PART A
<PAGE>
THE RUSHMORE FUND, INC.
RUSHMORE U.S. GOVERNMENT BOND PORTFOLIO
Prospectus
January 1, 1999
The Rushmore U.S. Government Bond Portfolio (the "Fund") is a no-load
portfolio of The Rushmore Fund, Inc. This Prospectus contains
important information about the Fund and should be read before
investing. Please keep the Prospectus on file for future reference.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
Page
Risk and Return Summary:
Investments, Risks, and Performance 3
Risk/Return Bar Chart and Table 3
Performance Table 4
Fees and Expenses 4
Investment Objectives, Principal Investment
Strategies, and Related Risks 4
Management's Discussion of Fund Performance 5
Performance Comparison 6
Shareholder Information 7
How to Invest in the Fund 7
How to Redeem Your Investment 7
Additional Information About the Fund 8
Exchanging Fund Shares 8
Pricing of Fund Shares 9
Dividends and Distributions 9
Tax Consequences of Investing in the Fund 9
Management, Organization, and Capital
Structure 9
Investment Adviser 9
Year 2000 Preparations 10
Financial Highlights 11
2
<PAGE>
RISK and RETURN SUMMARY
Investments, Risks, and Performance
Fund Investment Objective
The objective of the U.S. Government Bond Portfolio is to provide
investors with current income to the extent that such investment is
consistent with safety of principal.
Principal Fund Investment Strategy
In attempting to achieve this objective, the Fund invests principally
in United States Treasury notes and bonds and in other U.S. Government
securities.
Principal Risks of Investing in the Fund
As with any bond fund, the value of your investment in the U.S.
Government Bond Portfolio will rise or fall depending on interest rate
movements. The market values of the investment securities of the Fund
will vary inversely with interest rates; therefore, the per share
value of the Fund will also fluctuate as interest rates change.
Consequently, because of the fluctuation of per share values,
investment in the Fund may not be suitable for investors with short-
term investment objectives. Although the Fund seeks to meet its
investment objective, it is possible to lose money by investing in the
Fund.
An investment in the Fund is not a deposit or obligation of any bank
and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Risk/Return Bar Chart and Table
The chart and table below show the annual calendar-year returns and
the performance of the Fund. The Fund commenced operations on
December 18, 1985, and has a fiscal year-end of August 31. The
information in the chart and the table provides some indication of the
risks of investing in the Fund by showing changes in Fund performance
from year to year and by showing how the Fund's average annual returns
for 1 year and 5 years compare with the performance of both the Lehman
Brothers Intermediate Government Index and the Lehman Brothers Long
Treasury Bond Index.
The chart and the tables below assume the reinvestment of dividends
and distributions. Please keep in mind that how the Fund has
performed in the past does not necessarily indicate how the Fund will
perform in the future.
<TABLE>
[Deleted Annual Total Return Chart]
<CAPTION>
Year
----------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Total Return 9.1% 0.4% 7.9% 18.9% 4.5% 16.6% 6.1% 15.4% -9.9% 32.0% -2.8% 13.1%
</TABLE>
Notes to Annual Total Return Chart:
1. The Fund's year-to-date total return for the most-recent fiscal
quarter (ended September 30, 1998) was 14.60%.
2. The Fund's highest quarterly return was 13.73% in the second
quarter of 1989; the Fund's lowest quarterly return of (7.55)%
occurred in the first quarter of 1996.
3
<PAGE>
Performance Table
Average Annual Total Returns
(for Periods Ended December 31, 1997)
Lehman Lehman
U.S. Brothers Brothers
Government Intermediate Long
Bond Government Treasury
Portfolio Index Bond Index
One Year 13.06% 7.72% 15.13%
Five Years 8.54% 6.39% 9.99%
Ten Years 9.59% 8.13% 11.12%
FEES and EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees.......................... 0.50%
Other Expenses........................... 0.30%
Total Annual Fund Operating Expenses..... 0.80%
If your monthly account balance averages $500 or less due to
redemptions you may be charged a $5 fee.
Example
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated below and then redeem all of your shares at the end
of those periods. The Example also assumes that your investment has a
5% return each year and that the Fund's operating expenses remain the
same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 year 3 years 5 years 10 years
$ 82 $ 255 $ 444 $ 990
INVESTMENT OBJECTIVES, PRINCIPAL
INVESTMENT STRATEGIES, and RELATED RISKS
Fund Investment Objective
The investment objective of the Rushmore U.S. Government Bond
Portfolio is to provide investors with current income to the extent
that such investment is consistent with safety of principal.
Principal Investment Strategies
In attempting to achieve its objective, the Fund anticipates investing
at least 95% of its total assets in United States Treasury notes and
bonds and in other U.S. Government securities. At no time will the
Fund invest less than 65% of its total assets in these securities.
4
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In managing its portfolio, the Fund considers economic conditions and
interest rate trends in determining what securities to purchase. The
Fund will invest only in securities issued or guaranteed by the U.S.
Government, federal agencies and government-sponsored enterprises, and
in securities and certificates evidencing ownership of future interest
and principal payments on the above securities (e.g., zero coupon
securities). The Fund also may purchase U.S. Government securities
under repurchase agreements from member banks of the Federal Reserve
system or primary dealers of U.S. Government securities and may lend
portfolio securities for the purpose of earning additional income.
The Fund may invest in securities of any maturity. The Fund's average
weighted maturity varies, but as of November 30, 1998 the Fund's
average weighted maturity was approximately 19 years.
Risks of Investing in the Fund
Fluctuation in the market value of the securities of the Fund will
occur due to interest rate movements. The market values of the
investment securities of the Fund will vary inversely with interest
rate movements and, therefore, the per share value of the Fund will
also fluctuate as interest rates change. Furthermore, debt securities
with longer maturities generally experience greater price movement
compared to shorter-term securities as interest rates fluctuate.
Interest rate uncertainty is related to various factors. Among these
factors are swings in money growth, uncertainty about the policies of
the Federal Reserve Board, and inflationary expectations. Considering
these risks, there is a risk you could lose as well as make money by
investing in the Fund. As with any fund, there is no guarantee that
the Fund's performance will be positive over any period of time,
either short-term or long-term.
MANAGEMENT'S DISCUSSION of FUND PERFORMANCE
International financial woes and low inflation in the U.S. have been
major factors in the dramatic decrease in bond yields over the past
year. The yield on the benchmark thirty-year Treasury Bond has
dropped over 150 basis points since August 1997, to the lowest levels
since the Treasury Department began regular auctions of that issue in
1977. The entire Treasury yield curve currently falls below the
Federal Funds rate of 5 1/4%, which the Federal Reserve lowered by 25
basis points at the September 1998 Federal Open Market Committee
meeting.
There are several reasons for the dramatic drop in Treasury yields
over the past year. Among the most common cited are: a domestic
economy that has continued to operate in an environment of little or
no inflation, a decrease in issuance of new Treasuries due to a
shrinking budget deficit, recent worries about the performance of
stock markets here in the U.S., and international economic problems
such as those in Asia, Russia, and South America. The increased
demand for the safety of U.S. Treasury issues and decreased supply of
them, as well as low inflation, have resulted in the historically low
yields we are seeing now.
The U.S. Government Bond Portfolio invests primarily in the ten- and
thirty-year Treasury issues. Our objective is to provide current
income as well as maintain safety of principal. For the fiscal year
ending August 31, 1998, the total return of the portfolio was 19.35%,
as compared with the Lehman Brothers Intermediate Government Index
total return of 9.27%, and the Lehman Brothers Long Treasury Bond
Index total return of 20.84%. The Portfolio had an annualized net
investment income of 4.98% of net assets for the year ended August 31,
1998, and an average maturity of 18.6 years.
Outlook
It was only a few short months ago that an increase in the Federal
Funds rate by the end of this year was being considered a real
possibility. The sustained impact of financial woes in Asia and
other parts of the world on our domestic economy resulted in a change
in market sentiment, and a Fed easing was priced in to the market. At
the Federal Open Market Committee meeting in September, the Federal
Reserve did indeed decide to lower rates cutting them by 25 basis
points. This was considered a somewhat conservative move by many, as
an adjustment of as much as 50 basis points had been anticipated. The
question now is whether or not this was just the first of a series of
Fed easings. Our belief had previously been that the tight labor
market and rising wage pressures would be enough to keep the Fed from
intervening on interest rates, but the prolonged impact around the
world on our economic growth has become too much for the Fed to
ignore. Given the current global economic environment, we expect the
Federal Reserve to lower the Fed Funds rate 25 basis points at least
one more time, possibly as early as the next FOMC meeting in November.
5
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Performance Comparison
Assuming a $10,000 initial investment, the following graph compares
the Fund's total return to the performance of the Lehman Brothers
Intermediate Government Index and the Lehman Brothers Long Treasury
Bond Index since the Fund began operating on December 18, 1985.
Please remember that past performance does not necessarily reflect how
the Fund may perform in the future.
[Deleted Chart]
Lehman Lehman
Rushmore U.S. Brothers Brothers
Account Value Government Intermediate Long
Total Return Bond Government Treasury
(as of) Portfolio Index Bond Index
12/31/1985 $10,000 $10,000 $10,000
8/31/1986 $10,614 $11,136 $12,440
8/31/1987 $10,608 $11,341 $11,529
8/31/1988 $11,215 $12,178 $12,458
8/31/1989 $13,478 $13,516 $14,942
8/31/1990 $13,310 $14,615 $15,169
8/31/1991 $15,654 $16,470 $17,981
8/31/1992 $17,841 $18,581 $20,865
8/31/1993 $21,574 $20,194 $25,455
8/31/1994 $19,354 $20,026 $23,829
8/31/1995 $22,518 $21,814 $27,868
8/31/1996 $22,611 $22,787 $28,275
8/31/1997 $25,311 $24,601 $32,019
8/31/1998 $30,209 $26,882 $38,692
Average Annual Total Returns as of August 31, 1998
One Year 19.35%
Five Year 6.96%
Since Inception 9.07%
6
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SHAREHOLDER INFORMATION
How to Invest In The Fund
Facts To Know Before You Invest:
- The minimum initial investment is $2,500
- Retirement accounts may be opened with a $500 minimum investment
- There are no minimum amounts for subsequent investments
- There are no sales charges
- The Funds reserve the right to reject any purchase order
- All shares are electronically recorded; certificated shares are
not available
- A $10 fee may be charged for items returned for insufficient or
uncollectible funds
Purchasing Shares:
By Mail
Complete an application and make a check payable to "The Rushmore
Fund, Inc." Send your completed and signed application and check
drawn on a U.S. bank to:
The Rushmore Fund, Inc.
4922 Fairmont Avenue
Bethesda, Maryland 208l4
By Bank Wire
Speak to the branch manager of your bank. Request a transfer of
Federal funds to Rushmore Trust and Savings, FSB, instructing the
bank to wire transfer the money before 4:00 P.M., Eastern time to:
Rushmore Trust and Savings, FSB
Bethesda, Maryland
Routing # 0550-71084
Specify the Fund name, your account number (if assigned), and the
name(s) in which the account is registered.
After instructing your bank to transfer Federal funds, you must
telephone Shareholder Services at (800) 622-1386 or (301) 657-1510
between 8:30 A.M. and 4:00 P.M. Eastern time and tell us the amount
you transferred and the name of the bank sending the transfer.
Your bank may charge a fee for their services. Remember that it is
important to complete the wire transfer before 4:00 P.M. Eastern
time.
Through Brokers
You may invest in the Fund by purchasing shares through registered
broker-dealers, banks or other financial institutions that purchase
securities for their customers. Please note that such third
parties may charge a fee for their services.
How To Redeem Your Investment
Redeeming Shares:
By Telephone (1-800-622-1386)
As a Fund shareholder, you will automatically receive telephone
redemption privileges. If you choose to redeem your investment by
telephone, please contact Shareholder Services at 1-800-622-1386
between the hours of 8:30 A.M. and 4:30 P.M. Eastern time. For
your protection, we will take measures to verify your identity by
requiring some form of personal identification prior to acting on
telephone instructions and may also record telephone transactions.
A written confirmation will be mailed to you within five business
days after your redemption. Please note that we may terminate or
modify telephone redemption privileges upon 60 days notice.
7
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By Mail or Fax
Mail your instructions for Fax your instructions for
redemption to: redemption to:
Rushmore Trust and Savings, FSB (301) 657-1520
4922 Fairmont Avenue Attn: Shareholder Services
Bethesda, MD 20814
Attn: Shareholder Services
Include the following information in your redemption request:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as it appears on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Additional Information You Should Know When You Redeem:
- There are no fees charged for redemptions.
- You may receive redemption proceeds by bank wire, check, or
through the Automated Clearing House System (ACH). When the amount
to be redeemed is at least $5,000, we will, upon instruction, wire
transfer the amount to your commercial bank or brokerage account
specified in your account application. For amounts less than $5,000,
you may have redemption proceeds deposited directly into an account
specified on the account application or request that a redemption
check be delivered by mail to your address of record.
- If you request payment of redemptions to a third party or to a
location other than an address on record, the request must be in
writing and your signature must be guaranteed by an eligible
institution (eligible institutions generally include banking
institutions, securities exchanges, associations, agencies or
broker/dealers, and "STAMP" program participants).
- Normally, payment for all shares redeemed will be issued within
one business day. However, withdrawal requests on investments that
have been made by check may be delayed up to ten calendar days
following the investment or until the check clears, whichever occurs
first. This delay is necessary to assure us that investments made by
check are good funds. You will receive redemption proceeds promptly
upon confirmation of receipt of good funds.
- If your monthly Fund account balance averages $500 or less due to
redemptions, you may be charged a $5 fee. The fee will not be imposed
on tax-sheltered retirement plans or accounts established under the
Uniform Gifts or Transfers to Minors Acts. Additionally, we reserve
the right to involuntarily redeem accounts which fall below $500 after
providing 60 days written notice.
- The right of redemption may be suspended, or the date of payment
postponed during the following periods: (a) periods during which the
New York Stock Exchange (NYSE) is closed (other than customary weekend
or holiday closings); (b) periods when trading on the NYSE is
restricted, or an emergency exists, as determined by the Securities
and Exchange Commission, so that disposal of the Fund's investments or
determination of net asset value is not reasonably practicable; or (c)
for such other periods as the Commission, by order, may permit for
protection of the Fund's investors.
ADDITIONAL INFORMATION ABOUT THE FUND
Exchanging Fund Shares
You may exchange shares of the Fund, without cost, for shares of any
of the following Rushmore Funds: Fund for Government Investors, Fund
for Tax-Free Investors, Inc., or American Gas Index Fund, Inc. You
may also exchange shares of the Fund for shares of the Cappiello-
Rushmore Emerging Growth, Growth and Utility Income Funds. The
registration for both accounts must be identical and you should obtain
a current prospectus for the fund into which you are exchanging by
calling 1-800-343-3355. Exchanges will be effected at the respective
net asset values of the Funds involved as next determined after
receipt of the exchange request. The Fund may change or cancel their
exchange policies at any time, upon 60 days' notice to shareholders.
8
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Pricing of Fund Shares
The price of a fund's shares on any given day is its net asset value
per share. This figure is computed by dividing the total market value
of the fund's investments and other assets, less any liabilities, by
the number of fund shares outstanding. The net asset value per share
of the Fund is determined as of 4:00 P.M. Eastern time on days when
the New York Stock Exchange and the custodian bank are open for
business. Orders accepted by the Fund directly or by an authorized
third party will be priced at the Fund's net asset value next computed
after orders are received. This means that if you place a purchase or
redemption order after 4:00 P.M. ET, it will be effected at the next
calculation of net asset value, normally 4:00 P.M. the next business
day.
The Fund values its portfolio securities based on their market value.
Each security held by the Fund is valued at the last quoted sale price
for a given day, or if a sale is not reported for that date, at the
mean between the most recent quoted bid and asked prices. Price
information on each listed security is taken from the exchange where
the security is primarily traded. Unlisted securities for which
market quotations are readily available are valued at the closing
sales prices. The value of assets for which no quotations are readily
available (including any restricted securities) are valued at fair
value in good faith by the Board of Directors or at the direction of
the Directors.
Dividends and Distributions
Dividends of the Fund are declared daily. All dividends and capital
gain distributions of the Fund will be reinvested in additional shares
(including fractional shares where necessary) at net asset value,
unless you elect on your application form or in writing, not less than
five full business days prior to the record date for a particular
dividend or distribution, to receive such dividend or distribution in
cash. If you elect to receive distributions in cash, your election
will be effective until you give other written instructions. Dividends
paid in cash to those investors so electing will be mailed on the
second business day of the following month. Statements of account
showing dividends paid will be mailed to shareholders monthly.
Although the timing and amount of all dividends and distributions are
subject to the discretion of the Board of Directors, the Fund intends
to distribute long-term capital gains, if any, on an annual basis in
November or December.
Tax Consequences of Investing
Taxability of Distributions
As long as the Fund meets the requirements for being tax-qualified
regulated investment company, which the Fund intends to do, the
Fund pays no federal income tax on the earnings distributed to
shareholders. As a result, dividends and capital gains you
receive, whether reinvested or taken as cash, are generally
considered taxable as ordinary income. The Form 1099 that is mailed
to you each January details your dividends and their federal tax
category, although you should verify your tax liability with your
tax professional.
Taxability of Transactions
Any time you sell or exchange shares of the Fund, it is considered
a taxable event for you. For example, if you exchange shares of
the Fund for shares of another Rushmore or Cappiello-Rushmore fund,
the transaction would be treated as a sale. Consequently, any gain
resulting from the transaction would be subject to federal income
tax.
MANAGEMENT, ORGANIZATION and CAPITAL STRUCTURE
Investment Adviser
Money Management Associates ("Adviser"), 100 Lakeshore Drive, Suite
1555, North Palm Beach, Florida 33408, has served as the Fund's
investment adviser since the Fund's inception on December 18, 1985.
Established in 1974, the Adviser manages six no-load mutual funds
(including the Fund) with total assets under management of
approximately $900 million.
Subject to the general supervision of the Board of Directors of the
Fund, the Adviser manages the investment and reinvestment of the
assets of the Fund and is responsible for the overall management of
the Fund's business affairs. An Adviser Group makes investment
decisions; therefore, no one person is primarily responsible for
making investment decisions. For the advisory services performed, the
Adviser received 0.50% of the average net assets of the Fund for the
fiscal year ended August 31, 1998.
9
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Year 2000 Preparations
The day-to-day operations of the Fund are dependent upon the Fund's
service providers, principally the Adviser, Rushmore Trust and
Savings, FSB and Rushmore Services, Inc. (collectively, the
"Servicers"), and upon the smooth functioning of the computer systems
that they utilize. Many computer systems currently cannot properly
recognize or process date-sensitive information relating to the year
2000 and beyond. Like other mutual funds and financial and business
organizations around the world, the Fund, therefore, could be
adversely affected if the computer systems used by these Servicers,
and their vendors, do not properly process and calculate date-related
information and data on and after January 1, 2000. The Servicers have
been evaluating the impact that the year 2000 issue may have on the
computer systems that they utilize and are making appropriate
modifications to these systems in order to assure that they will be
prepared for the year 2000. The Fund and the Servicers expect that
any further modifications to their computer systems necessary to
address the year 2000 issue will be made and tested in a timely
manner. The Servicers also are working with their outside vendors,
and other persons whose systems are linked to those of the Fund and
the Servicers, to obtain satisfactory assurances regarding the year
2000 issue. The costs of this systems remediation will not be paid
directly by the Fund. Inadequate remediation could have an adverse
effect on the Fund's operations, including pricing and securities
trading and settlement, and the provision of shareholder services.
Although, at this time, there can be no assurance that the remedial
action taken by the Servicers will be sufficient or timely, the
Servicers do not anticipate that the transition to the 21st century
will have a material impact on the ability of the Servicers to
continue to service the Fund at current levels.
10
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FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you
understand the Fund's financial performance for the past 5 years.
Certain information reflects financial results for a single Fund
share. The total returns in the table represent the rate that you
would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the
Fund's financial statements, is included in the annual report, which
is available upon request.
<TABLE>
<CAPTION>
For the Years Ended August 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.92 $ 9.39 $ 9.89 $ 9.08 $ 11.55
--------- --------- --------- --------- ---------
Income from Investment Operations:
Net Investment Income 0.527 0.549 0.563 0.606 0.599
Net Realized and Unrealized Gain (Loss)
on Securities 1.350 0.549 (0.502) 0.810 (1.884)
--------- --------- --------- --------- ---------
Total from Investment Operations 1.877 1.098 0.061 1.416 (1.285)
--------- --------- --------- --------- ---------
Less Distributions:
Dividends (from net investment income) (0.527) (0.551) (0.561) (0.606) (0.602)
Distributions (from capital gains) - (0.017) - - (0.583)
--------- --------- --------- --------- ---------
Total Distributions (0.527) (0.568) (0.561) (0.606) (1.185)
--------- --------- --------- --------- ---------
Net Asset Value, End of Year $ 11.27 $ 9.92 $ 9.39 $ 9.89 $ 9.08
========= ========= ========= ========= =========
Total Investment Return 19.35% 11.94% 0.41% 16.35% (10.29)%
Ratios and Supplemental Data:
Net Assets, End of Period (000s omitted) $ 27,260 $ 15,212 $ 21,424 $ 16,391 $ 29,276
Ratio of Expenses to Average Net Assets 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of Net Income to Average Net Assets 4.98% 5.60% 5.59% 6.75% 5.97%
Portfolio Turnover Rate 49.0% 19.2% 95.0% 63.3% 188.3%
</TABLE>
11
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In addition to this prospectus, the following information is available
to assist you in making an investment decision:
Information Available Upon Request Description
Statement of Additional Information A document that includes
additional information about
the Fund.
Annual and Semi-Annual Reports Reports that contain
information about the Fund's
investments. The reports also
discuss the market conditions
and investment strategies that
significantly affected the
Fund's performance during its
last fiscal year.
There are a variety of ways to receive the above information and make
other inquiries of the Fund. You may contact the The Rushmore Fund,
Inc. directly by telephone 1-800-343-3355, visit our internet site at
http://www.rushmorefunds.com, or you may send a written request to the
Fund's offices at 4922 Fairmont Avenue, Bethesda, Maryland 20814.
Additional information about the Fund can also be reviewed and copied
at the Securities and Exchange Commission's Public Reference Room in
Washington D.C. (for hours of operation please call the Commission at
1-800-SEC-0330). You may also obtain copies of the information by
visiting the Commission's internet site at http://www.sec.gov, or,
upon payment of a duplicating fee, by writing the Public Reference
Section of the Commission at 450 Fifth Street, N.W. Washington, D.C.
20549.
The Rushmore Fund, Inc. Investment Company Act File No. 811-4369
12
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PART B
<PAGE>
THE RUSHMORE FUND, INC.
4922 Fairmont Avenue, Bethesda, Maryland 20814
(800) 343-3355
(301) 657-1500
Rushmore U.S. Government Bond Portfolio
Statement of Additional Information
January 1, 1999
This Statement of Additional Information is not a Prospectus. It
should be read in conjunction with the Fund's Prospectus, dated
January 1, 1999. A copy of the Fund's Prospectus may be obtained
without charge by writing or telephoning the Fund at the above address
or telephone numbers.
The audited financial statements of the Fund, for the Fund's fiscal
year ended August 31, 1998, are included in the Fund's 1998 Annual
Report to Shareholders, which has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. Copies
of the Fund's 1998 Annual Report are available, without charge, by
request by writing or telephoning the Fund at the above address or
telephone numbers.
<PAGE>
Table of Contents
Page in
Statement of
Additional Page in
Information Prospectus
Fund Description, Investments, and Risks 3 3
Investment Limitations 6 -
Management of the Fund 7 9
Control Persons and Principal Holders of Securities 9 -
Investment Advisory and Other Services 9 9
Brokerage Allocation and Portfolio Transactions 10 -
Taxation of the Fund 10 -
Calculation of Performance Data 11 -
Financial Statements 12 11
2
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FUND DESCRIPTION, INVESTMENTS and RISKS
Description
The Rushmore U.S. Government Bond Portfolio (the "Fund") is an open-
end, diversified management investment company incorporated in the
State of Maryland on July 24, 1985.
Investments
U.S. Government Securities
The term "government securities" is used loosely in the marketplace
and actually covers a wide array of securities. There are, in fact,
three major classifications, each of which the Fund may invest in:
U.S. Treasury Securities
U.S. Treasury securities are direct obligations of the U.S.
Government and are backed by the full faith and credit of the U.S.
Treasury. U.S. Treasury securities differ only in their interest
rates, maturities, and dates of issuance. Treasury Bills have
maturities of one year or less. Treasury Notes have maturities of
one to ten years, and Treasury Bonds generally have maturities of
greater than ten years at the date of issuance. Yields on short-,
intermediate-, and long-term U.S. Treasury securities are dependent
on a variety of factors, including the general conditions of the
money and bond markets, the size of a particular offering, and the
maturity of the obligation.
Government Agency Securities
Government agency securities, often called agencies, are indirect
obligations of the U.S. government, and are issued by federal
agencies and government-sponsored corporations under authority from
Congress. Government agency securities may be backed by the full
faith and credit of the federal government, which is the case with
Government National Mortgage Association and Small Business
Administration certificates, but are more often guaranteed by the
sponsoring agency with the implied backing of Congress. Examples
of government agency securities include, Export-Import Bank of the
United States, the Federal Home Loan Bank, and the Government
National Mortgage Association.
Government-Sponsored Enterprises
Government-sponsored enterprises are characterized as being
privately owned and publicly chartered. These entities were
created by the U.S. Government to help certain important sectors of
the economy reduce their borrowing costs. The U.S. Government does
not back government-sponsored enterprise securities. However, the
fact that the government sponsored the enterprise creates the
assumption that the federal government would not let the entity go
into default. The Student Loan Marketing Association, the Federal
National Mortgage Association, and Federal Home Loan Banks are
examples of government-sponsored enterprise securities.
Risks Associated with Investing in U.S. Government Securities
The U.S. Government is considered to be the best credit-rated
issuer in the debt markets. Since Treasury securities are direct
obligations of the U.S. Government, there is no credit risk. While
most other government-sponsored securities are not direct
obligations of the U.S. Government (some are guaranteed), they also
offer little, if any, credit risk.
However, another type of risk that may effect the Fund is market
and/or interest rate risk. For example, debt securities with
longer maturities tend to produce higher yields and are generally
subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower
yields. The market value of U.S. Government securities generally
varies inversely with changes in market interest rates. An
increase in interest rates, therefore, would generally reduce the
market value of portfolio investments of the Fund, while a decline
in interest rates would generally increase the market value of
portfolio investments of the Fund.
3
<PAGE>
Zero Coupon Securities
The Fund may also invest in direct and "stripped" U.S. Treasury zero
coupon securities. Although at the time this information was printed,
the Fund does not own, and has no intention of investing in, zero
coupon securities.
What are Zero Coupon Securities?
Zero coupon securities is the term used by the Fund to describe
United States Treasury notes and bonds which have been stripped of
their unmatured interest coupons, the coupons themselves, and
receipts or certificates representing interests in such stripped
debt obligations and coupons. A zero coupon security pays no
interest to its holder during the life of the security. The value
of the zero-coupon security to an investor consists of the
difference between the security's face value at the time of
maturity and the price for which the security was acquired, which
is generally an amount must less than the face value (sometimes
referred to as a "deep discount" price).
Currently the only U.S. Treasury security issued without coupons is
the Treasury bill. However, is the last few years a number of
banks and brokerage firms have separated (stripped") the principal
portions ("corpus") from the coupon portions of the U.S. Treasury
bonds and notes and sold them separately in the form of receipts or
certificates representing undivided interests in these instruments
(which instruments are generally held by a bank in a custodial or
trust account). More recently, the U.S. Treasury Department has
facilitate the stripping of Treasury notes and bonds by permitting
the separated corpus and coupons to be transferred directly through
the Federal Reserve Banks' book-entry system. This program, which
eliminates the need for custodial or trust accounts to hold the
Treasury securities, is called "Separate Trading of Registered
Interest and Principal of Securities" ("STRIPS"). Each such
stripped instrument (or receipt) entitles the holder to a fixed
amount of money from the Treasury at a single, specified future
date. The U.S. Treasury redeems zero coupon securities consisting
of the corpus for the face value thereof at maturity, and those
consisting of stripped coupons for the amount of interest, and at
the date, stated thereon.
Risks of Zero Coupon Securities
Treasury issues that are stripped by brokerage houses and marketed
separately as zero coupon securities represented by receipts or
certificates are highly safe as long as the broker holds the
underlying Treasury security in escrow, as is the practice. Direct
Treasury zero coupons are risk-free.
Repurchase Agreements
What is a Repurchase Agreement?
A repurchase agreement is an agreement where a Fund acquires a
money market instrument from a commercial bank or broker/dealer
with the understanding that the Fund will sell the instrument
back at an agreed-upon price and date (normally, the next
business day). Essentially, a repurchase agreement may be
considered a loan backed by securities. The resale price
reflects an agreed-upon interest rate effective for the period
the instrument is held by the Fund. In these transactions, the
value of the securities acquired by the Fund (including accrued
interest earned) must be greater than the value of the repurchase
agreement itself. The securities are held by the Fund's
custodian bank until repurchased.
Why Would The Fund Use Repurchase Agreements?
The Fund may invest in repurchase agreements with financial
institutions: (i) for defensive purposes due to market
conditions; or (ii) to generate income from the Fund's excess
cash balances. It is the current policy of the Fund to invest
in repurchase agreements that mature within seven days. Any
repurchase agreements that have a maturity greater than 7 days
will not exceed 10% of the Fund's assets. The investments of the
Fund in repurchase agreements, at times, may be substantial when,
in the view of the investment adviser, liquidity or other
considerations so warrant.
4
<PAGE>
Risks of Repurchase Agreements
The use of repurchase agreements involves certain risks. For
example, if the other party to the agreement defaults on its
obligations to repurchase the underlying security at a time when
the value of the security has declined, the Fund may incur a loss
when the security is sold. If the other party to the agreement
becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine
that the underlying security is collateral for a loan by the Fund
not within the control of the Fund. Consequently, the Fund may
not be able to substantiate its interest in the underlying
security and may be deemed an unsecured creditor of the other
party to the agreement. While the Fund's investment adviser
acknowledges these risks, it is expected that these risks can be
controlled through monitoring procedures. These procedures
include effecting repurchase transactions only with large, well-
capitalized and well-established financial institutions whose
condition will be continually monitored. In addition, the value
of the collateral underlying the repurchase agreement will always
be at least equal to the repurchase price, including any accrued
interest earned in the repurchase agreement.
Lending of Securities
Each Fund may lend its securities to qualified institutional investors
(i.e., brokers, dealers, banks or other financial institutions) who
need to borrow securities in order to complete certain transactions,
such as covering short sales, avoiding failures to deliver securities,
or completing arbitrage operations.
Why Would A Fund Lend Its Securities?
By lending its portfolio securities, the Fund attempts to
increase its net investment income through the receipt of
interest on the loan. Any gain or loss in the market price of
the securities loaned that might occur during the term of the
loan would be for the account of the Fund. The Fund may pay
reasonable finders, borrowers, administrative and custodial fees
in connection with the loan.
To lend securities, the following requirements must be met:
1. the borrower must pledge and maintain with the Fund collateral
consisting of cash, a letter of credit issued by a domestic U.S. bank,
or securities issued or guaranteed by the federal government having at
least equal the value of the securities loaned;
2. the borrower must add to the collateral whenever the price of the
securities loaned rises;
3. the Fund must be able to terminate the loan at any time; borrowed
securities must be returned when the loan is terminated.
4. the Fund should receive reasonable interest on the loan (which
may include the Fund's investing any cash collateral in portfolio
securities, thereby earning additional income), any distribution on
the loaned securities, and any increase in the market value of the
loaned securities; and,
5. the Fund will not lend its portfolio securities if such loans are
not permitted by the laws or regulations of any state in which the
Fund's shares are qualified for sale, and the Fund will not lend more
than 33-1/3% of the value of the Fund's total assets.
5
<PAGE>
Risks of Lending
A Fund will enter into securities lending and repurchase
transactions only with parties who meet creditworthiness
standards approved by the Fund's Board of Directors. In the
event of a default or bankruptcy by a seller or borrower, the
Fund will promptly liquidate collateral. However, the exercise
of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any
sale of collateral on a default of the seller or borrower were
less than the seller's or borrower's obligation, the Fund could
suffer a loss.
INVESTMENT LIMITATIONS
The following investment limitations are fundamental and may not be
changed without prior approval of a majority of the Fund's outstanding
voting shares.
The Fund may not:
1. borrow money except as a temporary measure to facilitate
redemptions. Such borrowing may be in an amount not to exceed 30% of
the Fund's total assets, taken at current value, before such
borrowing. The Fund may not purchase an investment security if a
borrowing by the Fund is outstanding;
2. make loans except through repurchase agreements and through the
lending of portfolio securities provided the borrower maintains
collateral equal to at least 100% of the value of the borrowed
security, and marked to market daily;
3. underwrite securities of any other issuer;
4. purchase or sell real estate, including limited partnership
interests;
5. purchase or sell restricted securities or warrants, nor may it
issue senior securities;
6. purchase any security whereby it would account for more than 10%
of any issuer's outstanding shares;
7. purchase securities of any issuer if, as a result of such a
purchase, such securities would account for more than 5%, (as defined
by Section 5 (b)(1) of the Investment Company Act of 1940), of the
Fund's assets. There is no limitation, however, as to investments
issued or guaranteed by the United States Government, its agencies or
government sponsored enterprises, or in obligations of the United
States Government, its agencies or instrumentalities;
8. purchase or sell commodities or commodities contracts;
9. concentrate more than 25% of its assets in any one industry;
The following restrictions have been adopted by the Fund, but are not
considered fundamental and may be changed by the Board of Directors of
the Fund.
The Portfolio may not:
1. invest in companies for the purpose of exercising management or
control;
2. purchase more than 10% of the voting securities of any one
issuer, or more than 10% of the securities of any class of any one
issuer;
3. purchase or hold the securities of any issuer if those officers
or directors of the Fund, or of Money Management Associates, who
individually own beneficially more than 0.5% of the outstanding
securities of the issuer, together own beneficially more than 5% of
those securities;
4. invest in securities of other investment companies, except at
customary brokerage commission rates or in connection with mergers,
consolidations or offers of exchange;
6
<PAGE>
5. purchase the securities of companies which, including
predecessors, have a record of less than three years continuous
operation if, as a result, more than 5% of the market value of the
Fund's assets would be invested in such companies;
6. invest more than 10% of their assets in illiquid securities;
7. invest in oil, gas or other mineral leases;
8. issue shares for other than cash;
9. purchase put or call options;
10. sell securities short.
MANAGEMENT OF THE FUND
A Board of Directors governs the Fund. The Directors are responsible
for overseeing the management of the Fund's business affairs and play
a vital role in protecting the interests of Fund shareholders. Among
other things, the Directors approve and review the Fund's contracts
and other arrangements and monitor Fund performance and operations.
The names, ages and addresses of the Directors and officers of the
Fund, together with information as to their principal business
occupations during the past five years are set forth below.
Name, Age, Address Position Held Principal Occupation(s)
With Fund During Past 5 Years
Daniel L. O'Connor*, 56 Chairman, General Partner of Money
100 Lakeshore Drive Treasurer, Management Associates,
Suite 1555 and registered investment adviser
North Palm Beach, FL 33408 Director of the Rushmore Funds, since
1975. Director, Rushmore Trust
and Savings, FSB, the Trust's
transfer agent and custodian.
Director of four Rushmore Fund
Boards. Director of the
Cappiello-Rushmore Trust.
Richard J. Garvey*, 65 President Limited Partner of the Adviser
4310 Southwest Warrens Way and since 1975. Director of four
Portland, OR 97221 Director Rushmore Fund Boards.
Bruce C. Ellis,** 53 Director A private investor in start-up
7108 Heathwood Court companies. Vice President,
Bethesda, MD 20817 LottoPhone, Inc., a telephone
state lottery service,
September 1991-1995. Director,
The Torray Fund, since 1994;
Director, the Sheppard Fund,
Since 1994. Director on three
Rushmore Fund Boards and the
Cappiello-Rushmore Trust.
Jeffrey R. Ellis,** 53 Director Executive Vice President, Buddy
513 Kerry Lane Systems, Inc., a manufacturing-
Virginia Beach, VA 23451 marketing company in Virginia
Beach, Virginia since January
1996. Vice President,
LottoPhone, Inc., a telephone
state lottery service,
September 1993-1995. Director
on three Rushmore Fund Boards
and the Cappiello-Rushmore
Trust.
Michael D. Lange, *55 Director Vice President, Capital Hill
7521 Pepperell Drive Management Corporation since
Bethesda, MD 20817 1967. Owner of Michael D.
Lange, Ltd., a builder and
developer since 1980. Partner
of Greatful Falls, a building
developer since 1994. Director,
Rushmore Trust and Savings,
FSB, the Trust's transfer agent
and custodian. Director of
three Rushmore Fund Boards.
7
<PAGE>
Patrick F. Noonan, 55 Director Chairman and Chief Executive
11901 Glen Mill Drive Officer of the Conservation
Potomac, MD 20854 Fund since 1986. Vice
Chairman, American Farmland
Trust and Trustee, American
Conservation Association since
1985. President, Conservation
Resources, Inc. since 1981.
Director of four Rushmore Fund
Boards.
Leo Seybold, 83 Director Retired 1988. Director of
5804 Rockmere Drive three Rushmore Fund Boards.
Bethesda, MD 20816
Timothy N. Coakley, CPA*, 31 Vice Chief Financial Officer and
4922 Fairmont Avenue President Treasurer, Rushmore Trust and
Bethesda, MD 20814 Savings, FSB, since 1995. Vice
President of four Rushmore
Funds and the Cappiello-
Rushmore Trust (collectively,
the "Funds"). Controller of
the Funds, 1995-1997. Formerly
Audit Manager, Deloitte &
Touche LLP until 1994.
Edward J. Karpowicz, CPA*, 35 Controller Vice President of Rushmore
4922 Fairmont Avenue Trust and Savings, FSB, since
Bethesda, MD 20814 1997. Controller of the Funds.
Treasurer, Bankers Finance
Investment Management Corp.,
August 1993 to June 1997.
Senior Accountant, Ernst &
Young, September 1989 to
February 1993.
Stephenie E. Adams*, 29 Secretary Secretary of three Rushmore
4922 Fairmont Avenue Funds and the Cappiello-
Bethesda, MD 20814 Rushmore Trust. Assistant
Secretary of one Rushmore Fund.
Manager, Fund Administration
and Marketing, Rushmore
Services, Inc., from July 1994
to Present. Regional Sales
Coordinator, Media General
Cable, from June 1993 to June
1994.
* Indicates an "interested" person. An interested person has any
one of several close business or family ties to the Fund, the
Fund's investment adviser, or an affiliated company of the Fund.
** Bruce C. Ellis and Jeffrey R. Ellis are brothers.
The aggregate compensation paid to the Directors serving during the
fiscal year ended August 31, 1998, is set forth in the table below:
<TABLE>
<CAPTION>
Total
Name of Person Aggregate Pension or Estimated Compensation
and Position Compensation Retirement Annual Paid to
Paid Benefits Benefits Directors for
Accrued Upon Services to the
Retirement Fund and Fund
Complex
<S> <C> <C> <C> <C>
Daniel L. O'Connor,*
Chairman, Treasurer $0 $0 $0 $0
and Director
Richard J. Garvey,*
President and $0 $0 $0 $0
Director
Bruce C. Ellis,
Director $3,000 $0 $0 $9,000
Jeffrey R. Ellis,
Director $3,000 $0 $0 $9,000
Michael D. Lange,*
Director $3,000 $0 $0 $9,000
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Patrick F. Noonan,
Director $3,000 $0 $0 $10,000
Leo Seybold,
Director $3,000 $0 $0 $9,000
</TABLE>
* Indicates an "interested" person. An interested person has any
one of several close business or family ties to the Fund, the Fund's
adviser, or an affiliated company of the Fund.
CONTROL PERSONS and PRINCIPAL HOLDERS of SECURITIES
As of December 15, 1998, the following parties were the only owners of
record owning 5% or more of the shares of the Fund.
Controlling Party or Shares % Owned
Principal Holder of Securities Outstanding
Address
Charles Schwab & Co., Inc. 536,406.331 28.998%
101 California Street
San Francisco, CA 94101
National Financial Services 229,759.555 12.421%
Corporation
82 Devonshire Street
Boston, MA 02109
IUE Strike Insurance Fund 121,828.397 6.586%
1126 16th Street, N.W.
Washington, D.C. 20036-4804
As of the date of this Statement of Additional Information, the
Officers and Directors of the Fund, as a group, owned, of record and
beneficially, less than 1% of the outstanding shares of the Fund.
INVESTMENT ADVISORY and OTHER SERVICES
Investment Adviser
Money Management Associates (the "Adviser"), 100 Lakeshore Drive,
Suite 1555, North Palm Beach, Florida 33408, has served as the Fund's
investment adviser since the Fund's inception on December 18, 1985.
The Adviser provides investment advice to the Fund and oversees its
day-to-day operations, subject to direction and control by the Fund's
Board of Directors. For its services, the Adviser receives a fee at
an annual rate based on 0.50% of the net assets of the Fund. In
dollars, the Fund paid advisory fees to the Adviser of approximately
$88,661, $86,364, and $127,595, for the fiscal years ended August 31,
1998, 1997, and 1996, respectively.
The Adviser also advises: Fund for Government Investors, a money
market fund established in 1975 that invests only in U.S. Treasury
securities; Fund for Tax-Free Investors, Inc., which was established
in 1983 and currently consists of three series, each of which invests
primarily in securities the interest on which is exempt either from
federal income tax or from state income tax; and American Gas Index
Fund, Inc., a common stock index fund established in 1989 that seeks
to provide investment results that correlate to those of an index
comprising the common stocks of natural gas distribution and
transmission company members of the American Gas Association. As of
August 31, 1998, total assets under the Adviser's management were
approximately $900 million.
9
<PAGE>
Fund expenses which are paid by the Adviser include, but are not
limited to: the expenses of shareholders and directors meetings, the
cost of office space, and the preparation, filing, printing and
distribution of the Fund's prospectus and Statement of Additional
Information. Additionally, the Adviser may, from its own resources,
including profits from advisory fees received from the Fund provided
such fees are legitimate and not excessive, make payments to broker-
dealers and other financial institutions for their expenses in
connection with the distribution of Fund shares.
Administrator
Under an Administrative Services Agreement between the Fund and
Rushmore Trust and Savings, FSB ("RTS"), 4922 Fairmont Avenue,
Bethesda, Maryland 20814, a majority-owned subsidiary of the Adviser,
RTS provides transfer agency, dividend-disbursing, fund accounting and
administrative services to the Fund. Under the Administrative
Services Agreement with RTS, which has been approved by the Board of
Directors, RTS receives an annual fee of 0.30% of the average daily
net assets of the Fund for the services it provides. For the fiscal
years ended August 31, 1998, 1997, and 1996, the Fund paid the
following administrative services fees to the RTS: $53,196, $51,818,
$76,557, respectively.
As the Administrator, RTS is responsible for all costs of the Fund
except for the investment advisory fee, extraordinary legal expenses,
interest and the expenses paid by the Adviser. Specifically, RTS pays
costs of registration of the Fund's shares with the Securities and
Exchanges commission and the various states, all expenses of dividend
and transfer agent services, outside auditing and legal fees,
preparation of shareholders reports, and all costs incurred in
providing custodial services.
Other Servicer
Under an agreement between the Adviser and Rushmore Services, Inc.
("RSI"), 4922 Fairmont Avenue, Bethesda, Maryland 20814, a wholly-
owned subsidiary of the Adviser, certain administrative services
provided to the Fund by the adviser, such as prospectus preparation,
are provided by RSI.
Custodian and Independent Public Accountant
RTS is the Fund's custodian and is responsible for safeguarding and
controlling the Fund's cash and securities, handling the securities,
and collecting interest on the Fund's investments.
Independent certified public accountants, Deloitte & Touche LLP,
University Square, 117 Campus Drive, Princeton, New Jersey 08540, are
responsible for auditing the annual financial statements of the Fund.
Brokerage Allocation and Other Practices
The Fund's portfolio securities are normally purchased on a net basis
which does not involve payment of brokerage commissions.
TAXATION OF THE FUND
The Fund currently qualifies, and will seek to continue to qualify, as
a regulated investment company (a "RIC") under Subchapter M of the
U.S. Internal Revenue Code of 1986, as amended (the "Code"). As a RIC,
the Fund will not be subject to federal income taxes on the net
investment income and capital gains that the Fund distributes to its
shareholders. The distribution of net investment income and capital
gains by the Fund to a Fund shareholder will be taxable to the
shareholder regardless of whether the shareholder elects to receive
these distributions in cash or in additional shares. Distributions
reported to a Fund shareholder as long-term capital gains shall be
taxable as such, regardless of how long the shareholder has owned the
shares. Fund shareholders will be notified annually by the Fund as to
the federal tax status of all distributions made by the Fund.
Distributions may be subject to state and local taxes.
10
<PAGE>
If the Fund fails to qualify as a RIC for any taxable year, the Fund
would be taxed in the same manner as an ordinary corporation. In that
event, the Fund would not be entitled to deduct the distributions
which the Fund had paid to shareholders and, thus, would incur a
corporate income tax liability on all of the Fund's taxable income
whether or not distributed. The imposition of corporate income taxes
on the Fund would directly reduce the return a shareholder would
receive from an investment in the Fund.
CALCULATION OF PERFORMANCE DATA
Average Annual Total Return Quotations
For purposes of quoting and comparing the performance of the Fund to
that of other mutual funds and to other relevant market indices in
advertisements or in reports to shareholders, performance may be
stated in terms of total return. Under the rules of the Securities
and Exchange Commission (the "SEC Rules"), Fund advertising stating
performance must include total return quotes calculated according to
the following formula:
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 the 1-, 5-, or 10-year
periods at the end of the 1-, 5-, or 10-year periods (or
fractional portion thereof).
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the
most recent quarter prior to submission of the advertising for
publication, and will cover 1, 5, and 10 year periods or a shorter
period dating from the effectiveness of the Registration Statement of
the Fund. In calculating the ending redeemable value, all dividends
and distributions by the Fund are assumed to have been reinvested at
net asset value as described in the Prospectus for the Fund on the
reinvestment dates during the period. Total return, or "T" in the
formula above, is computed by finding the average annual compounded
rates of return over the 1, 5, and 10 year periods (or fractional
portion thereof) that would equate the initial amount invested to the
ending redeemable value.
The Fund, from time to time, also may include in such advertising a
total return figure that is not calculated according to the formula
set forth above in order to compare more accurately the performance of
the Funds with other measures of investment return. For example, in
comparing the total return of the Funds with data published by Lipper
Analytical Services, Inc., or with the performance of the Lehman
Brothers Intermediate Government and Long Treasury Bond Indexes, as
appropriate, the Funds calculate their aggregate total return for the
specified periods of time by assuming the investment of $10,000 in a
Fund's shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the
beginning value. Such alternative total return information will be
given no greater prominence in such advertising than the information
prescribed under SEC Rules.
The average annual compounded rates of return, assuming the
reinvestment of all dividends and distributions, for the Fund, as of
August 31, 1998, are as follows:
11
<PAGE>
1 Year 5 Years Since Inception
19.35% 6.96% 9.07%
Computation of Yield
In addition to the total return quotations discussed above, the Fund
also may advertise its yield based on a thirty-day (or one month)
period ended on the date of the most-recent balance sheet included in
the Fund's Registration Statement, computed by dividing the net
investment income per share of a fund earned during the period by the
maximum offering price per Fund share on the last day of the period,
according to the following formula:
6
YIELD = 2[(a-b/cd+1) -1]
Where: a = income 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; and
d = the maximum offering price per share on
the last day of the period.
Under this formula, interest earned on debt obligations for purposes
of "a" above, is calculated by (i) computing the yield to maturity of
each obligation held by the Portfolio based on the market value of the
obligation (including actual accrued interest) at the close of
business on the last day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus
actual accrued interest), (ii) dividing that figure by 360 and
multiplying the quotient by the market value of the obligation
(including actual accrued interest as referred to above) to determine
the interest income on the obligation that is in the Portfolio's
portfolio (assuming a month of thirty days), and (iii) computing the
total of the interest earned on all debt obligations and all dividends
accrued on all equity securities during the thirty-day or one month
period. In computing dividends accrued, dividend income is recognized
by accruing 1/360 of the stated dividend rate of a security each day
that the security is in the Portfolio's portfolio. Undeclared earned
income, computed in accordance with generally accepted accounting
principles, may be subtracted from the maximum offering price
calculation required pursuant to "d" above.
Financial Statements
Copies of the Fund's audited financial statements for the fiscal year
ended August 31, 1998, may be obtained without charge by contacting
the Fund at 4922 Fairmont Avenue, Bethesda, Maryland 20814, or by
telephoning the Fund at (800) 343-3355 or (301) 657-1500.
12
