API TRUST
2303 Yorktown Avenue
Lynchburg, Virginia 24501
(804) 846-1361
(800) 544-6060
STATEMENT OF ADDITIONAL INFORMATION
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This Statement of Additional Information (the "SAI") sets forth
information regarding API Trust (the "Trust") and five of its series: the Growth
Fund, the Capital Income Fund, the Multiple Index Trust, the Treasuries Trust
and the Yorktown Classic Value Trust ("Value Trust") (each a "Fund" and
collectively, the "Funds"). Yorktown Management & Research Company, Inc. (the
"Adviser") is the investment adviser and administrator of each Fund; Yorktown
Distributors, Inc. ("Distributors") is the distributor of each Fund.
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This SAI is not a prospectus and should be read only in conjunction with
the Funds' current Prospectus, dated, October 1, 1999, which may be obtained
from:
Yorktown Distributors, Inc.
2303 Yorktown Avenue, P.O. Box 2529
Lynchburg, Virginia 24501
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October 1, 1999
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TABLE OF CONTENTS
PAGE
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GENERAL........................................................................1
INVESTMENT RESTRICTIONS........................................................1
INVESTMENT POLICIES AND RISKS..................................................6
MANAGEMENT OF THE TRUST.......................................................17
DISTRIBUTION OF FUND SHARES...................................................22
PRICING, ADDITIONAL PURCHASE AND EXCHANGE INFORMATION AND
CONTINGENT DEFERRED SALES CHARGE WAIVERS......................................28
PERFORMANCE INFORMATION.......................................................30
TAXATION......................................................................33
CUSTODIANS, TRANSFER AND DIVIDEND DISBURSING AGENT............................38
INDEPENDENT ACCOUNTANTS.......................................................38
OTHER INFORMATION.............................................................39
FINANCIAL STATEMENTS..........................................................39
APPENDIX A....................................................................40
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS..............................40
APPENDIX B....................................................................44
HEDGING STRATEGIES............................................................44
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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 (the "SEC") under the Investment Company Act
of 1940 (the "1940 Act") as an open-end management investment company. The Trust
currently consists of six separate series: the Growth Fund, the Capital Income
Fund, the Multiple Index Trust, the Treasuries Trust, the Value Trust and the
Yorktown Value Income Trust ("Income Trust"). The Trust's Board of Trustees
("Board") may elect to add additional series in the future, although it has no
present plan to do so. The Prospectus and this SAI relate only to shares of the
Funds and not shares of Income Trust. As of the date of this SAI, the Income
Trust has not commenced investment operations.
The Trust is authorized to issue an unlimited number of shares of
beneficial interest without par value of separate series. Shares of each Fund,
when issued, are fully paid, nonassessable, fully transferable, redeemable at
the option of the shareholder and have equal dividend and liquidation rights and
noncumulative voting rights. The shares of each series of the Trust will be
voted separately except when an aggregate vote of all series is required by the
1940 Act.
The Trust does not hold annual meetings of shareholders. There will
normally be no meetings of shareholders for the purpose of electing trustees
unless and until less than a majority of the trustees holding office have been
elected by shareholders, at which time the trustees then in office will call a
shareholders' meeting for the election of trustees. Under the 1940 Act,
shareholders of record of no less than two-thirds of the outstanding shares of
the Trust may remove a trustee by a vote cast in person or by proxy at a meeting
called for that purpose. The trustees are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of any
trustee when requested in writing to do so by the shareholders of record of not
less than 10% of the Trust's outstanding shares.
The investment objective of a Fund may not be changed without the
affirmative vote of a majority of the Fund's outstanding voting securities as
defined in the 1940 Act. Certain other investment limitations that apply to a
Fund may not be changed without shareholder approval, as indicated below. All
other investment policies, unless otherwise indicated, may be changed by the
Board without shareholder approval. The following information supplements the
discussion of each Fund's investment objective and policies found in the
Prospectus.
INVESTMENT RESTRICTIONS
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
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 of a Fund are represented at
the meeting in person or by proxy.
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ALL FUNDS
A Fund will not as a matter of fundamental policy:
1. Purchase any security if, as a result of such purchase, more than 5% of
the value of the Fund's total assets would be invested in the securities of a
single 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 value of the
Fund's total assets (50% of the Value Trust's total assets) may be invested
without regard to this limitation and provided that this limitation does not
apply to securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities ("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 (including, with respect to the Value
Trust, real estate limited partnerships); except that the Growth Fund and the
Capital Income Fund may invest in the securities of companies whose business
involves the purchase or sale of real estate;
4. Purchase or sell commodities or commodity contracts including futures
contracts, except that all Funds other than the Growth Fund and the Capital
Income 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; or
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 (5% of the
Fund's total assets with respect to the Growth Fund and the Capital Income
Fund).
GROWTH FUND AND CAPITAL INCOME FUND
The following additional fundamental investment restrictions apply only to
the Growth Fund and the Capital Income Fund. Neither Fund may:
1. Purchase any security if, as a result of such purchase, more than 5% of
the value of the Fund's total assets would be invested in the securities of
issuers which at the time of purchase had been in operation for less than three
years, except U.S. Government securities or securities issued by open-end
investment companies (for this purpose, the period of operation of any issuer
shall include the period of operation of any predecessor issuer or unconditional
guarantor of such issuer);
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2. Purchase participations or other direct interests in oil, gas, or other
mineral exploration or development programs;
3. Make short sales of securities or purchase securities on margin, except
for such short-term credits as may be necessary for the clearance of purchases
of portfolio securities;
4. Borrow money, except as a temporary measure for extraordinary or
emergency purposes, and then only from banks in amounts not exceeding the lesser
of 10% of the Fund's total assets (valued at cost) or 5% of its total assets
(valued at market) and, in any event, only if immediately thereafter there is
asset coverage of at least 300%;
5. Invest in puts, calls, straddles, spreads, or any combinations thereof,
except that a Fund may write covered call options as described below;
6. Mortgage, pledge or hypothecate securities, except in connection with
the borrowings permitted under restriction (4) above and then only where the
market value of the securities mortgaged, pledged or hypothecated does not
exceed 15% of the Fund's assets (valued at cost), or 10% of its net assets
(valued at market);
7. Underwrite securities issued by other persons;
8. Invest in companies for the purpose of exercising management or
control;
9. Purchase or retain the securities of any issuer if, to the knowledge of
the Trust's management, the officers or trustees of the Trust and the officers
and directors of the investment adviser who each own beneficially more than
0.50% of the outstanding securities of such issuer together own beneficially
more than 5% of such securities;
10. Issue securities or other obligations senior to the Fund's share of
beneficial interest;
11. Purchase any securities that would cause more than 2% of the value of
the Fund's total assets at the time of such purchase to be invested in warrants
that are not listed on the New York Stock Exchange or the American Stock
Exchange, or more than 5% of the value of its total assets to be invested in
warrants whether or not so listed, such warrants in each case to be valued at
the lesser of cost or market, but assigning no value to warrants acquired by the
Fund in units with or attached to debt securities; or
12. Purchase any security if, as a result of such purchase, more than 10%
of the value of the Fund's total assets would be invested in illiquid securities
(including repurchase agreements and time deposits maturing in more than seven
days) or foreign securities which are not publicly traded in the United States.
MULTIPLE INDEX TRUST AND TREASURIES TRUST
The following additional fundamental investment restrictions apply only to
the Multiple Index Trust and the Treasuries Trust. Neither Fund may:
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1. Borrow money, except to the extent permitted by the 1940 Act;
2. Underwrite securities issued by other persons, except to the extent
that, in connection with the disposition of portfolio securities, the Fund may
be deemed an underwriter under federal securities laws; or
3. 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 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.
VALUE TRUST
The following additional fundamental investment restrictions apply only to
the Value Trust. The Value Trust may not:
1. Borrow money, (a) except from a bank in an amount not in excess of
one-third of the Fund's net assets; or (b) by engaging in reverse repurchase
agreements;
2. Underwrite securities issued by other persons, except to the extent
that, in connection with the disposition of portfolio securities, the Fund may
be deemed an underwriter under federal securities laws; or
3. Issue senior securities, except as permitted by the 1940 Act and
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.
Whenever an investment policy or restriction states a maximum percentage
of a Fund's assets that may be invested in any security or other asset or sets
forth a policy regarding quality standards, that percentage shall be determined,
or that standard shall be applied, immediately after the Fund's acquisition of
the security or other asset. Accordingly, any later increase or decrease
resulting from a change in the market value of a security or in the Fund's net
or total assets will not cause the Fund to violate a percentage limitation.
Similarly, any later change in quality, such as a rating downgrade or the
delisting of a warrant, will not cause the Fund to violate a quality standard.
The following investment limitations may be changed for any Fund by the
vote of the Board and without shareholder approval.
GROWTH FUND AND CAPITAL INCOME FUND
Neither Fund may:
1. Purchase or otherwise acquire the securities of any open-end investment
company (except in connection with a merger, consolidation or acquisition of
substantially all of the assets or reorganization of another investment company)
if, as a result, the Fund and all of its affiliates would own more than 3% of
the total outstanding stock of that company; or
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2. Invest directly in real estate limited partnerships.
In addition, the underlying funds in which a Fund invests may, but need
not, have the same investment objective, policies or limitations as the Fund.
Although the Growth Fund and Capital Income Fund may, from time to time, invest
in shares of the same underlying fund, the percentage of each Fund's assets so
invested may vary, and the Adviser will determine whether such investments are
consistent with the investment objective and policies of each particular Fund.
MULTIPLE INDEX TRUST AND TREASURIES TRUST
Neither Fund may:
1. Invest more than 15% of its net assets in illiquid securities, a term
that 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.
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.
VALUE TRUST
The Value Trust may not:
1. Purchase or retain the securities of any issuer if, to the knowledge of
the Fund's management, those trustees or officers of the Trust and the directors
and officers of the Adviser who individually own beneficially more than 1/2 of
1% of the outstanding securities of such issuer, together own beneficially more
than 5% of such outstanding securities;
2. Invest in oil, gas or other mineral exploration or development programs
or leases, provided that the Fund may invest in securities issued by companies
engaged in such activities;
3. 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;
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4. 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, (b) in connection with the Fund's use of
options, futures contracts and options on future contracts and (c) the Fund may
sell short "against the box;"
5. Invest in warrants, valued at the lower of cost or market, in excess of
5% of the value of its net assets, which amount may include warrants that are
not listed on the New York or American Stock Exchanges, provided that such
warrants, valued at the lower of cost or market, do not exceed 2% of the Fund's
net assets, and further provided that this restriction does not apply to
warrants attached to, or sold as a unit with other securities; or
6. Purchase any security if as a result the Fund would have more than 5%
of its total assets invested in securities of companies which together with any
predecessors have been in continuous operation for less than three years.
INVESTMENT POLICIES AND RISKS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and risks.
GROWTH FUND, CAPITAL INCOME FUND AND MULTIPLE INDEX TRUST
Each Fund may invest up to 35% of its total assets directly in equity and
debt market securities of U.S. issuers.
MULTIPLE INDEX TRUST AND TREASURIES TRUST
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.
VALUE TRUST
NON-DIVERSIFIED STATUS. The Value Trust is "non-diversified," as that term
is defined in the 1940 Act, but intends to continue to qualify as a regulated
investment company (a "RIC") for federal income tax purposes. This means, in
general, that more than 5% of the Fund's total assets may be invested in
securities of one issuer, but only if, at the close of each quarter of the
Fund's taxable year, the aggregate amount of such holdings does not exceed 50%
of the value of its total assets and no more than 25% of the value of its total
assets is invested in the securities of a single issuer. To the extent that the
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Fund's portfolio at times will consist of the securities of a smaller number of
issuers than if it were "diversified" (as defined in the 1940 Act), the Fund
will at such times be subject to greater risk with respect to its portfolio
securities than an investment company that invests in a broader range and number
of securities, in that changes in the financial condition or market assessment
of a single issuer may cause greater fluctuation in the Fund's total return and
the price of the Fund's shares.
LEVERAGE. The Fund may engage in leveraging. Leveraging by the Fund may
exaggerate the effect on net asset value of any increase or decrease in the
market value of the Fund's portfolio. Money borrowed for leveraging will be
subject to interest and related costs which may or may not be recovered by
appreciation of the securities purchased. The Fund may also be required to
maintain minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest rate.
There can be no certainty that the Fund will be able to borrow money when the
Adviser seeks to do so or that it will be able to do so on advantageous terms.
ALL FUNDS
REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements with
U.S. banks and dealers secured by U.S. Government securities. 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
minimum credit risks in accordance with guidelines established by the Board. 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.
BANK OBLIGATIONS. Each Fund 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. 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
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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. 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. The underlying funds may invest in similar
instruments.
COMMERCIAL PAPER. Each Fund 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-1" by Moody's Investors
Services, Inc. ("Moody's") or "A-1" by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"), (ii) issued or guaranteed as to principal
and interest by issuers or guarantors having 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 Appendix
A to this SAI for more information on ratings assigned to commercial paper. The
underlying funds may invest in similar instruments.
ILLIQUID SECURITIES. Each Fund may invest in illiquid securities either
directly (Treasuries Trust and Value Trust) or indirectly through underlying
funds (Growth Fund, Capital Income Fund and Multiple Index Trust). A Fund or an
underlying 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. An underlying closed-end fund may invest without limit in such
securities. A considerable period may elapse between a decision to sell such
securities and the time when such securities can be sold. If, during such a
period, adverse market conditions were to develop, a Fund or an underlying fund
might obtain a less favorable price than prevailed when it decided to sell.
SHORT SALES. The Growth Fund, the Capital Income Fund and the Multiple
Index Trust may invest in underlying funds that 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 sale will be retained by the broker, to the extent necessary to
meet margin requirements, until the short position is closed out.
The underlying 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
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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.
An underlying 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.
In addition, the Value Trust and certain underlying funds may engage in
short sales "against the box." A short sale is "against the box" if at all times
when the short position is open the Fund or 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.
The Value Trust will not engage in short sales involving securities they do not
own or have the right to acquire.
LENDING OF PORTFOLIO SECURITIES. Each Fund may lend a portion of its
portfolio securities constituting up to 5% (25% in the case of the Value Trust)
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 and
maintained with the Fund'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 was
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. In order to
minimize these risks, each Fund will make loans of securities only to firms
deemed creditworthy by the Adviser and only when, in the judgment of the
Adviser, the consideration that the Fund will receive from the borrower
justifies the risk.
FOREIGN SECURITIES. Each Fund, except the Treasuries Trust, may invest,
either directly (the Value Trust) or indirectly through an investment in an
underlying fund (the Growth Fund, the Capital Income Fund and the Multiple Index
Trust) in foreign securities including common stocks, preferred stock and common
stock equivalents issued by foreign companies. 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
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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
complete orders to purchase, exchange or redeem shares only on days when the New
York Stock Exchange ("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 Funds.
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.
Investment income and gains realized on foreign securities in which the
funds may invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United States
and foreign countries, however, may reduce or eliminate the amount of foreign
taxes to which the funds would be subject.
The Value Trust may invest in foreign equity or debt securities directly
or through the use of American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs") and other similar securities convertible into securities of
foreign companies. ADRs are receipts typically issued by a U.S. bank evidencing
ownership of the underlying foreign securities. EDRs are receipts typically
issued by a European bank evidencing ownership of the underlying foreign
securities. To the extent an ADR or EDR is issued by a bank unaffiliated with
the foreign company issuer of the underlying security, the bank has no
obligation to disclose material information about the foreign company issuer.
Foreign fixed income securities include corporate debt obligations issued by
foreign companies and debt obligations of foreign governments or international
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organizations. This category may include floating rate obligations, variable
rate obligations and Yankee dollar obligations (U.S. dollar denominated
obligations issued by foreign companies and traded on foreign markets).
INVESTMENTS IN OTHER INVESTMENT COMPANIES. The Growth Fund, the Capital
Income Fund and the Multiple Index Trust each seeks to achieve its investment
objective by investing in shares of underlying funds and may invest up to 25% of
its total assets in any one underlying fund. Each of these Funds may invest in
shares of the same underlying fund; however, the percentage of each Fund's
assets so invested may vary and the Funds and their affiliates may not hold more
than 3% of an underlying fund's shares. If a Fund holds more than 1% of the
shares of an open-end fund, that Fund will be obligated to redeem only 1% of
those shares during any period of less than 30 days. Any shares of an open-end
fund held by a Fund in excess of 1% of the open-end fund's outstanding shares,
therefore, will be considered not readily marketable securities that, together
with other such securities, may not exceed 10% of the Fund's net assets.
The Value Trust may also invest in other investment companies. However,
the Value Trust will not invest more than 10% of its total assets in securities
of other investment companies, or more than 5% of its total assets in securities
of any investment company and will not purchase more than 3% of the outstanding
voting stock of any investment company.
The underlying funds in which the Funds invest may include new funds and
funds with limited operating history. Underlying funds may, but need not, have
the same investment objectives, policies and limitations as the Funds. For
example, although a Fund will not borrow money for investment purposes, it may
invest all of its assets in underlying funds that borrow money for investment
purposes (i.e., engage in the speculative activity of leveraging) or invest up
to 25% of its total assets in any one such underlying fund.
If an underlying fund submits a matter to shareholders for vote, each Fund
will either vote the shares (i) in accordance with instructions received from
Fund shareholders or (ii) in the same proportion as the vote of all other
holders of such securities. The Funds may not purchase shares of investment
companies that are not registered with the SEC. Each Fund intends only to invest
in underlying funds that intend to qualify for treatment as RICs under the
Internal Revenue Code of 1986, as amended ("Code"). If an underlying fund fails
to qualify for that treatment, it will be subject to federal income tax and may
adversely affect an investing Fund's ability to qualify for that treatment. No
assurance can be given, however, that an underlying fund will qualify for
treatment as a RIC.
OPEN-END FUNDS.Each Fund, except Treasuries Trust, may purchase shares of
open-end funds that impose a front-end sales load ("Load Fund Shares") and
shares of open-end funds that do not impose a front-end sales load. However, the
Funds may not invest in shares of open-end funds that are sold subject to a
redemption fee of more than 1%. An open-end fund is currently permitted under
the rules of the National Association of Securities Dealers ("NASD") to impose
front-end sales loads as high as 8.5% of the public offering price (9.29% of the
net amount invested), provided that it does not also impose an asset-based sales
charge. The Adviser anticipates, however, investing substantially all of each
Fund's assets in funds that impose no front-end sales load or impose a front-end
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sales load of no more than 3% of the public offering price of the shares. Fund
purchases may often qualify for so-called quantity discounts whereby a lower
front-end sales load is applied to purchases of, for example, $50,000 or more.
Additionally, where possible, the Adviser will seek to reduce the front-end
sales load imposed by purchasing shares pursuant to (i) letters of intent,
permitting it to obtain reduced front-end sales loads by aggregating its
intended purchases over time; (ii) rights of accumulation, permitting it to
obtain reduced front-end sales loads as it purchases additional shares of an
underlying fund; and (iii) rights to obtain reduced front-end sales loads by
aggregating its purchases of several funds within a family of mutual funds. In
addition to any front-end sales load imposed by an open-end fund, the open-end
fund may be subject to annual distribution and service fees of up to 1.00% of
the fund's average daily net assets.
Front-end sales loads generally are split into the dealer reallowance
(which typically comprises at least 80% of the amount of the charge) and the
underwriter's retention. Distributors generally will be designated as the dealer
entitled to receive the dealer reallowance portion of the sales charge on
purchases of Load Fund Shares by each Fund. However, Distributors will not
retain any dealer reallowance in excess of 1% of the public offering price on
any transaction, nor will it be designated as the dealer entitled to receive the
dealer reallowance portion of the sales charge where such reallowance would
exceed 1% of the public offering price.
Although open-end fund shares are redeemable by a Fund upon demand to the
issuer, under certain circumstances, an open-end fund may determine to make a
payment for redemption of its shares to the Fund wholly or partly by a
distribution in kind of securities from its portfolio, in lieu of cash, in
conformity with the rules of the SEC. In such cases, the Fund may hold
securities distributed by an open-end fund until the Adviser determines that it
is appropriate to dispose of such securities. Such disposition generally will
entail additional costs to the Fund.
CLOSED-END FUNDS. The Growth Fund and the Capital Income Fund may purchase
shares of closed-end funds. Shares of closed-end funds are typically offered to
the public in a one-time initial public offering by a group of underwriters who
retain a spread or underwriting commission of between 4% and 6% of the initial
public offering price. Such securities are then listed for trading on the NYSE,
the American Stock Exchange or the Nasdaq Stock Market ("Nasdaq") or, in some
cases, may be traded in other over-the-counter ("OTC") markets. Because the
shares of closed-end funds cannot be redeemed upon demand to the issuer like the
shares of an open-end investment company (such as a Fund), investors seek to buy
and sell shares of closed-end funds in the secondary market.
The Growth Fund and the Capital Income Fund generally will purchase shares
of closed-end funds only in the secondary market. Each Fund will incur normal
brokerage costs on such purchases similar to the expenses the Fund would incur
for the purchase of equity securities in the secondary market. The Funds may,
however, also purchase securities of a closed-end fund in an initial public
offering when, in the opinion of the Adviser, based on a consideration of the
nature of the closed-end fund's proposed investments, the prevailing market
conditions and the level of demand for such securities, they represent an
attractive opportunity for growth of capital. The initial offering price
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typically will include a dealer spread, which may be higher than the applicable
brokerage cost if the Fund purchased such securities in the secondary market.
The shares of many closed-end funds, after their initial public offering,
frequently trade at a price per share which is less than the net asset value per
share, the difference representing the "market discount" of such shares. This
market discount may be due in part to the investment objective of long-term
appreciation, which is sought by many closed-end funds, as well as to the fact
that the shares of closed-end funds are not redeemable by the holder upon demand
but rather are subject to the principles of supply and demand in the secondary
market. A relative lack of secondary market purchasers of closed-end fund shares
also may contribute to such shares' trading at a discount to their net asset
value.
Each Fund may invest in shares of closed-end funds that are trading at a
discount or a premium to net asset value. There can be no assurance that the
market discount on shares of any closed-end fund purchased by a Fund will ever
decrease. In fact, it is possible that this market discount may increase and the
Fund may suffer realized or unrealized capital losses due to further decline in
the market price of the securities of such closed-end funds, thereby adversely
affecting the net asset value of the Fund's shares. Similarly, there can be no
assurance that any shares of a closed-end fund purchased by a Fund at a premium
will continue to trade at a premium or that the premium will not decrease
subsequent to a purchase of such shares by the Fund.
A closed-end fund may issue senior securities (including preferred stock
and debt obligations) or borrow money for the purpose, and with the effect, of
leveraging the closed-end fund's common shares in an attempt to enhance the
current return to such closed-end fund's common shareholders. A Fund's
investment in the common shares of closed-end funds that are financially
leveraged may create an opportunity for greater total return on its investment,
but at the same time may be expected to exhibit more volatility in market price
and net asset value than an investment in shares of investment companies without
a leveraged capital structure. The Funds will only invest in common shares of
closed-end funds and will not invest in any senior securities issued by
closed-end funds.
INDEX SECURITIES. Each Fund, except the Treasuries Trust, may invest in
Standard & Poor's Depository Receipts(TM) ("SPDRs"), World Equity Benchmark
Shares(TM) ("WEBS"), and other similar securities (collectively "Index
Securities"). Index Securities represent interests in a fixed portfolio of
common stocks designed to track the price and dividend yield performance of a
broad-based securities index, such as the Standard & Poor's 500 Composite Stock
Price Index, but are traded on an exchange like shares of common stock. The
value of index securities fluctuates in relation to changes in the value of the
underlying portfolio of securities. However, the market price of index
securities may not be equivalent to the pro rata value of the index it tracks.
Index securities are subject to the risks of an investment in a broad-based
portfolio of common stocks. Index securities are considered investments in other
investment companies.
WARRANTS. Each Fund, except the Treasuries Trust, may invest in warrants
either directly (Value Trust) or indirectly through an investment in an
underlying fund (Growth Fund, Capital Income Fund and Multiple Index Trust).
Warrants are instruments that provide the owner with the right to purchase a
specified security, usually an equity security such as common stock, at a
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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. A Fund may invest in publicly
traded warrants only. 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 warrants remain unexercised at the end of the
specified exercise period, they lapse and a Fund's investment in them will be
lost. A Fund may not invest more than 5% of its net assets in warrants.
CONVERTIBLE SECURITIES. Each Fund, except the Treasuries Trust, may invest
directly (Value Trust) or indirectly through an investment in an underlying fund
(Growth Fund, Capital Income Fund and Multiple Index Trust), 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 dividends 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 in convertible 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.
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
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<PAGE>
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 a 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.
DEBT SECURITIES. The Growth Fund, the Capital Income Fund and the Multiple
Index Trust may each invest up to 35% of its total assets in debt securities
rated at least investment grade ("BBB" and above/ "Baa" and above) by S&P or
Moody's. In addition, the underlying funds may invest in debt securities rated
at least investment grade or below. Investment grade debt securities are those
that at the time of purchase have been assigned one of the four highest ratings
by S&P or Moody's or, if unrated, are determined by the underlying fund's
investment adviser to be of comparable quality. This includes debt securities
rated "BBB" by S&P or "Baa" by Moody's. Moody's considers securities rated "Baa"
to have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity for such securities
to make principal and interest payments than is the case for higher grade debt
securities. Debt securities rated below investment grade (commonly referred to
as "junk bonds"), which include debt securities rated "BB," "B," "CCC" and "CC"
by S&P and "Ba," "B," "Caa," "Ca" and "C" by Moody's, are deemed by these
agencies to be predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal and may involve major risk exposure to
adverse conditions. Debt securities rated lower than "B" may include securities
that are in default or face the risk of default with respect to principal or
interest.
Ratings of debt securities represent the rating agencies' opinions
regarding their quality and are not a guarantee of quality. Subsequent to its
purchase by an underlying fund, the rating of an issue of debt securities may be
reduced below the minimum rating required for purchase by that fund. Credit
ratings attempt to evaluate the safety of principal and interest payments and do
not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than the rating indicates. The ratings of S&P and Moody's are described in
detail in Appendix B of this SAI.
Lower rated debt securities generally offer a higher current yield than
that available from higher grade issues. However, lower rated securities involve
higher risks, in that they are especially subject to adverse changes in general
economic conditions and in the industries in which the issuers are engaged, to
changes in the financial condition of the issuers and to price fluctuation in
response to changes in interest rates.
Accordingly, the yield on lower rated debt securities will fluctuate over
time. During periods of economic downturn or rising interest rates, highly
leveraged issuers may experience financial stress that could adversely affect
their ability to make payments of principal and interest and increase the
possibility of default. In addition, the market for lower rated securities has
expanded rapidly in recent years, and its growth paralleled a long economic
expansion. In the past, the prices of many lower rated debt securities declined
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substantially, reflecting an expectation that many issuers of such securities
might experience financial difficulties. As a result, the yields on lower rated
debt securities rose dramatically, but such higher yields did not reflect the
value of the income stream that holders of such securities expected, but rather
the risk that holders of such securities could lose a substantial portion of
their value as a result of the issuers' financial restructuring or default. The
market for lower rated debt securities may be thinner and less active than that
for higher quality securities, which may limit an underlying fund's ability to
sell such securities at their fair value in response to changes in the economy
or the financial markets. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may also decrease the values and liquidity of
lower rated securities, especially in a thinly traded market.
An underlying fund may invest in zero coupon securities and
payment-in-kind securities. Zero coupon securities pay no interest to holders
prior to maturity and payment-in-kind securities pay interest in the form of
additional securities. However, a portion of the original issue discount on the
zero coupon securities, and the "interest" on payment-in-kind securities, must
be included in the underlying fund's income. Accordingly, to continue to qualify
for tax treatment as a RIC and to avoid a certain excise tax, these funds may be
required to distribute as a dividend an amount that is greater than the total
amount of cash they actually receive. These distributions must be made from a
fund's cash assets or, if necessary, from the proceeds of sales of portfolio
securities. A fund will not be able to purchase additional income-producing
securities with cash used to make such distributions, and its current income
ultimately may be reduced as a result. Zero coupon and payment-in-kind
securities usually trade at a deep discount from their face or par value and
will be subject to greater fluctuations of market value in response to changing
interest rates than debt obligations of comparable maturities that make current
distributions of interest in cash.
HEDGING STRATEGIES. Each Fund, except the Treasuries Trust, may either
directly (Value Trust) or indirectly through an investment in an underlying fund
(Growth Fund, Capital Income Fund and Multiple Index Trust) engage in certain
hedging strategies involving options, futures and forward currency exchange
contracts. A Fund may also hedge currency risks associated with investments in
foreign securities and in particular may hedge its portfolio through the use of
forward foreign currency contracts. The objective of a hedging strategy is to
protect a profit or offset a loss in a portfolio security from future price
erosion or to assure a definite price for a security, stock index, futures
contract, or currency. A Fund's ability to use options, futures and forward
foreign currency contracts may be limited by market conditions, regulatory
limits and tax considerations. These hedging strategies are described in detail
in Appendix B of this SAI.
There are transactional costs connected with using hedging strategies. In
addition, the use of hedging strategies involves certain special risks,
including (1) imperfect correlation between the hedging instruments and the
securities or market sectors being hedged; (2) the possible lack of a liquid
secondary market for closing out a particular instrument; (3) the need for
additional skills and techniques beyond normal portfolio management; (4) the
possibility of losses resulting from market movements not anticipated by the
Adviser; and (5) possible impediments to effective portfolio management because
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of the percentage of the Fund's assets segregated to cover its obligations.
FOREIGN CURRENCY TRANSACTIONS.Each Fund, except the Treasuries Trust, may
either directly (Value Trust) or indirectly through an investment in an
underlying fund (Growth Fund, Capital Income Fund and Multiple Index Trust) use
forward or foreign currency contracts to protect against uncertainty in the
level of future foreign currency exchange rates. When the Fund purchases or
sells a security denominated in a foreign currency, it may be required to settle
the purchase transaction in the relevant foreign currency or to receive the
proceeds of the sale in the relevant foreign currency. In either event, the Fund
will be obligated to acquire or dispose of the foreign currency by selling or
buying an equivalent amount of U.S. dollars. To effect the conversion of the
amount of foreign currency involved in the purchase or sale of a foreign
security, the Fund may purchase or sell such foreign currency on a "spot" (i.e.,
cash) basis.
In connection with its portfolio transactions in securities traded in the
foreign currency, the 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. 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. 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. These
foreign currency transactions are described in detail in Appendix B.
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER AND ADMINISTRATOR
The Adviser provides investment advisory and administrative services for
the Funds pursuant to Investment Advisory and Administrative Services Agreements
("Advisory Agreements") with the Trust. The Adviser is controlled, as a result
of stock ownership, by David D. Basten. Mr. Basten is a Trustee and Officer of
the Trust.
Each Advisory Agreement provides that, subject to overall supervision by
the Board, 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 periodically to enable them to determine that the investment
policies of each Fund and all other provisions of its Advisory Agreement are
being properly observed and implemented. Under the terms of each Advisory
Agreement, the Adviser is further obligated to cover basic administrative and
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operating expenses including, but not limited to, office space and equipment,
executive and clerical personnel, telephone and communications services and to
furnish supplies, stationery and postage relating to the Adviser's obligations
under the Advisory Agreement.
Each 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 vote of
a majority of the outstanding voting securities of that Fund, or by the Board,
including a majority of the Trustees who are not parties to the Advisory
Agreement or "interested persons" of any such party (by vote cast in person at a
meeting called for that purpose). 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
Fund 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.
Each Advisory Agreement provides that 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. Each Advisory Agreement may be terminated as
to a Fund, without penalty, by the 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).
The Adviser has agreed to waive the advisory fees it charges the Growth
Fund and Capital Income Fund in an amount equal to amounts Distributors retains
as (i) dealer reallowances resulting from those Funds' purchases of Load Fund
Shares and (ii) Rule 12b-1 fees received from underlying open-end funds.
For the fiscal years ended May 31, 1999, 1998, and 1997, the Value Trust
paid to the Adviser advisory fees in the amount of $107,382, $104,856, and
$69,685, respectively, and the Adviser waived $21,477, $20,971, and $13,937 of
its fees, respectively. During the fiscal years ended May 31, 1999, 1998, and
1997, the Growth Fund paid to the Adviser advisory fees in the amounts of
$540,140, $480,477, and $414,919, respectively, and the Adviser waived, pursuant
to the above-referenced procedure to reduce fees, a portion of its fees during
those fiscal years in the amounts of $184,052, $261,195, and $248,499,
respectively. During the fiscal years ended May 31, 1999, 1998, and 1997, the
Adviser waived all advisory fees in the amounts of $74,342, $58,321, and
$33,229, respectively, for the Capital Income Fund. During the fiscal year ended
May 31, 1999 and the fiscal period ended May 31, 1998, the Adviser waived all
advisory fees in the amounts of $28,785 and $11,631, respectively, for the
Multiple Index Trust and in the amounts of $18,515 and $6,060, respectively, for
the Treasuries Trust.
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In addition to the advisory fees, the Trust and the Funds are obligated to
pay certain expenses that are not assumed by the Adviser or Distributors. These
expenses include, among others, securities registration fees, compensation for
non-interested trustees, interest expense, taxes, brokerage fees, commissions
and sales loads, custodian charges, transfer agency fees, certain distribution
expenses pursuant to a plan of distribution adopted in the manner prescribed
under Rule 12b-1 under the 1940 Act, if any, legal expenses, insurance expenses,
association membership dues and the expense of reports to the shareholders,
shareholders' meetings and proxy solicitations. The Trust and the Funds are also
liable for nonrecurring expenses as may arise, including litigation to which the
Trust or a Fund may be a party.
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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 Principal Occupation(s)
With the Trust and Address During Past Five Years
- --------------------------- -----------------------
DAVID D. BASTEN; 48 * President and Director, Yorktown Management
President and Trustee & Research Company, Inc.; President and
P. O. Box 2529 Director, Yorktown Distributors, Inc.;
2303 Yorktown Avenue President, Yorktown Financial Corp.
Lynchburg, Virginia 24501 (insurance); Vice President, The Travel
Center of Virginia, Inc.; Partner, The
Rivermont Company (real estate); 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; 56 * Secretary/Treasurer and Director, Yorktown
Secretary/Treasurer and Trustee Management & Research Company, Inc.;
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; 47 President, Borel Construction Company,
Trustee Inc.; President, Borel Properties (real
P. O. Box 640 estate); Vice President, Borel Investments
Lynchburg, Virginia 24505
(real estate); Partner, James Riviera,
L.L.C. (real estate); President, MOBOWAD,
Inc. (real estate); Partner, New London
Development Company (real estate).
STEPHEN B. COX; 51 Vice-President of Operations, Span
Trustee America Medical Systems, Inc. (medical
1510 Stoney Brook Road equipment supplier).
Bedford, Virginia 24523
G. EDGAR DAWSON III; 43 Shareholder, Officer and Director, Petty,
Trustee Livingston, Dawson, Devening & Richards,
725 Church Street P.C. (law firm); prior to January
Suite 1300 1995, he was a partner at the same firm.
Lynchburg, Virginia 24505
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Name, Age, Position(s) Held Principal Occupation(s)
With the Trust and Address During Past Five Years
- --------------------------- -----------------------
WAYNE C. JOHNSON; 46 Director of Personnel, C.B. Fleet Company
Trustee Inc. (pharmaceuticals)
1736 Crockett Road
Forest, Virginia 24551
CHARLES D. FOSTER; 39 Chief Financial Officer, Yorktown
Chief Financial Officer Management & Research Company, Inc.;
P. O. Box 2529 Chief Financial Officer, Yorktown
2303 Yorktown Avenue Distributors, Inc.
Lynchburg, Virginia 24501
M. DENNIS STRATTON; 36 Controller, Yorktown Management & Research
Controller Company, Inc.; Controller, Yorktown
P. O. Box 2529 Distributors, Inc.
2303 Yorktown Avenue
Lynchburg, Virginia 24501
- ----------------------
* "Interested Person" of the Trust as defined in the 1940 Act by virtue of
his position with the Adviser and Distributors.
As of June 30, 1999, the Trustees and officers of the Growth Fund, the
Capital Income Fund, the Multiple Index Trust, the Treasuries Trust and the
Value Trust as a group owned beneficially, or may be deemed to have owned
beneficially, less than 1% of the outstanding shares of each Fund. Because the
Adviser performs substantially all of the services necessary for the operation
of the Trust and the Funds, the Trust requires no employees. No officer, trustee
or employee of the Adviser currently receives any compensation from the Trust
for acting as a Trustee or officer.
The Trust also pays each Trustee who is not an "interested person" of the
Trust $900 for his attendance at each meeting of the Board. 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. The following table shows
the fees paid to the Trustees during the fiscal year ended May 31, 1999, for
their services to the Trust.
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Trustees' Compensation for
Trustee Fiscal Year Ended 5/31/99
- ------- -------------------------
David D. Basten $ 0
Louis B. Basten III $ 0
Mark A. Borel $3,600
Stephen B. Cox $3,600
G. Edgar Dawson III $3,600
Wayne C. Johnson $3,600
DISTRIBUTION OF FUND SHARES
Distributors, located at 2303 Yorktown Avenue, Lynchburg, Virginia, acts
as distributor of shares of the Funds under distribution agreements with the
Trust ("Distribution Agreements") that require Distributors to use its best
efforts to sell shares of the Funds. Shares of the Funds are offered
continuously.
As distributor of Fund shares, Distributors may spend such amounts as it
deems appropriate on any activities or expenses primarily intended to result in
the sale of the Funds' shares or the servicing and maintenance of shareholder
accounts, including compensation to employees of Distributors; compensation to
and expenses, including overhead and telephone and other communication expenses,
of Distributors and selected dealers who engage in or support the distribution
of shares or who service shareholder accounts; the costs of printing and
distributing prospectuses, statements of additional information, and reports for
other than existing shareholders; the costs of preparing, printing and
distributing sales literature and advertising materials; and internal costs
incurred by Distributors and allocated by Distributors to its efforts to
distribute shares of the funds, such as office rent, employee salaries, employee
bonuses and other overhead expenses.
The Adviser normally pays brokers a sales commission of 1 1/2% at the time
of the sale of fund shares. In addition, Distributors pays brokers a fee based
on the average amount of client assets maintained in the funds during the month
at the following rates: Growth Fund - 1.00%; Capital Income Fund - 0.50%;
Multiple Index Trust - 0.40%; Treasuries Trust - 0.30%; and Value Trust - 0.75%.
In some instances, Distributors may offer additional incentives only to
certain brokers that have sold or may sell significant amounts of shares. Such
incentives may include permitting brokers to be named the dealer of record on
underlying fund shares purchased by the Growth Fund, the Capital Income Fund or
the Multiple Index Trust with the result that those brokers could receive trail
commissions from the underwriters of those underlying funds. These commissions
could be paid as long as a fund held the underlying fund shares in its portfolio
and the underwriters continued to pay the trail commissions. If these
commissions were not paid to those brokers, then, with respect to the Growth
Fund and the Capital Income Fund, the commissions could be paid to Distributors
and could thereby reduce the fees paid by the funds to the Adviser for advisory
services.
22
<PAGE>
Distributors also may pay certain banks, fiduciaries, custodians for
public funds, investment advisers and broker-dealers a fee for administrative
services in connection with the distribution of Fund shares. Such fees would be
based on the average net asset value represented by shares of the
administrators' customers invested in a Fund. This fee is in addition to any
commissions these entities may receive from Distributors out of the fees it
receives pursuant to a distribution plan, and, if paid, will be reimbursed by
the Adviser and not a Fund.
Applicable banking laws prohibit certain deposit-taking institutions from
underwriting or distributing securities. There is currently no precedent
prohibiting banks from performing administrative services in connection with the
distribution of fund shares. If a bank were prohibited from performing such
administrative services, its shareholder clients would be permitted to remain
shareholders of the fund and alternate means of servicing such shareholder would
be sought. It is not expected that shareholders would suffer any adverse
financial consequences as a result of any of these occurrences.
GROWTH FUND, CAPITAL INCOME FUND AND VALUE TRUST. Under plans of
distribution ("Plans") adopted by the Trust's Board of Trustees and approved by
the shareholders of each of the Growth Fund, the Capital Income Fund, and the
Value Trust pursuant to Rule 12b-1 under the 1940 Act, each of these Funds pays
Distributors a monthly fee as compensation for Distributors' distribution
activities and another monthly fee for Distributors' service activities with
respect to each Fund and its shareholders. The Growth Fund pays Distributors a
distribution fee at the annual rate of 0.75% of the average daily net assets of
the Fund and a service fee at the annual rate of 0.25% of the average daily net
assets of the Fund. The Capital Income Fund pays Distributors a distribution fee
at the annual rate of 0.25% of the average daily net assets of the Fund and a
service fee at the annual rate of 0.25% of the average daily net assets of the
Fund. The Value Trust pays Distributors a distribution fee at the annual rate of
0.65% of the average daily net assets of the Fund and a service fee at the
annual rate of 0.25% of the average daily net assets of the Fund.
During the period they are in effect, the Plans obligate the Funds to pay
fees to Distributors as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. Thus, even if
Distributors' expenses exceed its fees, the Funds will not be obligated to pay
more than those fees and, if Distributors' expenses are less than such fees, it
will retain the full fee and realize a profit.
For the fiscal year ended May 31, 1999, the Growth Fund, the Capital
Income Fund and the Value Trust paid to Distributors aggregate distribution fees
of $724,192, $61,951 and $128,859, respectively. For the same period,
Distributors estimates that the following distribution related expenses were
incurred on behalf of or allocable to each Fund:
23
<PAGE>
Capital
Growth Income Value
Fund Fund Trust
---- ---- -----
(a) brokers'
commissions $679,933 $59,955 $35,988
(b) printing of
prospectuses 6,458 1,066 1,143
and statements
of additional
information
(c) allocated
costs 37,80 930 15,747
--------- ------- -------
Total 724,192 61,951 52,878
"Allocated costs" include various internal costs allocated by Distributors
to its distribution efforts. These internal costs encompass office rent and
other overhead expenses of Distributors.
In approving these Plans, the Board considered all relevant factors,
including that as the size of each Fund increases, each Fund should experience
economies of scale and greater investment flexibility. The Board also considered
the compensation to be received by Distributors under the Plans and the benefits
that would accrue to the Adviser as a result of the Plans in that the Adviser
receives advisory fees that are calculated based upon a percentage of the
average net assets of each Fund, which fees would increase if the Plans were
successful and the Funds attained and maintained significant asset levels.
The Plans will remain in effect for one year from the date of approval.
Thereafter, each Plan, together with any related agreements, will continue in
effect for successive periods of one year so long as such continuance is
specifically approved by votes of a majority of both (a) the Board and (b) those
Trustees who are not "interested persons" of the Trust, as defined in the 1940
Act, and have no direct or indirect financial interest in the operation of the
Plan or any agreements related to it, cast in person at a meeting called for the
purpose of voting on the Plan and such related agreements. Each Plan may be
terminated at any time with respect to any Fund by vote of a majority of the
disinterested trustees or by vote of a majority of the outstanding voting
securities of each Fund.
While the Plans are in effect, the selection and nomination of Trustees
who are not interested persons of the Trust, as defined in the 1940 Act, shall
be committed to the discretion of the Trustees who are themselves not interested
persons. Under the Plans, any person authorized to direct the disposition of
monies paid by the Trust must provide to the Board, at least quarterly, a
written report of the amounts so expended and the purposes for which such
expenditures were made.
24
<PAGE>
In addition to payments under the Plans, Distributors receives any
contingent deferred sales charges payable with respect to redemptions of shares
of the Funds. For the fiscal years ended May 31, 1999, 1998, and 1997,
Distributors collected no contingent deferred sales charge with respect to the
Growth Fund, the Capital Income Fund, the Multiple Index Trust, and the
Treasuries Trust.
For the fiscal years ended May 31, 1999, 1998, and 1997, Distributors
collected contingent deferred sales charges in the amount of $22,075, $20,662,
and $22,398, respectively, with respect to the Value Trust.
With respect to the Growth Fund and the Capital Income Fund, Distributors
also may receive dealer reallowances (up to a maximum of 1% of the public
offering price) and/or distribution payments on purchases by the Funds of shares
of open-end funds sold with a sales load and/or which have a distribution plan.
For the fiscal year ended May 31, 1999, such payments and reallowances amounted
to $184,052 and $84,720, respectively, for the Growth Fund and the Capital
Income Fund.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board, the Adviser is responsible
for the execution of each Fund's portfolio transactions and the allocation of
brokerage transactions. In effecting portfolio transactions, the Adviser seeks
to obtain the best net results for each Fund. This determination involves a
number of considerations, including the economic effect on the Fund (involving
both price paid or received and any commissions and other costs), the efficiency
with which the transaction is effected where a large block is involved, the
availability of the broker to stand ready to execute potentially difficult
transactions, and the financial strength and stability of the broker. Such
considerations are judgmental and are weighed by the Adviser in determining the
overall reasonableness of brokerage commissions paid. 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.
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. Currently, an
open-end fund is permitted to impose a front-end sales load of up to 8.5% of the
public offering price, provided it does not also impose an asset-based sales
charge. 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 substantially all of the
assets of the Growth Fund, the Capital Income Fund and 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%, in the case of the Multiple Index Trust, and 3%, in
the case of the Growth Fund and Capital Income Fund, 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
25
<PAGE>
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.
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
may direct, 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. In providing execution assistance,
Distributors receives orders from the Adviser; places them with the underlying
fund's distributor, transfer agent or other person, as appropriate; confirms the
trade, price and number of shares purchased; and assures prompt payment by the
Fund and proper completion of the order.
For the fiscal year ended May 31, 1999, payments and reallowances received
by Distributors with respect to the purchase of underlying funds shares amounted
to $184,052 and $84,720, respectively, for the Growth Fund and Capital Income
Fund.
Distributors also may retain brokerage commissions on portfolio
transactions of underlying funds held in the portfolio of the Growth Fund, the
Capital Income Fund and Multiple Index Trust, including funds that 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.
A factor in the selection of brokers to execute the Funds' portfolio
transactions is the receipt of research, analysis, advice and similar services.
To the extent that research services of value are provided by brokers with or
through whom the Adviser places the Funds' portfolio transactions, the Adviser
may be relieved of expenses that it might otherwise bear. Research services
furnished by brokers through which a Fund effects securities transactions may be
used by the Adviser in advising other Funds, and, conversely, research services
furnished to the Adviser by brokers in connection with other Funds the Adviser
advises may be used by the Adviser in advising a Fund. Research and other
services provided by brokers to the Adviser or the Funds is in addition to, and
not in lieu of, services required to be performed by the Adviser under its
Advisory Agreement. For the fiscal year ended May 31, 1999, the Adviser directed
$2,284,434 and $32,218,795 in portfolio transactions on behalf of the Growth
26
<PAGE>
Value Trust, respectively, to brokers chosen because they provided research
services, for which the Growth Fund and the Value Trust paid $7,882 and $67,204,
respectively, in commissions.
The Capital Income Fund and the Multiple Index Trust did not direct any
portfolio transactions to brokers or dealers chosen because they provided
research services.
Another factor in the selection of brokers is the sale of Fund shares.
Where all major factors such as price and execution capability are equal, the
fact that a broker has sold Fund shares may be considered in placing portfolio
transactions. The Funds reserve the right to pay brokerage commissions to
brokers affiliated with the Trust or with affiliated persons of such persons.
Any such commissions will comply with applicable securities laws and
regulations. In no instance, however, will portfolio securities be purchased
from or sold to the Adviser or any other affiliated person. Since the Funds'
inception, no brokerage commissions have been paid to such affiliated persons.
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
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.
Investment decisions for each Fund are made independently of each other in
light of differing considerations. However, the same investment decision may
occasionally be made for more than one Fund. In such cases, simultaneous
transactions are inevitable. Purchases or sales are then averaged as to price
and allocated between the Funds as to amount according to a formula deemed
equitable to the Funds. While in some cases this practice could have a
detrimental effect upon the price or quantity of the security as far as a Fund
is concerned, or upon its ability to complete its entire order, in other cases
it is believed that coordination and the ability to participate in volume
transactions will be beneficial to a Fund.
The policy of the Trust with respect to brokerage is reviewed by the Board
from time to time. Because of the possibility of further regulatory developments
affecting the securities exchanges and brokerage practices generally, the
foregoing practices may be modified.
During the fiscal years ended May 31, 1999, 1998, and 1997, the Growth
Fund, the Capital Income Fund, the Value Trust and the Multiple Index Trust paid
the following amounts in brokerage commissions:
27
<PAGE>
Fiscal Year Ended
-----------------
5/31/99 5/31/98 5/31/97
------- ------- -------
Growth Fund $ 24,486 $ 15,507 $ 26,800
Capital Income Fund $ 5,250 $ 2,357 $ 5,382
Value Trust $207,992 $178,371 $127,552
Multiple Index Trust $ 0 $ 0 N/A
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, ADDITIONAL PURCHASE AND EXCHANGE INFORMATION
AND CONTINGENT DEFERRED SALES CHARGE WAIVERS
DETERMINING NET ASSET VALUE
Each Fund determines its net asset value per share as of the close of
regular trading (currently 4:00 p.m., eastern time) on the NYSE on each business
day, which is defined as 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.
The net asset value per share of a Fund is determined by dividing the Fund's
total net assets by the number of shares outstanding at the time of calculation.
Total net assets are determined by adding the total current value of portfolio
securities, cash, receivables and other assets and subtracting liabilities.
VALUE TRUST. Foreign security prices are expressed in their local currency
and translated into U.S. dollars at current exchange rates. Any changes in the
value of forward contracts due to exchange rate fluctuations are included in the
determination of net asset value. Foreign currency exchange rates are generally
determined prior to the close of trading on the NYSE. Occasionally, events
affecting the value of foreign securities and such exchange rates occur between
the time at which they are determined and the close of trading on the NYSE. When
events materially affecting the value of such securities or exchange rates occur
during such time period, the securities will be valued at their fair value as
determined in good faith by or under the direction of the Board.
28
<PAGE>
PURCHASE OF SHARES
When shares of a Fund are initially purchased, an account is automatically
established for the shareholder. Any shares of that Fund subsequently purchased
or received as a distribution are credited directly to the shareholder's
account. No share certificates are issued unless specifically requested in
writing to the Trust. Certificates are issued in full shares only. In addition,
no certificates are issued for shares purchased by check until 15 business days
have elapsed, unless the Trust is reasonably assured that payment for the shares
has been collected. There is no charge for certificate issuance.
EXCHANGE OF SHARES
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.
CONTINGENT DEFERRED SALES CHARGE WAIVERS.
The contingent deferred sales charge is waived on redemptions of shares
if: (1) the investor's dealer of record notifies Distributors prior to the time
of investment that the dealer waives the payment otherwise payable to him; (2)
the redemption is made to a Systematic Withdrawal Plan provided that the amount
redeemed for a particular Fund does not exceed on an annual basis 8% of the
account value at the time the election to participate in the Systematic
Withdrawal Plan; or (3) the redemption is made by an investor who invested at
least $100,000 in a Fund directly through Distributors.
TELEPHONE TRANSACTIONS
Shareholders may initiate three types of transactions by telephone:
telephone exchanges; telephone redemptions by wire; and telephone redemptions by
check. Once a telephone transaction request has been placed, it cannot be
revoked.
The telephone exchange privilege and/or telephone redemptions by wire
privilege must be elected by you when you fill out your initial application or
you may select either option later by completing the appropriate form(s) that is
available from Shareholder Services. The telephone redemptions by check
privilege is available to shareholders of the funds automatically, unless this
option is declined in the application or in writing.
The Funds will employ reasonable procedures to confirm that instructions
received by telephone (including instructions with respect to changes in
addresses) are genuine, such as requesting personal identification information
that appears on an account application and recording the telephone conversation.
A shareholder will bear the risk of loss due to unauthorized or fraudulent
instructions regarding his or her account, although the Funds may be liable if
reasonable procedures are not employed.
29
<PAGE>
UNDELIVERABLE MAIL
If the U.S. Postal Service cannot deliver a check representing the payment
of a distribution to a shareholder, or if any such check remains uncashed for
six months, the check(s) will be reinvested in shares of the distributing fund
at their then-current net asset value per share and all future distributions to
that shareholder will be reinvested in fund shares.
PERFORMANCE INFORMATION
From time to time, quotations of each Fund's average annual total return
("Standardized Return") may be included in advertisements, sales literature or
shareholder reports. Standardized Return shows percentage rates reflecting the
average annual change in the value of an assumed initial investment of $1,000,
assuming the investment has been held for periods of one year, five years and
ten years as of a stated ending date. If a five- and/or ten-year period has not
yet elapsed, data will be provided as of the end of a period corresponding to
the life of the Fund. Standardized Return assumes that all dividends and other
distributions were reinvested in shares of the Fund.
In addition, other total return performance data ("Non-Standardized
Return") regarding a Fund may be included in advertisements, sales literature or
shareholder reports. Non-Standardized Return shows a percentage rate of return
encompassing all elements of return (i.e., income and capital appreciation or
depreciation); and it assumes reinvestment of all dividends and other
distributions. Non-Standardized Return may be quoted for the same or different
periods as those for which Standardized Return is quoted. Non-Standardized
Return may consist of cumulative total returns, average annual total returns,
year-by-year rates or any combination thereof. Cumulative total return
represents the cumulative change in value of an investment in a Fund for various
periods. Average annual total return refers to the annual compound rate of
return of an investment in a Fund. The total return of a Fund is increased to
the extent that the Adviser has waived all or a portion of its advisory fee or
reimbursed all or a portion of the Fund's expenses. Total return figures are
based on historical performance of a Fund, show the performance of a
hypothetical investment and are not intended to indicate future performance.
Additional information about each Fund's performance is contained in the Funds'
annual report to shareholders, which may be obtained without charge by
contacting the Trust at the address or telephone numbers on the cover of the
Prospectus.
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.(1)
- ---------------------
1 Prior to February 22, 1991, the Growth Fund and the Capital Income Fund
invested directly in market securities.
30
<PAGE>
TOTAL RETURN CALCULATIONS
Standardized Return used in the Funds' Performance Advertisements are
calculated according to the following formula:
The Standardized Return for the fiscal year ended May 31, 1999 for the
Multiple Index Trust and the Treasuries Trust was 15.99% and 3.61%,
respectively.
n
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 all dividends and
distributions by the Funds are assumed to have been reinvested at net asset
value on the reinvestment dates during the period. In addition, contingent
deferred sales charges are taken into account. 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 Standardized Return for the fiscal year ended May
31, 1999 for Multiple Index Trust and the Treasuries Trust was 15.99% and 3.61%,
respectively. The Standardized Return for the period from July 2, 1999
(commencement of operations) to May 31, 1999 for Multiple Index Trust and the
Treasuries Trust was 14.72% and 6.80%, respectively. The Standardized Return for
the fiscal year ended May 31, 1999 for the Growth Fund and Capital Income Fund
was 6.96% and 5.07%, respectively. The Standardized Return for the Growth Fund
and Capital Income Fund for the five years ended May 31, 1999 was 13.37% and
16.81%, respectively. The Standardized Return for the Growth Fund and Capital
Income Fund for the ten years ended May 31, 1999 was 10.97% and 11.33%,
respectively. The Standardized Return for the Value Trust for the fiscal year
ended May 31, 1999, for the five years ended May 31, 1999 and for the period
from November 2, 1992 (commencement of operations) to May 31, 1999 was 16.30%,
17.42% and 13.20%, respectively.
Each Fund may include average annual Non-Standardized Returns in
Performance Advertisements that is calculated according to the formula described
above except that contingent deferred sales charges are not taken into account.
The average annual Non-Standarized return for the Multiple Index Trust and the
Treasuries Trust for the fiscal year ended May 31, 1999 was 18.99% and 5.11%,
respectively. The average annual Non-Standardized Return for the period from
July 2, 1997 (commencement of operations) to May 31, 1999 for Multiple Index
Trust and the Treasuries Trust was 15.41 % and 7.53%, respectively. The average
annual Non-Standardized Return for the Growth Fund for the fiscal year ended May
31, 1999, for the five years ended May 31, 1999, and for the ten years ended May
31, 1999 was 8.46%, 13.37%, and 10.97%, respectively. The average annual
Non-Standardized Return for the Capital Income Fund for the fiscal year ended
May 31, 1999, for the five years ended May 31, 1999, and for the ten years ended
May 31, 1999 was 6.57%, 16.81%, and 11.33%, respectively. The average annual
31
<PAGE>
Non-Standardized Return for the Value Trust for the fiscal year ended May 31,
1999, for the five years ended May 31, 1999 and for the period from November 2,
1992 (commencement of operations) to May 31, 1999 was 17.80%, 17.42% and 13.20%,
respectively.
In addition, each Fund may include aggregate Non-Standardized Return in
Performance Advertisements. Aggregate Non-Standardized Return is calculated by
subtracting the beginning value of an investment in a Fund from the value of the
investment at the end of the period and dividing the remainder by the beginning
value. For purposes of the calculation, it is assumed that the beginning value
is $1,000 and that dividends and other distributions are reinvested. In
addition, contingent deferred sales charges are not taken into account. The
aggregate Non-Standardized Return for the Growth Fund for the period from its
inception on June 14, 1985 to May 31, 1999 was 388.14%. The aggregate
Non-Standardized Return for the Capital Income Fund for the period from its
inception on April 18, 1988 to May 31, 1999 was 196.09%. The aggregate
Non-Standardized Return for the Value Trust for the period from its inception on
November 2, 1992 to May 31, 1999 was 126.23%. The aggregate Non-Standardized
Return for the Treasuries Trust for the period from its inception on July 2,
1997 to May 31, 1999 was 14.92%. The aggregate Non-Standardized Return for the
Multiple Index Trust for the period from its inception on July 2, 1997 to May
31, 1999 was 31.59%.
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:
6
YIELD = 2[( a-b + 1) - 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.
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
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<PAGE>
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. The Treasuries Trust's yield for
the 30-day period ended May 31, 1999 was 5.45%. Without fee waivers by the
Adviser during the period, the yield for that Fund would have been 5.07%.
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
TAXATION OF THE FUNDS - GENERAL
Each Fund is treated as a separate corporation for federal income tax
purposes and intends to continue to qualify for treatment as a RIC under the
Code. By doing so, it will be relieved of federal income tax on the part of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain and net gains from certain foreign currency
transactions, if any) and net capital gain (the excess of net long-term capital
gain over net short-term capital loss) that it distributes to its shareholders.
To continue to qualify for treatment as a RIC, a Fund must distribute
annually to its shareholders at least 90% of its investment company taxable
income ("Distribution Requirement") 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 or foreign
currencies and other 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, (a) 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 these 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 (b) not more than 25% of the value of its
total assets may be invested in securities (other than U.S. Government
securities or securities of other RICs) of any one issuer ("Diversification
Requirements").
33
<PAGE>
If a Fund failed to qualify for treatment as a RIC for any taxable year,
(1) it would be taxed as an ordinary corporation on the full amount of its
taxable income for that year without being able to deduct the distributions it
makes to its shareholders and (2) 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. In
addition, the Fund could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions before
requalifying for RIC treatment.
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.
TAXATION OF INVESTMENTS IN UNDERLYING FUNDS
The Growth Fund, the Capital Income Fund and the Multiple Index Trust
("Investing Funds") each intends to invest only in underlying funds that intend
to qualify for treatment as RICs under the Code. If an underlying fund fails to
qualify for that treatment, it will be subject to federal income tax on its
income and gains and may adversely affect an Investing Fund's ability to satisfy
the Diversification Requirements and thereby its ability to qualify as a RIC. No
assurance can be given, however, that an underlying fund will qualify for
treatment as a RIC.
An Investing Fund's redemption of shares it holds in an underlying fund
will result in taxable gain or loss to the Fund, depending on whether the
redemption proceeds are more or less than its adjusted basis for the redeemed
shares (which normally includes any sales charge paid on them); an exchange of
an underlying fund's shares for shares of another underlying fund normally will
have similar tax consequences. However, if an Investing Fund disposes of an
underlying fund's shares ("original 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
("replacement 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 original shares will be increased, or the loss
thereon decreased, by the amount of the sales charge paid when those shares were
acquired and (2) that amount will increase the adjusted basis of the replacement
shares that were subsequently acquired.
TAXATION OF SHAREHOLDERS
Certain dividends and other distributions declared by a Fund in December
are taxable to its shareholders as though received on December 31 if paid to
them during the following January. Accordingly, those distributions will be
taxed to the shareholders for the taxable year in which that December 31 falls.
A portion of the dividends from a Fund'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 for a Fund may not exceed the aggregate dividends it receives either
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directly from U.S. corporations (excluding RICs, among others) or indirectly
from those corporations through underlying funds 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 federal 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.
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. If a
shareholder purchases Fund shares within thirty days before or after redeeming
other shares of that Fund at a loss, all or part of that loss will not be
deductible and instead will increase the basis of the newly purchased shares. If
shares are purchased shortly before the record date for any dividend or capital
gain distribution, the investor will pay full price for the shares and receive
some portion of the price back as a taxable distribution.
The maximum tax rate applicable to a non-corporate taxpayer's net capital
gain recognized on the disposition of capital assets held for more than one year
is 20% (10% for taxpayers in the 15% marginal tax bracket).
Each Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. Withholding at that rate also is required from
dividends and capital gain distributions payable to those shareholders who
otherwise are subject to backup withholding.
QUALIFIED RETIREMENT PLANS. An investment in Fund shares may be
appropriate for individual retirement accounts (including "Roth IRAs"),
tax-deferred annuity plans under section 403(b) of the Code, self-employed
individual retirement plans (commonly referred to as "Keogh plans"), simplified
employee pension plans, savings incentive match plans for employees and other
qualified retirement plans (including section 401(k) plans). Dividends and
capital gain distributions received on Fund shares held by any of these accounts
or plans are automatically reinvested in additional Fund shares, and taxation
thereof is deferred until distributed by the account or plan. Investors who are
considering establishing such an account or plan may wish to consult their
attorneys or other tax advisers with respect to individual tax questions. The
option of investing in these accounts or plans through regular payroll
deductions may be arranged with Distributors and the employer.
ZERO COUPON AND PAYMENT-IN-KIND SECURITIES (TREASURIES TRUST)
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, the 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 them during the year. Similarly, the
Fund must include in its gross income securities it receives as "interest" on
payment in kind securities. Because the Fund annually must distribute
substantially all of its investment company taxable income, including any
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accrued OID and other non-cash income, 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 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. The 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.
FOREIGN INCOME AND GAINS (UNDERLYING FUNDS AND VALUE TRUST)
Dividends and interest received by an underlying fund, and gains realized
thereby, 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.
Underlying funds 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 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, an underlying 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 from disposition of that stock (collectively "PFIC income"), plus interest
thereon, even if the fund distributes the PFIC income as a taxable dividend to
its shareholders (including an Investing Fund). The balance of the PFIC income
will be included in the underlying 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 an underlying 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 underlying fund will 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 to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax -- even if the
underlying fund did not receive those earnings and gain from the QEF. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
An underlying 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 underlying fund's adjusted basis therein as of the end of that year.
Pursuant to the election, an underlying 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 in income by the underlying fund for prior taxable years under the
election (and under regulations proposed in 1992 that provided a similar
election with respect to the stock of certain PFICs). An underlying fund's
adjusted basis in each PFIC's stock subject to the election would be adjusted to
reflect the amounts of income included and deductions taken thereunder the
election.
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Section 988 of the Code also may apply to forward currency contracts and
options on foreign currencies. Under section 988 each foreign currency gain or
loss generally is computed separately and treated as ordinary income or loss. In
the case of overlap between sections 1256 (see below) and 988, special
provisions determine the character and timing of any income, gain or loss.
The Value Trust also may invest in foreign securities, with the
consequences described above.
HEDGING STRATEGIES (UNDERLYING FUNDS AND VALUE TRUST)
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the amount, character
and timing of recognition of the gains and losses an underlying fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
options, futures and forward contracts derived by an underlying fund with
respect to its business of investing in securities or those currencies, will
qualify as permissible income under the Income Requirement.
Certain futures and forward contracts in which the underlying funds may
invest will be "section 1256 contracts." Section 1256 contracts held by an
underlying fund at the end of each taxable year, other than section 1256
contracts that are part of a "mixed straddle" with respect to which an
underlying fund has made an election not to have the following rules apply, must
be "marked-to-market" (that is, treated as sold 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. Section 1256 contracts also may be marked-to-market for purposes of the
Excise Tax.
Code section 1092 (dealing with straddles) also may affect the taxation of
certain hedging instruments in which an underlying fund 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 generally 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 an underlying 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
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been promulgated, the tax consequences of straddle transactions are not entirely
clear.
If an underlying 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 gain will be recognized at that time. A constructive sale
generally consists of a short sale, an offsetting notional principal contract or
futures or forward contract entered into by an underlying 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 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 underlying 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).
The Value Trust also may engage in hedging strategies, with the
consequences described above.
CUSTODIANS, TRANSFER AND DIVIDEND DISBURSING AGENT
Custodial Trust Company ("CTC"), 101 Carnegie Center, Princeton, New
Jersey 08540-6231 is the custodian for the Multiple Index Trust, the Treasuries
Trust and the Value Trust. The Value Trust borrows money from CTC in connection
with its leveraging activities. Branch Banking and Trust Company, P.O. Box 5228,
Martinsville, Virginia 24115, serves as the custodian for the Growth Fund and
the Capital Income Fund. Branch Banking and Trust Company also has loans
outstanding to the Adviser under terms and conditions arrived at without regard
to the custodial relationship.
State Street Bank and Trust Company, Two Heritage Drive, North Quincy,
Massachusetts 02171 is the Trust's transfer and dividend disbursing agent.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland
21201, serves 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
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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 reasonably 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.
The Prospectus relating to the Funds and this SAI 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 Prospectus and this SAI 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.
FINANCIAL STATEMENTS
The financial statements of the Funds for the year ended May 31, 1999,
which are included in the Annual Report to Shareholders of the Funds, are hereby
incorporated by reference.
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APPENDIX A
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 S&P 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
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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 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 Ca are 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 C are 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.
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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 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
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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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APPENDIX B
HEDGING STRATEGIES
GENERAL DESCRIPTION OF HEDGING STRATEGIES
The Adviser may engage in a variety of strategies ("Hedging Strategies")
involving the use of certain financial instruments, including options, futures
contracts (sometimes referred to as "futures") and options on futures contracts
to attempt to hedge the portfolio of the Value Trust. The Funds' Adviser may
also hedge currency risks associated with these Funds' investments in foreign
securities through the use of forwarding foreign currency contracts. An
underlying fund may also engage in Hedging Strategies.
Hedging Strategies are used to hedge against price movements in one or
more particular securities positions that the Fund owns or intends to acquire.
Hedging Strategies on stock indices, in contrast, generally are used to hedge
against price movements in broad equity market sectors in which the Fund has
invested or expects to invest. Hedging Strategies on debt securities may be used
to hedge either individual securities or broad fixed income market sectors.
The use of Hedging Strategies is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, the Funds' ability to use Hedging Strategies will be
limited by tax considerations.
SPECIAL RISKS OF HEDGING STRATEGIES
The use of Hedging Strategies involves special considerations and risks,
as described below. Risks pertaining to particular instruments are described in
the sections that follow:
(1) Successful use of most Hedging Strategies depends upon the Adviser's
ability to predict movements of the overall securities and interest rate
markets, which requires different skills than predicting changes in the prices
of individual securities. There can be no assurance that any particular hedging
strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Strategy and price movements of the investments
being hedged. For example, if the value of an instrument used in a short hedge
increased by less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which hedging instruments are
traded. The effectiveness of Hedging Strategies on indices will depend on the
degree of correlation between price movements in the index and price movements
in the securities being hedged.
(3) Hedging Strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements in
the investments being hedged. However, Hedging Strategies can also reduce
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opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because the Adviser projected a decline in the price of a security in the
Fund's portfolio, and the price of that security increased instead, the gain
from that increase might be wholly or partially offset by a decline in the price
of the hedging instrument. Moreover, if the price of the hedging instrument
declined by more than the increase in the price of the security, the Fund could
suffer a loss. In either such case, the Fund would have been in a better
position had it not hedged at all.
(4) A Fund might be required to maintain assets as "cover," maintain
segregated accounts or make margin payments when it takes positions in hedging
instruments involving obligations to third parties (i.e., hedging instruments
other than purchased options). If the Fund were unable to close out its
positions in such hedging instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the positions
expired or matured. These requirements might impair the 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 the Fund sell a portfolio security at a
disadvantageous time. The Fund's ability to close out a position in an
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 opposite party to the transaction to enter into a transaction
closing out the position. Therefore, there is no assurance that any hedging
position can be closed out at a time and price that is favorable to the Fund.
COVER FOR HEDGING STRATEGIES
The Funds will not use Hedging Strategies for speculative purposes or for
purposes of leverage, although an underlying fund may do so. Hedging Strategies,
other than purchased options, expose the Funds to an obligation to another
party. The Funds will not enter into any such transactions unless they own
either (1) an offsetting ("covered") position in securities or other options or
futures contracts or (2) cash, receivables and short-term debt securities, with
a value sufficient at all times to cover its potential obligations to the extent
not covered as provided in (1) above. The Funds will comply with SEC guidelines
regarding cover for Hedging Strategies and will, if the guidelines so require,
set aside cash or liquid, high-grade debt securities in a segregated account
with their custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding instrument is open, unless they are replaced
with similar assets. As a result, the commitment of a large portion of a Fund's
assets to cover segregated accounts could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.
OPTIONS ACTIVITIES
Each Fund, either directly or through 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
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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.
Each Fund, either directly or through 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).
Each Fund, either directly or through an underlying fund, may 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. Closing
transactions may be effected with respect to options traded in the OTC markets
(currently the primary markets for options on debt securities) only by
negotiating directly with the other party to the option contract or in a
secondary market for the option if such market exists. Although the funds will
enter into OTC options with dealers that agree to enter into, and that are
expected to be capable of entering into, closing transactions with the fund,
there can be no assurance that the fund would be able to liquidate an OTC option
at a favorable price at any time prior to expiration. In the event of insolvency
of the contra-party, the fund may be unable to liquidate an OTC option.
Accordingly, it may not be possible to effect closing transactions with respect
to certain options, which would result in the fund having to exercise those
options that it has purchased in order to realize any profit. With respect to
options written by the fund, the inability to enter into a closing transaction
may result in material losses to the fund. For example, because the fund must
maintain a covered position with respect to any call option it writes on a
security or stock index, the fund may not sell the underlying security or invest
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any cash, U.S. Government securities or short-term debt securities used to cover
the option during the period it is obligated under such option. This requirement
may impair the fund's ability to sell a portfolio security or make an investment
at a time when such a sale or investment might be advantageous.
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.
In view of the risks involved in using the options strategies described
above, each Fund that engages directly in options activities has adopted the
following investment guidelines to govern its use of such strategies; these
guidelines may be modified without shareholder vote:
(1) a Fund will write only covered options and each such option will
remain covered so long as the Fund is obligated under the option;
(2) a Fund will not write call or put options having aggregate
exercise prices greater than 25% of its net assets; and
(3) a Fund may purchase a put or call option, including any
straddles or spreads, only if the value of its premium, when aggregated
with the premiums on all other options held by the Funds, does not exceed
5% of the Fund's total assets.
The Funds' activities in the option markets may result in a higher
portfolio turnover rate and additional brokerage costs; however, the Funds also
may save on commissions by using options as a hedge rather than buying or
selling individual securities in anticipation of or as a result of market
movements.
FUTURES CONTRACTS
The Value Trust may enter into futures contracts for the purchase or sale
of debt securities and stock indexes. The Growth Fund, the Capital Income Fund
and the Multiple Index Trust, through an underlying fund, may also do so. 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.
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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
requirements in the securities market. Therefore, increased participation by
speculators in the futures market may also cause temporary price distortions.
Positions in futures contracts may be closed out only on an exchange or
board of trade that provides a secondary market for such futures. Although the
Funds intend to purchase or sell futures only on exchanges or boards of trade
where there appears to be an active secondary market, there is no assurance that
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a liquid secondary market on an exchange or board of trade will exist for any
particular contract at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Funds would continue to be required to make variation margin
deposits.
As is the case with options, the Funds' activities in the futures markets
may result in a higher portfolio turnover rate and additional transaction costs
in the form of added brokerage commissions; however, the Funds also may save on
commissions by using futures contracts as a hedge rather than buying or selling
individual securities in anticipation of or as a result of market movements.
In view of the risks involved in using the futures strategies that are
described above, each of these Funds has adopted the following investment
guidelines to govern its use of such strategies; these guidelines may be
modified without shareholder vote.
(1) a Fund will not purchase or sell futures contracts or related
options if, immediately thereafter, the sum of the amount of initial
margin deposits on the Fund's existing futures positions and related
options and premiums paid for related options would exceed 5% of the
Fund's total assets; and
(2) futures contracts and related options will not be purchased if
immediately thereafter more than 30% of the Fund's total assets
would be so invested.
OPTIONS ON FUTURES CONTRACTS
The Value Trust may purchase and write (sell) put and call options on
futures contracts. The Growth Fund, the Capital Income Fund and the Multiple
Index Trust, through an underlying fund, also may do so. 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.
Each Fund, either directly or indirectly through an underlying fund, also
may purchase put options on interest rate and stock index futures contracts. 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.
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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.
FORWARD AND FOREIGN CURRENCY CONTRACTS
The Value Trust may use forward or foreign currency contracts to protect
against uncertainty in the level of future foreign currency exchange rates. The
Growth Fund, the Capital Income Fund and the Multiple Index Trust, through an
underlying fund, also may do so. The Funds will not speculate with forward
currency contracts or foreign currency exchange rates.
The Value Trust may enter into forward currency contracts with respect to
specific transactions. The Growth Fund, the Capital Income Fund and the Multiple
Index Trust, through an underlying fund, also may do so. For example, when a
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, or the Fund anticipates the receipt in a foreign currency
of dividend or interest payments on a security that it holds or anticipates
purchasing, the Fund may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such payment, as the case may be, by
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars or foreign currency, of the amount of foreign currency involved in
the underlying transaction. The Fund will thereby be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the currency exchange rates during the period between the date on which
the security is purchased or sold, or on which the payment is declared, and the
date on which such payments are made or received. 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.
The Value Trust also may hedge by using forward currency contracts in
connection with portfolio positions to lock in the U.S. dollar value of those
positions, to increase the Fund's exposure to foreign currencies that the
Adviser believes may rise in value relative to the U.S. dollar or to shift the
Fund's exposure to foreign currency fluctuations from one country to another.
The Growth Fund, the Capital Income Fund and the Multiple Index Trust, through
an underlying fund, may also do so. For example, when the Adviser believes that
the currency of a particular foreign country may suffer a substantial decline
relative to the U.S. dollar or another currency, it may enter into a forward
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contract to sell the amount of the former foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency. This investment practice generally is referred to as
"cross-hedging" when another foreign currency is used.
The precise matching of the forward amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (that is, cash)
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
the market value of the security exceeds the amount of foreign currency the Fund
is obligated to deliver. The projection of short-term currency market movements
is extremely difficult and the successful execution of a short-term hedging
strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing the
Fund to sustain losses on these contracts and transaction costs. The Fund may
enter into forward contracts or maintain a net exposure on such contracts only
if (1) the consummation of the contracts would not obligate the Fund to deliver
an amount of foreign currency in excess of the value of the Fund's portfolio
securities or other assets denominated in that currency or (2) the Fund
maintains cash, U.S. Government securities or liquid, high-grade debt securities
in a segregated account in an amount not less than the value of the Fund's total
assets committed to the consummation of the contract which value must be marked
to market daily. Under normal circumstances, consideration of the prospect for
currency parties will be incorporated into the longer term investment decisions
made with regard to overall diversification strategies. However, the Adviser
believes that it is important to have the flexibility to enter into such forward
contracts when it determines that the best interests of the Fund will be served.
At or before the maturity date of a forward contract requiring the Fund to
sell a currency, the Value Trust may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, the Fund
may close out a forward contract requiring it to purchase a specified currency
by entering into a second contract entitling it to sell the same amount of the
same currency on the maturity date of the first contract. The Fund would realize
a gain or loss as a result of entering into such an offsetting forward currency
contract under either circumstance to the extent the exchange rate or rates
between the currencies involved moved between the execution dates of the first
contract and the offsetting contract.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currencies 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.
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The use of forward currency contracts does not eliminate fluctuations in the
prices of the underlying securities the Fund owns or intends to acquire, but it
does fix a rate of exchange in advance. In addition, although forward currency
contracts limit the risk of loss due to a decline in the value of the hedged
currencies, at the same time they limit any potential gain that might result
should the value of the currencies increase.
Although each Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund may convert foreign currency from time to time and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
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