or by any two other
Trustees. Notice of the time, date and place of all meetings of the Trustees
shall be given to each Trustee as provided in the By-Laws.
Notice need not be given to any Trustee who attends the meeting without
objecting to the lack of notice or who executes a written waiver of notice with
respect to the meeting. Subject to the requirements of the 1940 Act, the
Trustees by majority vote may delegate to any one of their number the authority
to approve particular matters or take particular actions on behalf of the Trust.
CHAIRMAN OF THE TRUSTEES
SECTION 4. The Trustees may appoint one of their number to be Chairman of
the Board of Trustees and to perform such duties as the Trustees may designate.
ARTICLE VI
EXPENSES OF THE TRUST
Subject to the provisions of Article III, Section 4, the Trustees are
authorized to have paid from the Trust property or the assets belonging to the
Trust, as they deem fair and appropriate, expenses and disbursements of the
Trust, including, without limitation, fees and expenses of Trustees who are not
Interested Persons of the Trust, interest expenses, taxes, fees and commissions
of every kind, expenses of pricing Trust portfolio securities, expenses of
issue, repurchase and redemption of Shares including expenses attributable to a
program of periodic repurchases or redemptions, expenses of registering and
qualifying the Trust and its Shares under federal and state laws and
regulations, charges of investment advisers, managers, administrators,
Custodians, transfer agents, and registrars, expenses of preparing and
typesetting Prospectuses and Statements of Additional Information, expenses of
printing and distributing such documents sent to existing Shareholders, auditing
and legal expenses, reports to Shareholders, expenses of meetings of
Shareholders and proxy solicitations therefor, insurance expenses, association
membership dues and for such non-recurring items as may arise, including
litigation to which the Trust is a party, and for all losses and liabilities by
them incurred in administering the Trust, and for the payment of such expenses,
disbursements, losses and liabilities the Trustees shall have a lien on the
assets belonging to the Trust prior to any rights or interests of the
Shareholders thereto. This section shall not preclude the Trust from directly
paying any of the aforementioned fees and expenses.
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ARTICLE VII
INVESTMENT ADVISER, PRINCIPAL UNDERWRITER AND TRANSFER AGENT
INVESTMENT ADVISERS AND SUBADVISERS
SECTION 1. Subject to a Majority Shareholder Vote when required by the
1940 Act, the Trustees in their discretion from time to time may enter into one
or more investment advisory or similar agreements on behalf of the Trust or any
Series thereof whereby the other parties to such agreements shall undertake to
furnish the Trust and any Series thereof such investment advisory, statistical
and research facilities and services and such other facilities and services, if
any, and all upon such terms and conditions as the Trustees may in their
discretion determine. Notwithstanding any provisions of this Declaration of
Trust, the Trustees may authorize the investment advisers (subject to such
general or specific instructions as the Trustees may from time to time adopt) to
effect purchases, sales or exchanges of portfolio securities and other
investment instruments of the Trust on behalf of the Trustees or may authorize
any officer, agent, or Trustee to effect such purchases, sales or exchanges
pursuant to recommendations of the investment advisers (and all without further
action by the Trustees). Any such purchases, sales and exchanges shall be deemed
to have been authorized by all of the Trustees. The Trustees may, subject to
applicable requirements of the 1940 Act, including those relating to Shareholder
approval, authorize the investment advisers to employ one or more subadvisers
from time to time to perform such of the acts and services of the investment
adviser, and upon such terms and conditions, as may be agreed upon between the
investment adviser and subadviser.
PRINCIPAL UNDERWRITER
SECTION 2. The Trustees in their discretion from time to time may enter
into an agreement(s) on behalf of the Trust or any Series or Class thereof
providing for the sale of the Shares, whereby the Trust may either agree to sell
the Shares to the other party to the agreement or appoint such other party its
sales agent for such Shares. In either case, the agreement shall be on such
terms and conditions as may be prescribed in the By-Laws, if any, and such
further terms and conditions as the Trustees may in their discretion determine
to be not inconsistent with the provisions of this Article VII, or of the
By-Laws, if any; and such agreement may also provide for the repurchase or sale
of Shares by such other party as principal or as agent of the Trust.
Alternatively, or in addition thereto, the Trust can directly distribute its
Shares and, if necessary in connection with such distribution, register as a
broker-dealer in appropriate jurisdictions. The Trustees may in their discretion
adopt a plan or plans of distribution and enter into any related agreements
whereby the Trust finances directly or indirectly any activity that is primarily
intended to result in sales of Shares.
TRANSFER AGENT
SECTION 3. The Trustees in their discretion from time to time may enter
into a transfer agency and shareholder service agreement whereby the other party
shall undertake to furnish the Trust or any Series or Class with transfer agency
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and shareholder services. The agreement shall be on such terms and conditions as
the Trustees may in their discretion determine are not inconsistent with the
provisions of this Declaration of Trust or of the By-Laws, if any. Such services
may be provided by one or more entities including one or more agents of such
parties.
PARTIES TO CONTRACT
SECTION 4. Any agreement of the character described in Sections 1, 2 and 3
of this Article VII or in Article IX hereof may be entered into with any
corporation, firm, partnership, trust or association, although one or more of
the Trustees or officers of the Trust may be an officer, director, trustee,
shareholder or member of such other party to the agreement, and no such
agreement shall be invalidated or rendered voidable by reason of the existence
of any relationship, nor shall any person holding such relationship be liable
merely by reason of such relationship for any loss or expense to the Trust under
or by reason of said agreement or accountable for any profit realized directly
or indirectly therefrom, provided that the agreement when entered into was
reasonable and fair and not inconsistent with the provisions of this Article VII
or the By-Laws, if any. The same person (including a firm, corporation,
partnership, trust, or association) may be the other party to agreements entered
into pursuant to Sections 1, 2 and 3 above or Article IX, and any individual may
be financially interested or otherwise affiliated with persons who are parties
to any or all of the agreements mentioned in this Section 4.
ARTICLE VIII
SHAREHOLDERS' VOTING POWERS AND MEETINGS
VOTING POWERS
SECTION 1. The Shareholders shall have power to vote: (i) for the election
of Trustees as provided in Article IV, Section 2, (ii) for the removal of
Trustees as provided in Article IV, Section 3(c), (iii) with respect to any
investment advisory agreement as provided in Article VII, Section 1, (iv) with
respect to the amendment of this Declaration of Trust as provided in Article
XII, Section 7, (v) to the same extent as the shareholders of a Massachusetts
business corporation, as to whether or not a court action, proceeding or claim
should be brought or maintained derivatively or as a class action on behalf of
the Trust or the Shareholders, provided, however, that a Shareholder of a
particular Series or Class shall not be entitled to bring any derivative or
class action on behalf of any other Series or Class of the Trust, and (vi) with
respect to such additional matters relating to the Trust as may be required or
authorized by law, by this Declaration of Trust, or the By-Laws of the Trust, if
any, or any registration statement of the Trust with the Commission or any
State, as the Trustees may consider desirable. On any matter submitted to a vote
of Shareholders, all Shares shall be voted in the aggregate and not by
individual Series or Class; except (i) when required by the 1940 Act or (ii)
when the Trustees have determined that the matter affects only the interests of
one or more Series or Classes, then only the Shareholders of such Series or
Classes shall be entitled to vote thereon. Each whole Share shall be entitled to
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one vote as to any matter on which it is entitled to vote, and each fractional
Share shall be entitled to a proportionate fractional vote. There shall be no
cumulative voting in the election of Trustees. Shares may be voted in person or
by proxy. Until Shares are issued, the Trustees may exercise all rights of
Shareholders and may take any action required or permitted by law, this
Declaration of Trust or any By-Laws of the Trust to be taken by Shareholders.
MEETINGS
SECTION 2. Special meetings of the Shareholders may be called by the
Trustees and may be held at the principal office of the Trust or such other
place as the Trustees may designate. Special meetings also shall be called by
the Trustees for the purpose of removing one or more Trustees upon the written
request for such a meeting by Shareholders owning at least 10% of the
outstanding Shares entitled to vote. Whenever ten or more Shareholders meeting
the qualifications set forth in Section 16(c) of the 1940 Act, as the same may
be amended from time to time, seek the opportunity of furnishing materials to
the other Shareholders with a view to obtaining signatures on such a request for
a meeting, the Trustees shall comply with the provisions of said Section 16(c)
with respect to providing such Shareholders access to the list of the
Shareholders of record of the Trust or the mailing of such materials to such
Shareholders of record. Shareholders shall be entitled to at least 15 days'
notice of any meeting.
QUORUM AND REQUIRED VOTE
SECTION 3. A majority of Shares entitled to vote in person or by proxy
shall be a quorum for the transaction of business at a Shareholders' meeting,
except that where any provision of law or of this Declaration of Trust permits
or requires that holders of any Series or Class shall vote as a Series or Class,
then a majority of the aggregate number of Shares of that Series or Class
entitled to vote shall be necessary to constitute a quorum for the transaction
of business by that Series or Class. Any lesser number shall be sufficient for
adjournments. Any adjourned session or sessions may be held, within a reasonable
time after the date set for the original meeting, without the necessity of
further notice. Except when a larger vote is required by any provision of this
Declaration of Trust, the By-Laws or applicable law, a majority of the Shares
voted in person or by proxy shall decide any questions and a plurality shall
elect a Trustee, provided that where any provision of law or of this Declaration
of Trust permits or requires that the holders of any Series or Class shall vote
as a Series or Class, then a majority of the Shares of that Series or Class
voted on the matter shall decide that matter insofar as that Series or Class is
concerned.
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ARTICLE IX
CUSTODIAN
APPOINTMENT AND DUTIES
SECTION 1. The Trustees shall at all times employ a bank or trust company
having capital, surplus and undivided profits of at least two million dollars
($2,000,000) as Custodian on such basis of compensation as may be agreed upon
between the Trustees and the Custodian. The Custodian shall have authority as
agent for the Trust, but subject to such restrictions, limitations and other
requirements, if any, as may be contained in the By-Laws of the Trust:
(a) to hold the securities owned by the Trust and any Series or
Class thereof and deliver the same upon written order;
(b) to receive and take receipt for any moneys due to the Trust and
deposit the same in its own banking department or elsewhere as the
Trustees may direct;
(c) to disburse such funds upon orders or vouchers;
(d) to keep the books and accounts of the Trust and furnish clerical
and accounting services; and
(e) to compute, if authorized to do so by the Trustees, the Trust's
Net Asset Value in accordance with the provisions hereof.
If so directed by a Majority Shareholder Vote, the Custodian shall deliver
and pay over all property of the Trust held by it as specified in such vote.
EMPLOYMENT OF SUB-CUSTODIANS
SECTION 2. The Trustees also may authorize the Custodian to employ one or
more sub-Custodians from time to time to perform such of the acts and services
of the Custodian, and upon such terms and conditions, as may be agreed upon
between the Custodian and such sub-Custodian and approved by the Trustees,
provided that in every case such sub-Custodian shall be (a) a bank or trust
company organized under the laws of the United States or one of the states
thereof and having capital, surplus and undivided profits of at least two
million dollars ($2,000,000) or such other person as may be permitted by the
Commission, or otherwise in accordance with the 1940 Act as from time to time
amended, or (b) an eligible foreign custodian in accordance with Rule 17f-5
under the 1940 Act or any such applicable successor regulation.
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CENTRAL DEPOSITORY SYSTEM
SECTION 3. Subject to such rules, regulations and orders as the Commission
may adopt, the Trustees may direct the Custodian to deposit all or any part of
the securities owned by the Trust in a system for the central handling of
securities established by a national securities exchange or a national
securities association registered with the Commission under the Securities
Exchange Act of 1934, as amended, or such other person as may be permitted by
the Commission, or otherwise in accordance with the 1940 Act as from time to
time amended, pursuant to which system all securities of any particular class of
any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust.
ARTICLE X
DISTRIBUTIONS AND REDEMPTIONS
DISTRIBUTIONS
SECTION 1.
(a) The Trustees may from time to time declare and pay dividends and
other distributions. The amount of such dividends and the payment of them
shall be wholly in the discretion of the Trustees.
(b) The Trustees shall have power, to the fullest extent permitted
by the laws of Massachusetts, at any time to declare and cause to be paid
dividends on Shares from assets of a particular Series, which dividends
and other distributions, at the election of the Trustees, may be paid
daily or otherwise pursuant to a standing resolution or resolutions
adopted only once or with such frequency as the Trustees may determine,
and may be payable in Shares, in cash or otherwise, at the election of
each Shareholder. All dividends and other distributions on Shares of a
particular Series shall be distributed pro rata to the holders of that
Series in proportion to the number of Shares of that Series held by such
holders at the date and time of record established for the payment of such
dividends or distributions, except that such dividends and other
distributions shall appropriately reflect expenses allocated to a
particular Class of such Series.
(c) Anything in this Declaration of Trust to the contrary
notwithstanding, the Trustees may at any time declare and distribute pro
rata among the Shareholders of a particular Series of a Class thereof a
"stock dividend."
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REDEMPTIONS
SECTION 2. In case any Shareholder of record desires to dispose of his or
her Shares, the Shareholder may deposit at the office of the transfer agent or
other authorized agent of the Trust a written request or such other form of
request as the Trustees may from time to time authorize, requesting that the
Trust purchase the Shares in accordance with this Section 2; and the Shareholder
so requesting shall be entitled to require the Trust to purchase, and the Trust
or the Principal Underwriter of the Trust shall purchase, said Shares, but only
at the Net Asset Value thereof (as described in Section 3 hereof) less such
charges as are determined by the Trustees and described in the Trust's
Registration Statement under the Securities Act of 1933, as amended, or any
Prospectus or Statement of Additional Information contained therein, as
supplemented. The Trust shall make payment for any such Shares to be redeemed,
as aforesaid, in cash to the extent required by federal law, and securities from
Trust assets, and payment for such Shares shall be made by the Trust or the
Principal Underwriter to the Shareholder of record within seven (7) days after
the date upon which the request is effective. Provided, however, that if Shares
being redeemed have been purchased by check, the Series may postpone payment
until the Trust has assurance that good payment has been collected for the
purchase of the Shares. The Trust may require Shareholders to pay a sales charge
to the Trust, the Principal Underwriter or any other person designated by the
Trustees upon redemption or repurchase of Shares of any Series or Class in such
amount as shall be determined from time to time by the Trustees. The amount of
such sales charge may, but need not, vary depending on numerous factors,
including without limitation the holding period of the redeemed or repurchased
Shares. The Trustees also may charge a redemption or repurchase fee in such
amount as may be determined from time to time by the Trustees.
DETERMINATION OF NET ASSET VALUE AND VALUATION OF PORTFOLIO ASSETS
SECTION 3. The term "Net Asset Value" of any Series or Class shall mean
that amount by which the assets of any Series or any Class thereof exceed its
liabilities, all as determined by or under the direction of the Trustees. Such
value shall be determined separately for each Series or Class of Shares, as
applicable, and shall be determined on such days and at such times as the
Trustees may determine. The determination shall be made with respect to
securities for which market quotations are readily available, at the market
value of such securities; and with respect to other securities and assets, at
the fair value as determined in good faith by the Trustees, provided, however,
that the Trustees, without Shareholder approval, may alter the method of
appraising portfolio securities insofar as permitted under the 1940 Act and the
rules, regulations and interpretations thereof promulgated or issued by the
Commission or insofar as permitted by any order of the Commission. The Trustees
may delegate any powers and duties under this Section 3 with respect to
appraisal of assets and liabilities. At any time the Trustees may cause the net
asset value per Share last determined to be determined again in similar manner
and may fix the time when such redetermined value shall become effective.
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SUSPENSION OF THE RIGHT OF REDEMPTION
SECTION 4. The Trustees may declare a suspension of the right of
redemption or postpone the date of payment to the extent permitted under the
1940 Act. Such suspension shall take effect at such time as the Trustees shall
specify but not later than the close of business on the business day next
following the declaration of suspension, and thereafter there shall be no right
of redemption or payment until the Trustees shall declare the suspension at an
end. In the case of a suspension of the right of redemption, a Shareholder may
either withdraw his or her request for redemption or receive payment based on
the Net Asset Value per Share existing after the termination of the suspension.
ARTICLE XI
LIMITATION OF LIABILITY AND INDEMNIFICATION
LIMITATION OF LIABILITY
SECTION 1. Provided they have exercised reasonable care and have acted
under the reasonable belief that their actions are in the best interest of the
Trust, the Trustees shall not be responsible for or liable in any event for
neglect or wrongdoing committed by them or any officer, agent, employee or
investment adviser of the Trust, but nothing contained herein shall protect any
Trustee against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
INDEMNIFICATION
SECTION 2.
(a) Subject to the exceptions and limitations contained in paragraph
(b) below:
(i) every person who is, or has been, a Trustee or officer of
the Trust (hereinafter referred to as a "Covered Person") shall be
indemnified by the Trust and/or by the appropriate Series to the
fullest extent permitted by law against liability and against all
expenses reasonably incurred or paid by him or her in connection
with any claim, action, suit or proceeding in which he or she
becomes involved as a party or otherwise by virtue of his or her
being or having been a Covered Person and against amounts paid or
incurred by him or her in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened while a
Covered Person is in office or thereafter, and the words "liability"
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and "expenses" shall include, without limitation, attorneys' fees,
costs, judgments, amounts paid in settlement, fines, penalties and
other liabilities.
(b) No indemnification shall be provided hereunder to a Covered
Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust or
its Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his or her office or (B) not to have acted in good faith
in the reasonable belief that his or her action was in the best
interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Covered Person did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his or her office, (A) by the
court or other body approving the settlement; (B) by at least a
majority of those Trustees who are neither Interested Persons of the
Trust nor parties to the matter based upon a review of readily
available facts (as opposed to a full trial-type inquiry or full
investigation); or (C) by written opinion of independent legal
counsel based upon a review of readily available facts (as opposed
to a full trial-type inquiry); provided, however, that any
Shareholder may, by appropriate legal proceedings, challenge any
such determination by the Trustees, or by independent legal counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not
be exclusive of or affect any other rights to which any Covered Person may
now or hereafter be entitled, shall continue as to a person who has ceased
to be such Trustee or officer and shall inure to the benefit of the heirs,
executors and administrators of such a person. Nothing contained herein
shall affect any rights to indemnification to which Trust personnel, other
than Trustees and officers, and other persons may be entitled by contract
or otherwise under law.
(d) Expenses in connection with the preparation and presentation of
a defense to any claim, action, suit or proceeding of the character
described in paragraph (a) of this Section 2 may be paid by the Trust from
time to time prior to final disposition thereof upon receipt of an
undertaking by or on behalf of such Covered Person that such amount will
be paid over by him or her to the Trust if it is ultimately determined
that he or she is not entitled to indemnification under this Section 2;
provided, however, that:
(i) such Covered Person shall have provided appropriate
security for such undertaking,
(ii) the Trust is insured against losses arising out of any
such advance payments, or
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(iii) either a majority of the Trustees who are neither
interested persons of the Trust nor parties to the matter, or independent
legal counsel in a written opinion, shall have determined, based upon a
review of readily available facts (as opposed to a trial-type inquiry or
full investigation), that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Section 2.
SHAREHOLDERS
SECTION 3. In case any Shareholder or former Shareholder of any Series of
the Trust shall be held to be personally liable solely by reason of his or her
being or having been a Shareholder and not because of his acts or omissions or
for some other reason, the Shareholder or former Shareholder (or his heirs,
executors, administrators or other legal representatives or, in the case of a
corporation or other entity, its corporate or other general successor) shall be
entitled out of the assets belonging to the applicable Series to be held
harmless from and indemnified against all loss and expense arising from such
liability. The Series shall, upon request by the Shareholder, assume the defense
of any claim made against the Shareholder for any act or obligation of the Trust
and satisfy any judgment thereon.
ARTICLE XII
MISCELLANEOUS
TRUST NOT A PARTNERSHIP
SECTION 1. It is hereby expressly declared that a trust and not a
partnership is created hereby. No Trustee hereunder shall have any power to bind
personally either the Trust's officers or any Shareholder. All persons extending
credit to, contracting with or having any claim against the Trust or a
particular Series or the Trustees shall look only to the assets of the Trust or
of such Series, as the case may be, for payment under such credit, contract or
claim; and neither the Shareholders nor the Trustees, nor any of their agents,
whether past, present or future, shall be personally liable therefor. Nothing in
this Declaration of Trust shall protect 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 office of Trustee hereunder.
TRUSTEES' GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY
SECTION 2. The exercise by the Trustees of their powers and discretion
hereunder in good faith and with reasonable care under the circumstances then
prevailing, shall be binding upon everyone interested. Subject to the provisions
of Section 1 of this Article XII and to Article XI, the Trustees shall not be
liable for errors of judgment or mistakes of fact or law. The Trustees may take
advice of counsel or other experts with respect to the meaning and operation of
this Declaration of Trust, and subject to the provisions of Section 1 of this
Article XII and to Article XI, shall be under no liability for any act or
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omission in accordance with such advice or for failing to follow such advice.
The Trustees shall not be required to give any bond as such, nor any surety if a
bond is obtained.
ESTABLISHMENT OF RECORD DATES
SECTION 3. The Trustees may close the stock transfer books of the Trust
for a period not exceeding 60 days preceding the date of any meeting of
Shareholders, or the date for the payment of any dividends, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
Shares shall go into effect; or in lieu of closing the stock transfer books as
aforesaid, the Trustees may fix in advance a date, not exceeding 60 days
preceding the date of any meeting of Shareholders, or the date for payment of
any dividend, or the date for the allotment of rights, or the date when any
change or conversion or exchange of Shares shall go into effect, as a record
date for the determination of the Shareholders entitled to notice of, and to
vote at, any such meeting, or entitled to receive payment of any such dividend,
or to any such allotment of rights, or to exercise the rights in respect of any
such change, conversion or exchange of Shares, and in such case such
Shareholders and only such Shareholders as shall be Shareholders of record on
the date so fixed shall be entitled to such notice of, and to vote at, such
meeting, or to receive payment of such dividend, or to receive such allotment or
rights, or to exercise such rights, as the case may be, notwithstanding any
transfer of any Shares on the books of the Trust after any such record date
fixed as aforesaid. The Trustees need not set a new record date when a
Shareholder meeting is adjourned to achieve a quorum and reconvened more than 60
days after the record date for that meeting.
TERMINATION OF TRUST
SECTION 4.
(a) This Trust shall continue without limitation of time but subject
to the provisions of paragraph (b) of this Section 4.
(b) Subject to a Majority Shareholder Vote of each Series affected
by the matter or, if applicable, by a Majority Shareholder vote of the
Trust, the Trustees may:
(i) sell and convey the assets of the Trust or any affected
Series to another Series or to another trust, partnership,
association or corporation organized under the laws of any state
which is an open-end management investment company as defined in the
1940 Act, for adequate consideration which may include the
assumption of all outstanding obligations, taxes and other
liabilities; accrued or contingent, of the Trust and which may
include shares of beneficial interest or stock of such trust,
partnership, association or corporation; or
(ii) at any time sell and convert into money all or
substantially all of the assets of the Trust or any affected Series.
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Upon making provision for the payment of all such liabilities in
either (i) or (ii) above, by such assumption or otherwise, the Trustees
shall distribute the remaining proceeds or assets (as the case may be)
ratably among the holders of the Shares of the Trust or any affected
Series then outstanding; however, the payment to any particular Class
within such Series may be reduced by any fees, expenses or charges
allocated to that Class. Nothing in this Declaration of Trust shall
preclude the Trustees from distributing such remaining proceeds or assets
so that holders of the Shares of a particular Class of the Trust or any
affected Series receive as their ratable distribution Shares solely of an
analogous class, as determined by the Trustees, of such Series, trust,
partnership, association or corporation.
The Trustees may take any of the actions specified in clauses (i)
and (ii) above without obtaining a Majority Shareholder Vote of any Series
or Class or of the Trust if a majority of the Trustees makes a
determination that the continuation of a Series or Class or the Trust is
not in the best interests of such Series or Class, or the Trust or their
respective Shareholders as a result of factors or events adversely
affecting the ability of such Series or Class or the Trust to conduct its
business and operations in an economically viable manner. Such factors and
events may include: the inability of a Series or Class, or the Trust to
maintain its assets at an appropriate size, changes in laws or regulations
governing the Series or Class, or the Trust or affecting assets of the
type in which such Series or Class, or the Trust invests or economic
developments or trends having a significant adverse impact on the business
or operations of such Series or Class, or the Trust.
(c) Upon completion of the distribution of the remaining assets as
provided in paragraph (b), the Trust or any affected Series shall
terminate and the Trustees shall be discharged of any and all further
liabilities and duties hereunder and the right, title and interest of all
parties shall be canceled and discharged.
FILING OF COPIES, REFERENCES, HEADINGS
SECTION 5. The original or a copy of this instrument and of each amendment
hereto shall be kept at the office of the Trust where it may be inspected by any
Shareholder. A copy of this instrument and of each amendment hereto shall be
filed by the Trustees with the Secretary of the Commonwealth of Massachusetts
and any other governmental office where such filing may from time to time be
required. Anyone dealing with the Trust may rely on a certificate by an officer
or Trustee of the Trust as to whether or not any such amendments to this
Declaration of Trust have been made and as to any matters in connection with the
Trust hereunder, and with the same effect as if it were the original, may rely
on a copy certified by an officer or Trustee of the Trust to be a copy of this
instrument or of any such amendments. In this instrument or in any such
amendments, references to this instrument, and the expressions "herein,"
"hereof" and "hereunder," shall be deemed to refer to this instrument as amended
from time to time. Headings are placed herein for convenience of reference only
and in case of any conflict, the text of this instrument, rather than the
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headings, shall control. This instrument may be executed in any number of
counterparts each of which shall be deemed an original.
APPLICABLE LAW
SECTION 6. The trust set forth in this instrument is made in the
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth. The
Trust shall be of the type commonly called a Massachusetts business trust, and
without limiting the provisions hereof, the Trust may exercise all powers which
are ordinarily exercised by such a trust.
AMENDMENTS
SECTION 7. This instrument can be amended, supplemented or restated by a
majority vote of the Trustees. Amendments, supplements or restatements having
the purpose of materially decreasing the rights of Shareholders in regard to
liability and indemnification, as set forth in Article III, Section 6 and
Article XI, Section 3, respectively, shall require a Majority Shareholder Vote.
Copies of the amended, supplemented or restated Declaration of Trust shall be
filed as specified in Section 5 of this Article XII.
FISCAL YEAR
SECTION 8. The fiscal year of the Trust or of each Series thereof shall
end on a specified date as determined by the Trustees; provided, however, that
the Trustees may, without Shareholder approval, change the fiscal year of the
Trust.
NOTICE TO OTHER PARTIES
SECTION 9. Every note, bond, contract, instrument, certificate or
undertaking made or issued by the Trustees or by any officer or officers shall
give notice that this Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts and shall recite that the same was executed or
made by or on behalf of the Trust or by them as Trustee or Trustees or as
officer or officers and not individually, and that the obligations of such
instrument are not binding upon any of them or the Shareholders individually but
are binding only upon the assets and property of the Trust, and may contain such
further recital as he and she or they may deem appropriate, but the omission
thereof shall not operate to bind any Trustee or Trustees or officer or officers
or Shareholder or Shareholders.
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IN WITNESS WHEREOF, the undersigned, being the initial Trustee of the
Potomac Insurance Trust, has executed this instrument.
12/28/99 /s/ Lawrence C. Rafferty
- ----------------- ----------------------------------
Date Lawrence C. Rafferty
Trustee
Trustee Address:
1311 Mamaroneck Avenue
White Plains, New York 10605
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POTOMAC INSURANCE TRUST
A MASSACHUSETTS BUSINESS TRUST
BY-LAWS
DECEMBER 28, 1999
<PAGE>
POTOMAC INSURANCE TRUST
BY-LAWS
TABLE OF CONTENTS
PAGE
ARTICLE I - OFFICERS AND THEIR ELECTION...................................1
Section 1: Officers..........................................1
Section 2: Election of Officers..............................1
Section 3: Resignations and Removals.........................1
Section 4: Vacancies and Newly Created Offices...............1
ARTICLE II - POWERS AND DUTIES OF OFFICERS AND TRUSTEES....................1
Section 1: Management of the Trust -General..................1
Section 2: Right to Engage in Business.......................2
Section 3: Executive and Other Committees....................2
Section 4: Chairman of the Trustees..........................2
Section 5: President.........................................2
Section 6: Treasurer.........................................2
Section 7: Secretary.........................................2
Section 8: Vice President....................................3
Section 9: Assistant Treasurer...............................3
Section 10: Assistant Secretary..............................3
Section 11: Other Officers...................................3
ARTICLE III - SHAREHOLDERS' MEETINGS........................................3
Section 1: Special Meetings..................................3
Section 2: Notice............................................3
Section 3: Place of Meeting..................................4
Section 4: Ballots...........................................4
Section 5: Proxies...........................................4
Section 6: Action Without a Meeting..........................4
ARTICLE IV - TRUSTEES' MEETINGS............................................4
Section 1: Special Meetings..................................4
Section 2: Regular Meetings..................................5
Section 3: Quorum............................................5
Section 4: Notice............................................5
Section 5: Special Action....................................5
Section 6: Action By Consent.................................5
ARTICLE V - SHARES OF BENEFICIAL INTEREST.................................5
Section 1: Beneficial Interest...............................5
Section 2: Transfer of Shares................................6
Section 3: Equitable Interest Not Recognized.................6
ARTICLE VI - INSPECTION OF BOOKS...........................................6
ARTICLE VII - FISCAL YEAR...................................................6
ARTICLE VIII - AMENDMENTS....................................................6
ARTICLE IX - PRINCIPAL OFFICE OF THE TRUST.................................6
<PAGE>
BY-LAWS OF THE POTOMAC INSURANCE TRUST
These By-Laws of the Potomac Insurance Trust (the "Trust"), a
Massachusetts business trust, are subject to the Trust's Declaration of Trust as
from time to time amended.
ARTICLE I
OFFICERS AND THEIR ELECTION
OFFICERS
SECTION 1. The officers of the Trust shall be a President, a Treasurer, a
Secretary, and such other officers as the Trustees may from time to time elect.
It shall not be necessary for any Trustee or officer to be a holder of shares in
the Trust.
ELECTION OF OFFICERS
SECTION 2. The President, Treasurer and Secretary shall be chosen annually
by the Trustees. Two or more offices may be held by a single person except the
offices of President and Secretary. The officers shall hold office until their
successors are chosen and qualified.
RESIGNATIONS AND REMOVALS
SECTION 3. Any officer of the Trust may resign by filing a written
resignation with the President, the Trustees or the Secretary, which resignation
shall take effect on being so filed or at such time as may be therein specified.
The Trustees may at any meeting remove any officer by a majority vote of the
voting Trustees.
VACANCIES AND NEWLY CREATED OFFICES
SECTION 4. If any vacancy shall occur in any office or if any new office
shall be created, such vacancies or newly created offices may be filled by the
Trustees at any regular or special meeting of the Trustees.
ARTICLE II
POWERS AND DUTIES OF OFFICERS AND TRUSTEES
MANAGEMENT OF THE TRUST - GENERAL
SECTION 1. The business and affairs of the Trust shall be managed by the
Trustees, and they shall have all powers necessary and desirable to carry out
their responsibilities, so far as such powers are not inconsistent with the laws
of the Commonwealth of Massachusetts, the Declaration of Trust, or these
By-Laws.
<PAGE>
RIGHT TO ENGAGE IN BUSINESS
SECTION 2. Any officer or Trustee of the Trust, the investment adviser,
the manager, the administrator and any officers or directors of the investment
adviser, manager or administrator may have personal business interests and may
engage in personal business activities.
EXECUTIVE AND OTHER COMMITTEES
SECTION 3. The Trustees may elect from their own number an executive
committee which shall have the power and duty to conduct the current and
ordinary business of the Trust, including the purchase and sale of securities,
while the Trustees are not in session, and such other powers and duties as the
Trustees may from time to time delegate to such committee. The Trustees also may
elect from their own number other committees from time to time. The number
composing such committees and the powers conferred upon the same are to be
determined by vote of the Trustees.
CHAIRMAN OF THE TRUSTEES
SECTION 4. The Trustees may, but need not, appoint from among their number
a Chairman. He or she shall perform such duties as the Trustees may from time to
time designate.
PRESIDENT
SECTION 5. The President shall be the chief executive officer of the Trust
and, subject to the supervision of the Trustees, shall have general supervision
over the business and policies of the Trust. When present, he or she shall
preside at all meetings of the Shareholders and the Trustees, and he or she may,
subject to the approval of the Trustees, appoint a Trustee to preside at such
meetings in his or her absence. The President shall perform such duties
additional to all of the foregoing as the Trustees may from time to time
designate.
TREASURER
SECTION 6. The Treasurer shall be the principal financial and accounting
officer of the Trust. He or she shall deliver all funds and securities of the
Trust that may come into his or her hands to such bank or trust company as the
Trustees shall employ as Custodian. He or she shall have the custody of the seal
of the Trust. He or she shall make annual reports regarding the business and
condition of the Trust, which reports shall be preserved in Trust records, and
he or she shall furnish such other reports regarding the business and condition
of the Trust as the Trustees may from time to time require. The Treasurer shall
perform such additional duties as the Trustees may from time to time designate.
SECRETARY
SECTION 7. The Secretary shall record in books kept for the purpose all
votes and proceedings of the Trustees and the Shareholders at their respective
meetings. The Secretary shall perform such additional duties as the Trustees may
from time to time designate.
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VICE PRESIDENT
SECTION 8. Any Vice President of the Trust shall perform such duties as
the Trustees may from time to time designate.
ASSISTANT TREASURER
SECTION 9. Any Assistant Treasurer of the Trust shall perform such duties
as the Trustees may from time to time designate.
ASSISTANT SECRETARY
SECTION 10. Any Assistant Secretary of the Trust shall perform such duties
as the Trustees may from time to time designate.
OTHER OFFICERS
SECTION 11. The Trustees from time to time may appoint such other officers
or agents as they may deem advisable, each of whom shall have such title, hold
office for such period, have such authority and perform such duties as the
Trustees may determine. The Trustees from time to time may delegate to one or
more officers or agents the power to appoint any such subordinate officers or
agents and to prescribe their respective rights, terms of office, authorities
and duties.
ARTICLE III
SHAREHOLDERS' MEETINGS
SPECIAL MEETINGS
SECTION 1. A special meeting of the Shareholders shall be called by the
Secretary whenever (a) ordered by the Trustees or (b) requested, for the purpose
of removing a Trustee from office, in writing by the holder or holders of at
least 10% of the outstanding Shares entitled to vote. If the Secretary, when so
ordered or requested, refuses or neglects for more than 30 days to call such
special meeting, the Trustees or the Shareholders so requesting may, in the name
of the Secretary, call the meeting by giving notice thereof in the manner
required when notice is given by the Secretary. If the meeting is a meeting of
the Shareholders of one or more series or classes of Shares, but not a meeting
of all Shareholders of the Trust, then only the Shareholders of such one or more
series shall be entitled to notice of and to vote at such meeting.
NOTICE
SECTION 2. Except as provided above, notices of the place, date and hour,
and purpose(s) for which any special meeting of the Shareholders is called shall
be given by the Secretary by delivering or mailing, postage prepaid, to each
Shareholder entitled to vote at such meeting, a written or printed notification
of such meeting, at least 15 days before the meeting, to such address as may be
registered with the Trust by the Shareholder.
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PLACE OF MEETING
SECTION 3. All special meetings of the Shareholders shall be held at the
principal place of business of the Trust or at such other place in the United
States as the Trustees may designate.
BALLOTS
SECTION 4. The vote upon any question shall be by ballot whenever
requested by any person entitled to vote, but, unless such a request is made,
voting may be conducted in any way approved by the meeting.
PROXIES
SECTION 5. Shareholders entitled to vote may vote either in person or by
proxy, provided that an instrument authorizing such proxy to act is executed by
the Shareholder in writing and dated not more than eleven months before the
meeting, unless the instrument specifically provides for a longer period.
Shareholders may have their votes recorded by telephone, at which time
Shareholders may authorize proxies to vote their Shares in accordance with their
instructions. Shareholders will not execute telephone proxies in writing, but
will receive a confirmation of their instructions by mail and be provided an
opportunity to correct any incorrect instructions. Proxies shall be delivered to
the Secretary of the Trust or other person responsible for recording the
proceedings before being voted. A proxy with respect to Shares held in the name
of two or more persons shall be valid if executed by one of them unless at or
prior to exercise of such proxy the Trust receives a specific written notice to
the contrary from any one of them. Unless otherwise specifically limited by
their terms, proxies shall entitle the holder thereof to vote at any adjournment
of a meeting. A proxy purporting to be exercised by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its exercise
and the burden of providing invalidity shall rest on the challenger. At all
meetings of the Shareholders, unless the voting is conducted by inspectors, all
questions relating to the qualifications of voters, the validity of proxies, and
the acceptance or rejection of votes shall be decided by the chairman of the
meeting.
ACTION WITHOUT A MEETING
SECTION 6. Any action to be taken by Shareholders may be taken without a
meeting if all Shareholders entitled to vote on the matter consent to the action
in writing and the written consents are filed with the records of meetings of
Shareholders of the Trust. Such consent shall be treated for all purposes as a
vote at a meeting.
ARTICLE IV
TRUSTEES' MEETINGS
SPECIAL MEETINGS
SECTION 1. Special meetings of the Trustees shall be called by the
Secretary at the written request of the President, the Treasurer, or any two
Trustees, and if the Secretary, when so requested, refuses or fails for more
than 24 hours to call such meeting, the President, the Treasurer, or such two
Trustees may, in the name of the Secretary, call such meeting by giving due
notice in the manner required when notice is to be given by the Secretary. All
special meetings of the Trustees shall be held at the principal place of
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business of the Trust or such other place in the United States as the person or
persons requesting such meeting to be called may designate, but any meeting may
adjourn to any other place.
REGULAR MEETINGS
SECTION 2. Regular meetings of the Trustees may be held without call or
notice at such places and at such times as the Trustees may from time to time
determine, provided that any Trustee who is absent when such determination is
made shall be given notice of the determination.
QUORUM
SECTION 3. A majority of the Trustees shall constitute a quorum for the
transaction of business.
NOTICE
SECTION 4. Except as otherwise provided, notice of any special meeting of
the Trustees shall be given by the Secretary to each Trustee orally or by mail,
hand delivery or telegram. A notice may be mailed, postage prepaid, addressed to
him or her at his or her address as registered on the books of the Trust or, if
not so registered, at his or her last known address at least three days before
the meeting or delivered to him or her at least two days before the meeting,
provided orally by telephone at least 24 hours before the meeting or sent to him
or her at least 24 hours before the meeting by prepaid telegram addressed to him
or her at said registered address, if any, or if he has no such registered
address, at his last known address.
SPECIAL ACTION
SECTION 5. When all the Trustees shall be present at any meeting, however
called or wherever held, or shall assent to the holding of the meeting without
notice, or after the meeting shall sign a written assent thereto on the record
of such meeting, the acts of such meeting shall be valid as if such meeting had
been regularly held.
ACTION BY CONSENT
SECTION 6. Any action by the Trustees may be taken without a meeting if a
written consent thereto is signed by all the Trustees and filed with the records
of the Trustees' meeting or by telephone consent provided a quorum of Trustees
participate in any such telephone meeting. Such consent shall be treated as a
vote of the Trustees for all purposes.
ARTICLE V
SHARES OF BENEFICIAL INTEREST
BENEFICIAL INTEREST
SECTION 1. The beneficial interest in the Trust shall at all times be
divided into an unlimited number of transferable Shares without par value, each
of which shall represent an equal proportionate interest in the series or class
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thereof with each other Share of any outstanding series or class thereof. No
Share shall have priority or preference over another Share.
TRANSFER OF SHARES
SECTION 2. The Shares of the Trust shall be transferable, so as to affect
the rights of the Trust, only by transfer recorded on the books of the Trust, in
person or by attorney.
EQUITABLE INTEREST NOT RECOGNIZED
SECTION 3. The Trust shall be entitled to treat the holder of record of
any Share or Shares of beneficial interest as the holder in fact thereof and
shall not be bound to recognize any equitable or other claim or interest in such
Share or Shares on the part of any other person except as may be otherwise
expressly provided by law.
ARTICLE VI
INSPECTION OF BOOKS
The Trustees shall from time to time determine whether and to what extent,
and at what times and places, and under what conditions and regulations the
accounts and books of the Trust or any of them shall be open to the inspection
of the Shareholders; and no Shareholder shall have any right to inspect any
account or book or document of the Trust except as conferred by law or otherwise
by the Trustees or by resolution of the Shareholders.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall end on such date as the Trustees shall
from time to time determine.
ARTICLE VIII
AMENDMENTS
These By-Laws may be amended at any meeting of the Trustees of the Trust
by a majority vote.
ARTICLE IX
PRINCIPAL OFFICE OF THE TRUST
The principal place of business of the Trust shall be located within or
without the Commonwealth of Massachusetts as the Trustees may determine or as
they may authorize.
* * * * *
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