MULTIPLE INDEX TRUST
TREASURIES TRUST
P.O. Box 2529
2303 Yorktown Avenue
Lynchburg, Virginia 24501
(804) 846-1361
(800) 544-6060
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information sets forth information regarding API
Trust (the "Trust") and two of its series: the Multiple Index Trust and the
Treasuries Trust (each a "Fund" and collectively, the "Funds"). Yorktown
Management and Research Company, Inc. (the "Adviser") furnishes investment
advisory and administrative services to the Trust and the Funds; Yorktown
Distributors, Inc. ("Distributors") serves as the distributor of Fund shares.
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This Statement of Additional Information is not a prospectus and should be read
only in conjunction with the Prospectus of the Funds dated June 1, 1997. The
Prospectus may be obtained from:
Yorktown Distributors, Inc.
2303 Yorktown Avenue, P.O. Box 2529
Lynchburg, Virginia 24501
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June 1, 1997
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TABLE OF CONTENTS
Page
GENERAL......................................................................1
INVESTMENT RESTRICTIONS AND POLICIES.........................................1
Repurchase Agreements......................................................2
Ratings of Debt Obligations................................................3
Reverse Repurchase Agreements..............................................3
Bank Obligations...........................................................3
Commercial Paper...........................................................4
Lending of Portfolio Securities............................................4
Convertible Securities.....................................................4
llliquid Securities........................................................5
Foreign Securities.........................................................5
Foreign Currency Transactions..............................................6
Industry Concentration.....................................................6
Options Activities.........................................................7
Futures Contracts..........................................................8
Options on Futures Contracts...............................................9
Short Sales................................................................9
Warrants..................................................................10
MANAGEMENT OF THE TRUST.....................................................11
Investment Adviser and Administrator......................................11
Trustees and Officers.....................................................12
DISTRIBUTION OF FUND SHARES.................................................13
PORTFOLIO TRANSACTIONS......................................................13
PRICING AND ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION..................15
Determining Net Asset Value...............................................15
Additional Exchange and Redemption Information............................15
PERFORMANCE INFORMATION.....................................................15
Total Return Calculations.................................................16
Yield.....................................................................16
Other Information.........................................................17
TAXATION....................................................................17
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT...........................19
INDEPENDENT ACCOUNTANTS.....................................................19
OTHER INFORMATION...........................................................19
APPENDIX...................................................................A-1
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GENERAL
The Trust was organized as a Massachusetts business trust in January 1985
under the name American Pension Investors Trust and is registered with the
Securities and Exchange Commission ("SEC") under the Investment Company Act of
1940 ("1940 Act") as an open-end management investment company and consists of
seven series, each with a different investment objective. In addition to the two
series covered in this Statement of Additional Information, the Trust's series
include, the Growth Fund, the Capital Income Fund, T-1 Treasury Trust, the
Yorktown Classic Value Trust and the Yorktown Value Income Trust.
The following information supplements the discussion of each Fund's
investment objective and policies found in the Funds' Prospectus.
INVESTMENT RESTRICTIONS AND POLICIES
The following investment restrictions are fundamental and, like the Funds'
investment objectives, may not be changed with respect to a Fund without the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
the Fund or (2) 67% or more of the shares of the Fund present at a shareholders'
meeting if more than 50% of the outstanding shares of the Fund are represented
at the meeting in person or by proxy. Each Fund may not:
1. Purchase securities of any one issuer if as a result more than 5% of
the Fund's total assets would be invested in such issuer or the Fund would own
or hold more than 10% of the outstanding voting securities of that issuer,
except that up to 25% of the Fund's total assets may be invested without regard
to this limitation and provided that this limitation does not apply to U.S.
Government securities or to securities issued by other open-end investment
companies;
2. Purchase any security if, as a result of such purchase, 25% or more of
the value of the Fund's total assets would be invested in the securities of
issuers having their principal business activities in the same industry;
provided, however, that (a) the Multiple Index Trust will invest at least 25% of
its total assets in securities issued by other open-end investment companies and
(b) this limitation does not apply to U.S.
Government securities;
3. Purchase or sell real estate;
4. Purchase or sell commodities or commodity contracts, except that the
Fund may purchase or sell interest rate, stock index and foreign currency
futures contracts and options thereon, may engage in transactions in foreign
currencies and may purchase or sell options on foreign currencies for hedging
purposes;
5. Make loans, except when (a) purchasing a portion of an issue of debt
securities; (b) engaging in repurchase agreements; or (c) engaging in securities
loan transactions limited to one-third of the Fund's total assets;
6. Borrow money, except to the extent permitted by the 1940 Act;
7. Underwrite securities issued by other persons, except to the extent
that, in connection with the disposition of portfolio securities, the Fund maybe
deemed an underwriter under federal securities laws; or
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8. Issue senior securities, except as appropriate to evidence indebtedness
that the Fund is permitted to incur and to issue additional classes of
securities that the Board of Trustees may establish, provided that the Fund's
use of options, futures contracts and options thereon, and currency-related
contracts will not be deemed senior securities for this purpose.
The following investment restrictions are non-fundamental and may be
changed by the vote of the Trust's Board of Trustees without shareholder
approval. Each Fund may not:
1. Invest more than 15% of its net assets in illiquid securities, a term
which means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Fund has
valued the securities and includes, among other things, repurchase agreements
maturing in more than seven days;
2. Make short sales of securities or purchase securities on margin, except
(a) for such short-term credits as may be necessary for the clearance of the
purchases of portfolio securities and (b) in connection with the Fund's use of
options, futures contracts and options on future contracts; or
3. Borrow money, except from banks for temporary purposes and for reverse
repurchase agreements, and then in an aggregate amount not in excess of 10% of
the Fund's total assets, provided the Fund may not purchase securities while
borrowings in excess of 5% of the Fund's total assets are outstanding.
If a percentage restriction is adhered to at the time of an investment or
transaction, a later increase or decrease in percentage resulting from a change
in values of portfolio securities or the amount of total assets will not be
considered a violation of any of the foregoing fundamental and non-fundamental
restrictions. The Funds have no current intention of engaging in any of the
activities listed in fundamental investment restriction 4 during the coming
year.
The underlying funds in which the Multiple Index Trust invests may, but
need not, have the same investment objective, policies or limitations as the
Multiple Index Trust.
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements secured by U.S. Government
securities with U.S. banks and dealers. A repurchase agreement is a transaction
in which a Fund purchases a security from a bank or recognized securities dealer
and simultaneously commits to resell that security to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased security. The Fund maintains custody of
the underlying security prior to its repurchase; thus, the obligation of the
bank or securities dealer to pay the repurchase price on the date agreed to is,
in effect, secured by such security. If the value of such security is less than
the repurchase price, the other party to the agreement shall provide additional
collateral so that at all times the collateral is at least equal to the
repurchase price.
Although repurchase agreements carry certain risks not associated with
direct investments in securities, each Fund intends to enter into repurchase
agreements only with banks and dealers believed by the Adviser to present
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minimum credit risks in accordance with guidelines established by the Trust's
Board of Trustees. The Adviser will review and monitor the creditworthiness of
such institutions under the Board's general supervision. To the extent that the
proceeds from any sale of collateral upon a default in the obligation to
repurchase were less than the repurchase price, the Fund would suffer a loss. If
the other party to the repurchase agreement petitions for bankruptcy or
otherwise becomes subject to bankruptcy or other liquidation proceedings, there
might be restrictions on the Fund's ability to sell the collateral and the Fund
could suffer a loss. An open-end investment company ("underlying fund") in which
the Multiple Index Trust may also invest may enter into repurchase agreements
with banks and broker-dealers.
RATINGS OF DEBT OBLIGATIONS
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings
Services ("S&P") are private services that provide ratings of the credit quality
of debt obligations. A description of ratings assigned to corporate debt
obligations by Moody's and S&P is included in the Appendix to this Statement of
Additional Information. These ratings represent Moody's and S&P's opinions as to
the quality of the securities that they undertake to rate. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality. Consequently, securities with the same maturity, interest rate and
rating may have different market prices. Subsequent to its purchase by an
underlying fund, an issue of securities may cease to be rated or its ratings
maybe reduced below the minimum rating required for purchase by an underlying
fund.
REVERSE REPURCHASE AGREEMENTS
Although they have no intention of doing so during the coming year, each
Fund may enter into reverse repurchase agreements with banks and broker-dealers
up to an aggregate value of not more than 10% of its total assets. Such
agreements involve the sale of securities held by a Fund subject to the Fund's
agreement to repurchase the securities at an agreed-upon date and price
reflecting a market rate of interest. Such agreements are considered to be
borrowings and may be entered into only for temporary or emergency purposes.
While a reverse repurchase agreement is outstanding, a Fund will maintain with
its custodian in a segregated account cash, U.S. government securities or other
liquid securities, marked to market daily, in an amount at least equal to the
Fund's obligations under the reverse repurchase agreement.
BANK OBLIGATIONS
The Funds may invest in instruments (including certificates of deposit and
bankers' acceptances) of U.S. banks and savings associations that are insured by
the Federal Deposit Insurance Corporation. To the extent a Fund invests more
than $100,000 in a single bank or savings and loan association, the investment
is not protected by federal insurance.
A certificate of deposit is an interest-bearing negotiable certificate
issued by a bank against funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. Although the borrower is liable
for payment of the draft, the bank unconditionally guarantees to pay the draft
at its face value on the maturity date.
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COMMERCIAL PAPER
The Funds temporarily may invest in commercial paper. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by bank
holding companies, corporations and finance companies. The commercial paper
purchased by the Funds consists of direct obligations of domestic issuers that,
at the time of investment, are (i) rated Prime-l by Moody's or A-l by S&P, (ii)
issued or guaranteed as to principal and interest by issuers or guarantor
shaving an existing debt security rating of Aa or better by Moody's or AA or
better by S&P or (iii) securities that, if not rated, are, in the opinion of the
Adviser, of an investment quality comparable to rated commercial paper in which
the Funds may invest. (See the Appendix to this Statement of Additional
Information for more information on ratings assigned to commercial paper.)
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities constituting up to 5% of its net
assets to brokers, dealers, banks or other institutional investors, provided
that (1) the loan is secured by cash or equivalent collateral equal to at least
100% of the current market value of the loaned securities that is maintained
with the Trust's custodian while portfolio securities are on loan and (2) the
borrower pays the Fund an amount equivalent to any dividends or interest
received on such securities. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. Although a Fund does not have the right to vote securities on loan, the
Fund could terminate the loan and regain the right to vote if the vote were
considered important. Any underlying fund also may lend its portfolio securities
pursuant to similar conditions in an amount not in excess of one-third of its
total assets. Loans of securities involve a risk that the borrower may fail to
return the securities or may fail to provide additional collateral.
CONVERTIBLE SECURITIES
An underlying fund may invest in a convertible security which is a bond,
debenture, note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible debt securities in
that they ordinarily provide a stable stream of income with generally higher
yields than those of common stocks of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure but
are usually subordinated to comparable nonconvertible securities. While no
securities investment is without some risk, investments inconvertible securities
generally entail less risk than the issuer's common stock, although the extent
to which such risk is reduced depends in large measure upon the degree to which
the convertible security sells above its value as a fixed-income security.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable nonconvertible securities, (2) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics and
(3) provide the potential for capital appreciation if the market price of the
underlying common stock increases.
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The value of a convertible security is a function of its "investment
value" (determined by its yield comparison with the yields of other securities
of comparable maturity and quality that do not have a conversion privilege) and
its "conversion value" (the security's worth, at market value, if converted into
the underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
conversion value decreases as the convertible security approaches maturity. To
the extent the market price of the underlying common stock approaches or exceeds
the conversion price, the price of the convertible security will be increasingly
influenced by its conversion value. In addition, a convertible security
generally will sell at a premium over its conversion value determined by the
extent to which investors place value on the right to acquire the underlying
common stock while holding a fixed-income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by the fund is called for redemption,
the fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party.
LLLIQUID SECURITIES
An open-end fund may invest up to 15% of its net assets in securities for
which no readily available market exists ("illiquid securities") or securities
the disposition of which would be subject to legal restrictions (so-called
"restricted securities") and repurchase agreements maturing in more than seven
days. A closed-end fund may invest without limit in such securities. A
considerable period may elapse between an underlying fund's decision to sell
securities and the time when the fund is able to sell such securities. If,
during such a period, adverse market conditions were to develop, the underlying
fund might obtain a less favorable price than prevailed when it decided to sell.
FOREIGN SECURITIES
An underlying fund may invest up to 100% of its assets in securities of
foreign issuers. Investments in foreign securities involve risks relating to
political and economic developments abroad as well as those that may result from
the differences between the regulation to which U.S. issuers are subject and
that applicable to foreign issuers. These risks may include expropriation,
confiscatory taxation, withholding taxes on dividends and interest, limitations
on the use or transfer of an underlying fund's assets and political or social
instability or diplomatic developments. These risks often are heightened to the
extent an underlying fund invests in issuers located in emerging markets or a
limited number of countries.
Individual foreign economies may differ favorably or unfavorably from the
U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficient and balance of
payments position. Securities of many foreign companies may be less liquid and
their prices more volatile than securities of comparable U.S. companies.
Moreover, the underlying funds generally calculate their net asset values and
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complete orders to purchase, exchange or redeem shares only on days when the
NYSE is open. However, foreign securities in which the underlying funds may
invest may be listed primarily on foreign stock exchanges that may trade on
other days (such as U.S. holidays and weekends). As a result, the net asset
value of an underlying fund's portfolio may be significantly affected by such
trading on days when the Adviser does not have access to the underlying funds
and shareholders do not have access to the Fund.
Additionally, because foreign securities ordinarily are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect an underlying fund's net asset value, the value of dividends
and interest earned, gains and losses realized on the sale of securities and net
investment income and capital gain, if any, to be distributed to shareholders by
the underlying fund. If the value of a foreign currency rises against the U.S.
dollar, the value of the underlying fund's assets denominated in that currency
will increase; correspondingly, if the value of a foreign currency will
increase; correspondingly, if the value of a foreign currency declines against
the U.S. dollar, the value of the underlying fund's assets denominated in that
currency will decrease. The exchange rates between the U.S. dollar and other
currencies are determined by supply and demand in the currency exchange markets,
international balances of payments, government intervention, speculation and
other economic and political conditions. The costs attributable to foreign
investing that an underlying fund must bear frequently are higher than those
attributable to domestic investing. For example, the costs of maintaining
custody of foreign securities exceed custodian costs related to domestic
securities.
FOREIGN CURRENCY TRANSACTIONS
In connection with its portfolio transactions in securities traded in a
foreign currency, an underlying fund may enter into forward contracts to
purchase or sell an agreed upon amount of a specific currency at a future date
that may be any fixed number of days from the date of the contract agreed upon
by the parties at a price set at the time of the contract. Under such an
arrangement, concurrently with the entry into a contract to acquire a foreign
security for a specified amount of currency, the fund would purchase with U.S.
dollars the requires amount of foreign currency for delivery at the settlement
date of the purchase; the fund would enter into similar forward currency
transactions in connection with the sale of foreign currencies. The effect of
such transactions would be to fix a U.S. dollar price for the security to
protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date the security is purchased or sold and the date on which
payment is made or received, the normal range of which is three to fourteen
days. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. Although such contracts tend to minimize the
risk of loss due to a decline in the value of the subject currency, they tend to
limit commensurately any potential gain that might result should the value of
such currency increase during the contract period.
INDUSTRY CONCENTRATION
An underlying fund may concentrate its investments (invest 25% or more of
its total assets) within one industry. Because the scope of investment
alternatives within an industry is limited, the value of the shares of such an
underlying fund may be subject to greater market fluctuation than an investment
in a fund that invests in a broader range of securities.
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OPTIONS ACTIVITIES
An underlying fund may write (i.e., sell) call options ("calls") if the
calls are "covered" throughout the life of the option. A call is "covered" if
the fund owns the optioned securities. When a fund writes a call, it receives a
premium and gives the purchaser the right to buy the underlying security at
anytime during the call period (usually not more than nine months in the case of
common stock) at a fixed exercise price regardless of market price changes
during the call period. If the call is exercised, the fund will forego any gain
from an increase in the market price of the underlying security over the
exercise price. Each Fund also is authorized to write covered call options, but
has no intention of doing so during the current fiscal year.
An underlying fund may purchase a call on securities only to effect a
"closing transaction," which is the purchase of a call covering the same
underlying security and having the same exercise price and expiration date as a
call previously written by the fund on which it wishes to terminate its
obligation. If the fund is unable to effect a closing transaction, it will not
be able to sell the underlying security until the call previously written by the
fund expires (or until the call is exercised and the fund delivers the
underlying security).
An underlying fund also may write and purchase put options ("puts"). When
a fund writes a put, it receives a premium and gives the purchaser of the put
the right to sell the underlying security to the fund at the exercise price at
any time during the option period. When a fund purchases a put, it pays a
premium in return for the right to sell the underlying security at the exercise
price at any time during the option period. An underlying fund also may purchase
stock index puts, which differ from puts on individual securities in that they
are settled in cash based on the values of the securities in the underlying
index rather than by delivery of the underlying securities. Purchase of a stock
index put is designed to protect against a decline in the value of the portfolio
generally rather than an individual security in the portfolio. If any put is not
exercised or sold, it will become worthless on its expiration date.
A fund's option positions may be closed out only on an exchange that
provides a secondary market for options of the same series, but there can be no
assurance that a liquid secondary market will exist at any given time for any
particular option. In this regard, trading in options on certain securities
(such as U.S. Government securities) is relatively new, so that it is impossible
to predict to what extent liquid markets will develop or continue.
An underlying fund's custodian, or a securities depository acting for it,
generally acts as escrow agent as to the securities on which the fund has
written puts or calls, or as to other securities acceptable for such escrow so
that no margin deposit is required of the fund. Until the underlying securities
are released from escrow, they cannot be sold by the fund.
In the event of a shortage of the underlying securities deliverable on
exercise of an option, the Options Clearing Corporation ("OCC") has the
authority to permit other, generally comparable securities to be delivered in
fulfillment of option exercise obligations. If the OCC exercises its
discretionary authority to allow such other securities to be delivered, it may
also adjust the exercise prices of the affected options by setting different
prices at which otherwise ineligible securities may be delivered. As an
alternative to permitting such substitute deliveries, the OCC may impose special
exercise settlement procedures.
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FUTURES CONTRACTS
An underlying fund may enter into futures contracts for the purchase or
sale of debt securities and stock indexes. A futures contract is an agreement
between two parties to buy and sell a security or an index for a set price on a
future date. Futures contracts are traded on designated "contract markets" that,
through their clearing corporation, guarantee performance of the contracts.
Generally, if market interest rates increase, the value of outstanding
debt securities declines (and vice versa). Entering into a futures contract for
the sale of debt securities has an effect similar to the actual sale of
securities, although sale of the futures contract might be accomplished more
easily and quickly. For example, if an underlying fund holds long-term U.S.
Government securities and it anticipates a rise in long-term interest rates (and
therefore a decline in the value of those securities), it could, in lieu of
disposing of those securities, enter into futures contracts for the sale of
similar long-term securities. If rates thereafter increase and the value of the
fund's portfolio securities thus declines, the value of the fund's futures
contracts would increase, thereby protecting the fund by preventing the net
asset value from declining as much as it otherwise would have. Similarly,
entering into futures contracts for the purchase of debt securities has an
effect similar to the actual purchase of the underlying securities, but permits
the continued holding of securities other than the underlying securities. For
example, if an underlying fund expects long-term interest rates to decline, it
might enter into futures contracts for the purchase of long-term securities so
that it could gain rapid market exposure that may offset anticipated increases
in the cost of securities it intends to purchase while continuing to hold
higher-yield short-term securities or waiting for the long-term market to
stabilize.
A stock index futures contract may be used to hedge an underlying fund's
portfolio with regard to market risk as distinguished from risk relating to a
specific security. A stock index futures contract does not require the physical
delivery of securities, but merely provides for profits and losses resulting
from changes in the market value of the contract to be credited or debited at
the close of each trading day to the respective accounts of the parties to the
contract. On the contract's expiration date, a final cash settlement occurs.
Changes in the market value of a particular stock index futures contract reflect
changes in the specified index of equity securities on which the contract is
based.
There are several risks in connection with the use of futures contracts.
In the event of an imperfect correlation between the futures contract and the
portfolio position that is intended to be protected, the desired protection may
not be obtained and the fund may be exposed to risk of loss. Further,
unanticipated changes in interest rates or stock price movements may result in a
poorer overall performance for the fund than if it had not entered into futures
contracts on debt securities or stock indexes.
In addition, the market prices of futures contracts may be affected by
certain factors. 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 that could distort the normal relationship between the
securities and futures markets. Second, from the point of view of speculators,
the deposit requirements in the futures market are less onerous than margin
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requirements in the securities market. Therefore, increased participation by
speculators in the futures market may also cause temporary price distortions.
Finally, positions in futures contracts may be closed out only on an
exchange or board of trade that provides a secondary market for such futures.
There is no assurance that a liquid secondary market on an exchange or board of
trade will exist at any particular time.
OPTIONS ON FUTURES CONTRACTS
An underlying fund may purchase and write (sell) put and call options on
futures contracts. An option on a futures contract gives the purchaser the
right, in return for the premium paid, 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), at a specified exercise price at any time during the option
period. When an option on a futures contract is exercised, delivery of the
futures position is accompanied by cash representing the difference between the
current market price of the futures contract and the exercise price of the
option. A fund may purchase put options on futures contracts in lieu of, and for
the same purpose as, a sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying futures contract in
the same manner as it purchases "protective puts" on securities.
As with options on securities, the holder of an option on a futures
contract may terminate its position by selling an option of the same series.
There is no guarantee that such closing transactions can be effected. An
underlying fund is required to deposit initial margin and variation margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements similar to those applicable to futures contracts described
above and, in addition, net option premiums received will be included as initial
margin deposits.
In addition to the risks that apply to all options transactions, there are
several special risks relating to options on futures contracts. The ability to
establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. There can be no
certainty that liquid secondary markets for all options on futures contracts
will develop. Compared to the use of futures contracts, the purchase of options
on futures contracts involves less potential risk to an underlying fund because
the maximum amount at risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the use of an option on a
futures contract would result in a loss to the fund when the use of a futures
contract would not, such as when there is no movement in the prices of the
underlying securities. Writing an option on a futures contract involves risks
similar to those arising in the sale of futures contracts, as described above.
SHORT SALES
An underlying fund may sell securities short. In a short sale, the fund
sells securities that it does not own, making delivery with securities
"borrowed" from a broker. The fund is then obligated to replace the borrowed
securities by purchasing them at the market price at the time of replacement.
This price may or may not be less than the price at which the securities were
sold by the fund. Until the securities are replaced, the fund is required to pay
to the lender any dividends or interest that accrue during the period of the
loan. In order to borrow the securities, the fund may also have to pay a premium
that would increase the cost of the securities sold. The proceeds of the short
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sale will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out.
The fund also must deposit in a segregated account an amount of cash or
U.S. Government securities equal to the difference between (a) the market value
of the securities sold short at the time they were sold short and (b) the value
of the collateral deposited with the broker in connection with the sale (not
including the proceeds from the short sale). Each day the short position is
open, the fund must maintain the segregated account at such a level that the
amount deposited in it plus the amount deposited with the broker as collateral
(1) equals the current market value of the securities sold short and (2) is not
less than the market value of the securities at the time they were sold short.
Depending upon market conditions, up to 80% of the value of a fund's net assets
may be deposited as collateral for the obligation to replace securities borrowed
to effect short sales and allocated to a segregated account in connection with
short sales.
A fund will incur a loss as a result of a short sale if the price of the
security increases between the date of the short sale and the date on which the
fund replaces the borrowed security. The fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased and the amount of any loss increased by the amount of any premium,
dividends or interest the fund may be required to pay in connection with the
short sale.
A short sale is "against the box" if at all times when the short position
is open the fund owns an equal amount of the securities or securities
convertible into, or exchangeable without further consideration for, securities
of the same issue as the securities sold short. Such a transaction serves to
defer a gain or loss for federal income tax purposes.
WARRANTS
An underlying fund may invest in warrants, which are options to purchase a
specified security, usually an equity security such as common stock, at a
specified price (usually representing a premium over the applicable market value
of the underlying equity security at the time of the warrant's issuance) and
usually during a specified period of time. Moreover, they are usually issued by
the issuer of the security to which they relate. While warrants may be traded,
there is often no secondary market for them. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities. Holders of
warrants have no voting rights, receive no dividends and have no rights with
respect to the assets of the issuer. To the extent that the market value of the
security that may be purchased upon exercise of the warrant rises above the
exercise price, the value of the warrant will tend to rise. To the extent that
the exercise price equals or exceeds the market value of such security, the
warrants will have little or no market value. If a warrant is not exercised
within the specified time period, it will become worthless and the fund will
lose the purchase price paid for the warrant and the right to purchase the
underlying security.
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MANAGEMENT OF THE TRUST
INVESTMENT ADVISER AND ADMINISTRATOR
Yorktown Management & Research Company, Inc. provides investment
advisory and administrative services for the Funds and the Trust pursuant to
an Investment Advisory and Administrative Services Agreement ("Advisory
Agreement"). The Adviser is controlled, as a result of stock ownership, by
David D. Basten. Mr. Basten is a Trustee and Officer of the Trust.
The Advisory Agreement provides that, subject to overall supervision by
the Board of Trustees, the Adviser shall act as investment adviser and shall
manage the investment and reinvestment of the assets of each Fund, obtain and
evaluate pertinent economic data relative to the investment policies of each
Fund, place orders for the purchase and sale of securities on behalf of each
Fund, and report to the Board of Trustees periodically to enable them to
determine that the investment policies of each Fund and all other provisions of
this Advisory Agreement are being properly observed and implemented. Under the
terms of the Advisory Agreement, the Adviser is further obligated to cover basic
administrative and operating services including, but not limited to,
bookkeeping, office space and equipment, executive and clerical personnel, and
telephone and communications services and to furnish supplies, stationery and
postage relating to the Adviser's obligations under the Advisory Agreement.
The Advisory Agreement provides that it will remain in effect for two
years and may be renewed from year to year thereafter with respect to a Fund,
provided that renewal is specifically approved at least annually by the
affirmative vote of the Trust's Board of Trustees or by vote of a majority of
the outstanding voting securities of that Fund. In either case, renewal of the
Advisory Agreement must be approved by a majority of the Trustees who are not
parties to the Advisory Agreement or "interested persons" of any such party. Any
approval of the Advisory Agreement or the renewal thereof with respect to a Fund
shall be effective to continue the Advisory Agreement with respect to that Fund
notwithstanding that (a) the Advisory Agreement or the renewal thereof has not
been approved by any other series of the Trust or (b) the Advisory Agreement or
renewal has not been approved by the vote of a majority of the outstanding
voting securities of the Trust as a whole.
Under the Advisory Agreement, the Adviser will not be liable for any error
of judgment or mistake of law or for any loss suffered by a Fund in connection
with the performance of the Advisory Agreement, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Adviser in
the performance of its duties or from reckless disregard of its duties and
obligations thereunder. The Advisory Agreement may be terminated as to a Fund,
without penalty, by the Board of Trustees or by the vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of that Fund, on 60
days written notice to the Adviser or by the Adviser on 60 days written notice
to the Trust. The Advisory Agreement may not be terminated by the Adviser unless
another investment advisory agreement has been approved by the Fund in
accordance with the 1940 Act. The Advisory Agreement terminates automatically
upon assignment (as defined in the 1940 Act).
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TRUSTEES AND OFFICERS
Information concerning the trustees and officers of the Trust is set forth
below:
Name, Age, Position(s) Held
With the Trust and Address Principal Occupation(s) During Past Five Years
- -------------------------- ----------------------------------------------
David D. Basten; 45* President and Director, Yorktown Management
President and Trustee & Research Company, Inc.; President and
P.O. Box 2529 Director, Yorktown Distributors, Inc.;
2303 Lynchburg Avenue President, Yorktown Financial Corp.
Lynchburg, Virginia 24501 (insurance); Vice President, The Travel
Center of Virginia, Inc.; Partner, The
Rivermont Company (real estate); Partner,
Maban Enterprises (real estate development);
Managing Partner, Basten-Mason Properties
(real estate); Managing Partner, D.A.D., A
Virginia General Partnership (real estate). He
is the brother of Louis B. Basten, III.
Louis B. Basten, III; 53* Secretary/Treasurer and Director, Yorktown
Secretary/Treasurer and Management & Research Company, Inc.;
Trustee P.O. Box 2529 Secretary/Treasurer and Director, Yorktown
2303 Yorktown Avenue Distributors, Inc.; President, Mid-State
Lynchburg, Virginia 24501 Insurance; Secretary/Treasurer, The Travel
Center of Virginia, Inc.; Managing Partner,
The Rivermont Company (real estate). He is
the brother of David D. Basten.
Mark A. Borel; 44 President, Borel Construction Company, Inc.;
Trustee President, River Properties, Inc. (real
P. O. Box 640 estate); President, MOBOWAD, Inc. (real
Lynchburg, Virginia 24505 estate); Vice President/Secretary, BOWAD,
Inc. (real estate); Partner, James Riviera,
L.L.C. (real estate)
Stephen B. Cox; 48 Vice President of Operations, Span America
Trustee Medical Systems, Inc. (medical equipment
Route 5, Box 284 supplier)
Bedford, Virginia 24523
G. Edgar Dawson III; 40 Shareholder, Officer and Director, Petty,
Trustee Livingston, Dawson, Devening & Richards,
725 Church Street, Suite 1300 P.C. (law firm); prior to January 1995, he
Lynchburg, Virginia 24505 was a partner at the same firm.
Wayne C. Johnson; 43 Director of Personnel, C.B. Fleet Company,
Trustee Inc. (pharmaceuticals)
Route 2, Box 438
Forest, Virginia 24551
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Charles D. Foster; 36 Chief Financial Officer, Yorktown Management
Chief Financial Officer & Research Company, Inc.; Chief Financial
P.O. Box 2529 Officer, Yorktown Distributors, Inc.
2303 Yorktown Avenue
Lynchburg, Virginia 24501
M. Dennis Stratton; 33 Controller, Yorktown Management & Research
Controller Company, Inc.; Controller, Yorktown
P.O. Box 2529 Distributors, Inc.
2303 Yorktown Avenue
Lynchburg, Virginia 24501
- -----------------------------
*"Interested Person" as that term is defined in the 1940 Act by virtue of his
positions with the Trust, the Adviser and Distributors or family relationships
to such persons.
On May 1, 1997, the trustees and the officers of the Trust as a group
owned beneficially, or may be deemed to have owned beneficially, less than 1% of
the outstanding shares of the Trust. The Trust pays trustees who are not
"interested persons" of the Trust $900 per meeting of the board.
Compensation for
Trustee Fiscal Year Ended 5/31/97
------- -------------------------
David D. Basten $ 0
Louis B. Basten $ 0
Mark A. Borel $3,600
Stephen B. Cox $3,600
G. Edgar Dawson III $3,600
Wayne C. Johnson $3,600
There are no pension or retirement benefits accrued as part of the Trust's
expenses and there are no estimated annual benefits to be paid upon retirement.
Because the Adviser performs substantially all of the services necessary for the
operation of the Trust, the Trust requires no employees. No officer, director or
employee of the Adviser currently receives any compensation from the Trust for
acting as a trustee or officer.
DISTRIBUTION OF FUND SHARES
Yorktown Distributors, Inc., located at 2303 Yorktown Avenue, Lynchburg,
Virginia, 24501, acts as distributor of shares of the Funds under a distribution
agreement with the Trust ("Distribution Agreement") that requires Distributors
to use its best efforts to sell shares of the Funds.
Shares of the Funds are offered continuously.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Trust's Board of Trustees, the
Adviser is responsible for the execution of the Funds' portfolio transactions.
In executing portfolio transactions, the Adviser seeks to obtain the best net
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results for the Funds. With respect to purchases of shares of underlying funds
subject to a front-end sales load at the time of purchase ("load fund
shares"),the Adviser anticipates directing, to the extent possible,
substantially all of the orders to Distributors. Where Distributors acts as the
dealer with respect to purchases of load fund shares, it retains dealer
reallowances on those purchases up to a maximum of 1% of the public offering
price of the shares. Distributors is not designated as the dealer on any sales
where such reallowance exceeds 1% of the public offering price. In the event
Distributors is unable to execute a particular transaction, the Adviser will
direct such order to another broker-dealer.
Distributors may assist in the execution of Fund portfolio transactions to
purchase underlying fund shares for which it may receive distribution payments
from the underlying funds or their underwriters or sponsors in accordance with
the normal distribution arrangements of those funds. These payments are separate
from the dealer reallowances noted above.
Distributors may retain brokerage commissions on portfolio transactions of
underlying funds held in the portfolio of the Multiple Index Trust, including
funds which have a policy of considering sales of their shares in selecting
broker-dealers for the execution of their portfolio transactions. Payment of
brokerage commissions to Distributors on such transactions is not a factor
considered by the Adviser in selecting an underlying fund for investment.
Under the 1940 Act, a mutual fund must sell its shares at the price
(including sales load, if any) described in its prospectus, and current rules
under the 1940 Act do not permit negotiations of sales loads. The Adviser takes
into account the amount of the applicable sales load, if any, when it is
considering whether or not to purchase shares of an underlying fund. The Adviser
anticipates investing all of the assets of the Multiple Index Trust in funds
that impose no front-end sales load or impose a front-end sales load on the Fund
of no more than 1% of the public offering price. The Adviser, to the extent
possible, seeks to reduce the sales load imposed by purchasing shares pursuant
to (i) letters of intent, permitting purchases over time; (ii) rights of
accumulation, permitting it to obtain reduced sales charges as it purchases
additional shares of an underlying fund; and (iii) rights to obtain reduced
sales charges by aggregating its purchases of several funds within a "family" of
mutual funds. The Adviser also takes advantage of exchange or conversion
privileges offered by any "family" of mutual funds.
A factor in the selection of brokers is the receipt of research, analysis,
advice and similar services. The extent to which commissions reflect an element
of value for research services cannot be presently determined. To the extent
that research services of value are provided by broker-dealers with or through
whom the Adviser places the Funds' portfolio transactions, the Adviser may be
relieved of expenses that it might otherwise bear. Any research and other
services provided by brokers to the Adviser or the Funds is considered to be in
addition to and not in lieu of services required to be performed by the Adviser
under its Advisory Agreement.
Another important factor in the selection of brokers is the sale of Fund
shares. Where all major factors are equal, the fact that a broker has sold Fund
shares may be considered in placing portfolio transactions.
The Trust expects that purchases and sales of money market instruments
will usually be principal transactions and purchases and sales of other debt
securities may be principal transactions. Thus, the Funds will normally not pay
brokerage commissions in connection with those transactions. Money market
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<PAGE>
instruments are generally purchased directly from the issuer, an underwriter or
market maker for the securities and other debt securities may be purchased in a
similar manner. Purchases from underwriters include an underwriting commission
or concession and purchases from dealers serving as market makers include the
spread between the bid and asked price. Where transactions are made in the
over-the-counter market, the Funds will deal with the primary market makers
unless more favorable prices are obtainable elsewhere.
Because of the possibility of further regulatory developments affecting
the securities exchanges and brokerage practices generally, the foregoing
practices may be modified.
The portfolio turnover rate may vary greatly from year to year for any
Fund and will not be a limiting factor when the Adviser deems portfolio changes
appropriate. The annual portfolio turnover rate is calculated by dividing the
lesser of a Fund's annual sales or purchases of portfolio securities (exclusive
of purchases or sales of securities whose maturities at the time of acquisition
were one year or less) by the monthly average value of the securities in the
Fund during the year.
PRICING AND ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION
DETERMINING NET ASSET VALUE
The net asset value per share of a Fund is determined as of the close of
normal trading (currently 4:00 p.m., eastern time) on the New York Stock
Exchange, Inc. ("NYSE") on each Monday through Friday when the NYSE is open.
Currently, the NYSE is closed on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION
Shareholders will receive at least 60 days notice of any termination or
material modification of the exchange privilege described in the prospectus,
except no notice need be given if, under extraordinary circumstances, either
redemptions are suspended under the circumstances described below or a Fund
temporarily delays or ceases the sale of its shares because it is unable to
invest amounts effectively in accordance with the Fund's investment objective,
policies and restrictions.
Each Fund will redeem its shares at the net asset value per share next
determined after receipt of a request for redemption that is in "good order.
"Redemptions or repurchases may be suspended at times (i) when the NYSE is
closed(other than customary weekends and holidays) or trading on the NYSE is
restricted, (ii) when an emergency exists (as determined by the SEC) making
disposal of portfolio securities or the valuation of the assets of the Funds not
reasonably practicable or (iii) as the SEC may otherwise permit.
PERFORMANCE INFORMATION
The Funds' performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represents past performance and is not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than the original cost.
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<PAGE>
TOTAL RETURN CALCULATIONS
Average annual total return quotes ("Standardized Return") used in the
Funds' Performance Advertisements are calculated according to the following
formula:
P (1 + T) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. In calculating the ending redeemable value, the maximum 1-1/2%
initial sales charge is deducted from the initial $1,000 payment and all
dividends and distributions by the Funds are assumed to have been reinvested at
net asset value on the reinvestment dates during the period. Total return, or
"T" in the formula above, is computed by finding the average annual compounded
rate of return over the period that would equate the initial amount invested to
the ending redeemable value.
The Funds may also from time to time include in Performance Advertisements
total return figures that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The Funds calculate Non-Standardized Return
for a specified period of time by assuming the investment of $1,000 in shares
and assuming the reinvestment of each dividend or other distribution at net
asset value. Percentage rates of return are then determined by subtracting the
value of the investment at the beginning of the period from the ending value and
by dividing the remainder by the beginning value. The initial sales charge is
not taken into account in calculating Non-Standardized Return; the inclusion of
this charge would reduce return.
YIELD
Yield used in Performance Advertisements for the Treasuries Trust is
calculated by dividing its interest income for a 30-day period ("Period"), net
of expenses by the average number of shares of such class entitled to receive
dividends during the Period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the net asset value per share
at the end of the Period. Yield quotations are calculated according to the
following formula:
YIELD = 2[( A-B + 1)(SUPERSCRIPT)6 - 1]
---
cd
where: a = dividends and interest earned during the Period
b = expenses accrued for the Period (net of reimbursements)
c = the average daily number of shares outstanding during
the Period that were entitled to receive dividends
d = the maximum offering price per share on the last day
of the Period.
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Except as noted below, in determining net investment income earned during
the Period (variable "a" in the above formula), the Treasuries Trust calculates
interest earned on each debt obligation held by it during the Period by (1)
computing the obligation's yield to maturity, based on the market value of the
obligation (including actual accrued interest) on the last business day of the
Period or, if the obligation was purchased during the Period, the purchase price
plus accrued interest and (2) dividing the yield to maturity by 360, and
multiplying the resulting quotient by the market value of the obligation
(including actual accrued interest) to determine the interest income on the
obligation for each day of the period that the obligation is in the portfolio.
Once interest earned is calculated in this fashion for each debt obligation held
by the Treasuries Trust, interest earned during the Period is then determined by
totaling the interest earned on all debt obligations. For purposes of these
calculations, the maturity of an obligation with one or more call provisions is
assumed to be the next date on which the obligation reasonably can be expected
to be called or, if none, the maturity date. In calculating the maximum offering
price per share at the end of the Period(variable (d) in the above formula) the
maximum 1-1/2% initial sales charge is included.
OTHER INFORMATION
In connection with communicating a Fund's performance information to
current or prospective shareholders, the Trust also may compare these figures to
the performance of other mutual funds tracked by mutual fund rating services or
other unmanaged indexes that may assume reinvestment of distributions but
generally do not reflect deductions for administrative and management costs.
TAXATION
In order to qualify for treatment as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended, a Fund -- each Fund
being treated as a separate corporation for these purposes -- must distribute
annually to its shareholders at least 90% of its investment company taxable
income (generally, net investment income plus net short-term capital gain, if
any) and must meet several additional requirements. With respect to 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, gains from the sale or other disposition of
securities and certain other income; (2) the Fund must derive less than 30% of
its gross income each taxable year from the sale or other disposition of
securities held for less than three months ("Short-Short Limitation"); (3) at
the close of each quarter of the Fund's taxable year, 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 (including, in the case of the multiple Index
Trust, underlying funds that qualify as such) 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 (4)
at the close of each quarter of the Fund's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
Government securities, and securities of other RICs (including, in the case of
the Multiple Index Trust, underlying funds that qualify as such) of any one
issuer.
Dividends and other distributions declared by a Fund in October, November
or December of any year and payable to shareholders of record on a date in one
of those months will be deemed to have been paid by the Fund and received by the
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<PAGE>
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from the Multiple Index Trust's investment
company taxable income (whether paid in cash or reinvested in additional Fund
shares) may be eligible for the dividends-received deduction allowed to
corporations. The eligible portion may not exceed the aggregate dividends
received by that Fund either directly from U.S. corporations (excluding RICs,
among others) or indirectly from such corporations through RICs in which it
invests. However, dividends received by a corporate shareholder and deducted by
it pursuant to the dividends-received deduction are subject indirectly to the
alternative minimum tax. It is not anticipated that any part of the
distributions by the Treasuries Trust (which invests exclusively in debt
securities and thus receives no dividend income) will be eligible for this
deduction.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares. Investors
also should be aware that if shares are purchased shortly before the record date
for any dividend or capital gain distribution, the shareholder will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.
Under certain circumstances, a sales charge incurred by the Multiple Index
Trust on the acquisition of an underlying fund's shares may not be taken into
account in determining the gain or loss on the disposition of those shares.
Generally, a redemption of an underlying fund's shares will result in taxable
gain or loss to the Multiple Index Trust, depending on whether the redemption
proceeds are more or less than that Fund's adjusted basis for the redeemed
shares (which normally includes any sales charge paid); an exchange of an
underlying fund's shares for shares of another underlying fund normally will
have similar tax consequences. However, if that Fund disposes of an underlying
fund's shares ("A shares") within 90 days after its purchase thereof and
subsequently reacquires shares of that underlying fund or acquires shares of
another underlying fund on which a sales charge normally is imposed or of the
same fund ("B shares"), without paying the sales charge (or paying a reduced
charge) due to an exchange privilege or a reinstatement privilege, then (1) any
gain on the disposition of the A shares will be increased, or the loss thereon
decreased, by the amount of the sales charge paid when the A shares were
acquired and (2) that amount will increase the adjusted basis of the B shares
that were subsequently acquired.
The Treasuries Trust may acquire zero coupon securities or other
securities issued with original issue discount ("OID") such as "stripped" U.S.
Treasury securities. As a holder of those securities, that Fund must include in
its income the OID that accrues on the securities during the taxable year, even
if it receives no corresponding payment on the securities during the year.
Because each Fund annually must distribute substantially all of its investment
company taxable income, including any accrued OID, in order to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax, it may be
required in a particular year to distribute as a dividend an amount that is
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greater than the total amount of cash it actually receives. Those distributions
will be made from its cash assets or from the proceeds of sales of portfolio
securities, if necessary. That Fund may realize capital gains or losses from
those sales, which would increase or decrease its investment company taxable
income and/or net capital gain (the excess of net long-term capital gain over
net short-term capital loss). In addition, any such gains may be realized on the
disposition of securities held for less than three months. Because of the
Short-Short Limitation, any such gains would reduce that Fund's ability to sell
other securities held for less than three months that it might wish to sell in
the ordinary course of its portfolio management.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey
08540-6231, serves as the custodian for the Funds. Fund Services, Inc., 1500
Forest Avenue, Suite 111, Richmond, Virginia 23229, is the Trust's transfer
and dividend disbursing agent.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 217 E. Redwood Street, Baltimore, Maryland
21202-3316, was appointed by the trustees to serve as the Trust's independent
certified public accountants, providing professional services including (1)audit
of the annual financial statements, (2) assistance and consultation in
connection with SEC filings and semi-annual reports, including semi-annual
financial statements and (3) preparation of the federal income tax returns filed
on behalf of the Funds.
OTHER INFORMATION
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust. The
Declaration of Trust states that no shareholder as such shall be subject to any
personal liability whatsoever to any person in connection with Trust property or
the acts, omissions, obligations or affairs of the Trust. It also states that
every written obligation, contract, instrument, certificate, share, other
security of the Trust or undertaking made or issued by the Trustees may recite,
in substance, that the same is executed or made by them not individually, but as
Trustees under the Declaration of Trust, and that the obligations of the Trust
under any such instrument are not binding upon any of the Trust's Trustees or
shareholders individually, but bind only the Trust estate, and may contain any
further recital which they or he may deem applicable, but the omission of such
recital shall not operate to bind the Trustees or shareholders individually.
The Declaration of Trust further provides that the Trust shall indemnify
and hold each shareholder harmless from and against all claims and liabilities
to which such shareholder may become subject by reason of his being or having
been a shareholder, and shall reimburse such shareholder for all legal and other
expenses responsibility incurred by him in connection with any such claim or
liability. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Trust would be
unable to meet its obligations.
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The Funds' Prospectus and this Statement of Additional Information do not
contain all the information included in the Trust's registration statement filed
with the SEC under the Securities Act of 1933 and the 1940 Act with respect to
the securities offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the SEC. The registration statement,
including the exhibits filed therewith, may be examined at the offices of the
SEC in Washington, D.C.
Statements contained in the Funds' Prospectus and this Statement of
Additional Information as to the contents of any contract or other documents
referred to are not necessarily complete, and in each instance reference is made
to the copy of such contracts or other documents filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference.
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APPENDIX
DESCRIPTION OF COMMERCIAL PAPER
AND BOND RATINGS
Description of Moody's Short-Term Debt Ratings
Prime-1. Issuers (or supporting institutions) rated Prime-1 ("P-1")have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured sources of
alternate liquidity. Prime-2. Issuers (or supporting institutions) rated
Prime-2("P-2") have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Description of Standard & Poor's Commercial Paper Ratings
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety. A-1. This
designation indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation. A-2. Capacity for
timely payment on issues with this designation is satisfactory. However, the
relative degree of safety is not as high as for issues designated A-1.
Description of Moody's Long-Term Debt Ratings
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues; Aa. Bonds which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities; A. Bonds which are rated A possess many
favorable investment attributes and are considered as upper-medium-grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
A-1
<PAGE>
impairment some time in the future; Baa. Bonds which are rated Baa are
considered as medium-grade obligations (i.e., they are neither highly protected
nor poorly secured). Interest payments and principal security appear adequate
for the present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well; Ba. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well-assured. Often
the protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B. Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Caa. Bonds which are rated Caa are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest; Ca. Bonds which are rated Care
present obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings; C. Bonds which are rated
Care the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the Company ranks in
the higher end of its generic rating category; the modifier 2 indicates
amid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
Description of S&P Corporate Debt Ratings
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong; AA. Debt rated AA has a
very strong capacity to pay interest and repay principal and differs from the
higher rated issues only in small degree; A. Debt rated A has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt in higher rated categories; BBB. Debt rated BBB is regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories; BB,
B, CCC, CC, and C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB. Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating; B. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating; CCC. Debt rated CCC
has a currently identifiable vulnerability to default, and is dependent upon
favorable business, financial and economic conditions to meet timely payment of
interest and repayment of principal. In the event of adverse business, financial
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or economic conditions, it is not likely to have the capacity to pay interest
and repay principal. The CCC rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied B or B- rating; CC. The
rating CC is typically applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating; C. The rating C is typically applied
to debt subordinated to senior debt which is assigned an actual or implied
CCC-debt rating. The C rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments are continued; CI.
The rating CI is reserved for income bonds on which no interest is being paid;
D. Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are in jeopardy.
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