Bailard, Biehl & Kaiser Fund Group
BAILARD, BIEHL & KAISER DIVERSA FUND
PROSPECTUS
JANUARY 27, 2000
950 Tower Lane, Suite 1900
Foster City, CA 94404
(800) 882-8383
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities, nor has it passed on the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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TABLE OF CONTENTS
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Objective and Principal Strategies......................................... 3
Principal Risks and Past Performance....................................... 4
Fees & Expenses............................................................ 5
Additional Information on Strategies and Risks............................. 6
Fund Management............................................................ 9
Pricing of Fund Shares..................................................... 10
Purchasing Shares.......................................................... 10
Selling/Exchanging Shares.................................................. 12
Distributions/Taxes........................................................ 14
Financial Highlights....................................................... 16
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OBJECTIVE: The Fund seeks an above average total return with below average risk
through global asset allocation.
PRINCIPAL STRATEGIES
GLOBAL ASSET ALLOCATION: The Fund invests in a changing mix of U.S. and
international stocks, bonds and cash equivalents. This global diversification
allows the Fund to seek an optimum balance between risk and return. Bailard,
Biehl & Kaiser, Inc., the Adviser to the Fund, uses a disciplined methodology to
determine how much to allocate to each asset area. It considers such factors as
each asset class's:
* relative valuation
* historical and projected risk characteristics, and
* probable performance under possible future economic scenarios.
All asset allocation decisions are made relative to an internal strategic
benchmark. This strategic benchmark is the asset mix the Adviser would pursue
over a one-to-five-year time period for a moderate growth/moderate risk investor
if the Adviser were neutral about its investment outlook. The strategic
benchmark may be revised from time to time by the Adviser to reflect the
Adviser's assessment of fundamental changes in economic and market conditions.
The current strategic benchmark is: 0% U.S. and international cash equivalents,
25% U.S. bonds, 10% international bonds, 50% U.S. stocks, and 15% international
stocks. As economic and market conditions change, the Adviser will overweight
asset classes that appear undervalued and in the midst of an upward move.
Similarly, it will underweight asset classes that appear overvalued and at risk
of weakening. The Fund can invest up to 65% of its assets in U.S. stocks and up
to 50% of its assets in each of the four other asset classes. Although the
current strategic benchmark weighting for U.S. and international cash
equivalents is 0%, as a practical matter the Fund will always hold some of this
asset class for liquidity purposes.
INVESTMENTS: The Fund diversifies within as well as across asset classes. It
uses fundamental analysis, among other tools to identify mispriced securities
and sectors within each asset area. The Fund invests in:
* EQUITY SECURITIES, such as common and preferred stocks, of companies based in
the U.S. and foreign countries. The Fund will purchase stocks of U.S.
companies whose activities will normally represent at least eight different
economic sectors. It will invest in international stocks representing
different economic sectors and at least five of the 18 largest markets of the
world as defined by the Morgan Stanley Capital International EAFE index. The
Fund will also hold emerging market equity securities.
* FIXED-INCOME SECURITIES, such as bonds, notes and other debt securities
issued by the U.S. government and its agencies, U.S. corporations, foreign
governments, supra-national entities and foreign companies. Ordinarily, the
Fund will invest at least 65% of its international fixed-income assets in at
least three foreign countries. The Fund will also invest in emerging market
fixed-income securities.
* CASH EQUIVALENTS, such as U.S. and international government securities, bank
debt, commercial paper, and repurchase agreements, which mature in one year
or less.
* HEDGING INSTRUMENTS, such as foreign currency forward contracts, options,
futures and certain other derivative instruments, to manage investment risk
or to serve as a substitute for underlying securities or currency positions.
For more information about the Fund's investment practices, please see the
section titled "Additional Information about the Fund's Investment Strategies
and Risks."
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DETERMINING IF THE FUND IS RIGHT FOR YOU
An investment in the Fund provides a core portfolio for longer-term investors
looking for global diversification. The Fund may be most suited to investors who
seek moderate growth and can accept a moderate amount of risk. We strongly
discourage short-term traders and market timers from investing in the Fund.
PRINCIPAL RISKS
All Fund investments are subject to some degree of risk that will affect the
value of the Fund's assets and may result in a loss of your money. The Fund's
principal risks are:
* MARKET RISK, the risk that the market value of the Fund's investments will
fluctuate as the stock and bond markets fluctuate.
* FOREIGN COUNTRY AND CURRENCY RISKS, the risks that accompany investing in
foreign securities, including the risk that a decline in the value of foreign
currencies relative to the U.S. dollar will reduce the value of securities
denominated in those currencies.
* INTEREST RATE RISK, the risk that changes in interest rates will affect stock
and bond prices. Generally, an increase in interest rates will cause the
value of fixed-rate securities to fall, while a decline in interest rates
will cause an increase in the value of these securities.
* CREDIT RISK, the risk that the issuer of a security will default on its
financial obligations. o ASSET ALLOCATION RISK, the risk that the Adviser
will not correctly anticipate the relative performance of different asset
classes over specific time periods. In such cases, the Adviser may
underweight asset classes that perform well or overweight asset classes that
do not perform well.
PAST PERFORMANCE
The following Annual Total Returns bar chart provides some indication of the
risk of investing in the Fund by illustrating how Fund returns have varied from
year to year over the past ten years.
ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31ST
TOTAL RETURN (%)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
- -9.51% 15.96% 4.43% 21.58% -9.37% 20.55% 10.66% 13.19% 13.64% 4.72%
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Quarter Ended Total Return
------------- ------------
Best Quarter, 1990-1999 03/31/91 11.17%
Worst Quarter, 1990-1999 09/30/90 -12.76%
The Average Annual Total Returns table beneath compares the Fund's performance
to three indices.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 12/31/99
1-Year 5-Year 10-Year
------ ------ -------
Bailard, Biehl & Kaiser Diversa Fund 4.27% 12.43% 8.05%
Morgan Stanley World Stock Index (Local currency) 27.68% 21.31% 11.01%
Morgan Stanley World Stock Index ($) 24.93% 19.76% 11.42%
Salomon Brothers World Government Bond Index -4.27% 6.42% 8.03%
The Morgan Stanley World Stock Index, which measures the performance of the U.S.
and international stock markets, is given in both U.S. dollar and local currency
terms. This index does not measure the performance of the Fund's other asset
classes, including U.S. and international bonds. Therefore, we also provide
return data for the Salomon Brothers World Government Bond Index, which measures
the U.S. dollar performance of government bonds in the U.S. and seventeen other
developed countries. These indices do not measure the performance of the stock
or bond markets in developing countries.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
FEES AND EXPENSES
The tables below describe the fees and expenses that you may pay if you buy and
hold shares of the Fund:
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Load Imposed on Purchases.................................. None
Maximum Sales Load Imposed on Reinvested Dividends
(and other Distributions).............................................. None
Maximum Deferred Sales Load.............................................. None
Redemption Fee........................................................... None*
Exchange Fee............................................................. None
* Please note that redemptions sent by wire transfer are subject to a $10 wire
charge.
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM THE FUND'S ASSETS)
Management Fees.......................................................... 0.95%
12b-1 Fees............................................................... None
Other Expenses........................................................... 1.00%
Total Fund Operating Expenses............................................ 1.95%*
* The Adviser has agreed to waive its fees and reimburse other Fund expenses so
that total Fund operating expenses will not exceed on an annualized basis
1.75% of the average daily net assets from January 1 , 2000 through June 30,
2000, and 1.60% of the average daily net assets from July 1, 2000 through
December 31, 2000. The Adviser has stated its intention, but is not required,
to reduce such expenses further to 1.55% from January 1 through June 30,
2001, and to 1.50% from July 1 through December 31, 2001.
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EXAMPLE
The example below is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on the above assumptions, your costs would be:
1 year 3 years 5 years 10 years
------ ------- ------- --------
$ 198 $ 612 $1,052 $2,275
ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENT STRATEGIES AND RISKS
U.S. STOCKS: The Fund invests this portion of its assets primarily in a
diversified portfolio of undervalued growth stocks. These are stocks whose
current price does not fully reflect the company's long-term growth prospects.
The Fund will invest in other types of stocks as needed to manage the overall
risk of the U.S. stock portfolio relative to the S&P 500 U.S. stock index.
As part of its U.S. stock portfolio the Fund may invest in U.S.-based investment
companies, precious metal-related securities, real estate securities and
American Depository Receipts (ADRs) with respect to foreign companies with
significant U.S. operations.
INTERNATIONAL STOCKS: The Fund invests this portion of its assets in a
diversified portfolio of international stocks issued by companies based in
developed and emerging market countries around the world. It will invest
principally in companies located in such geographic regions as Europe, Great
Britain, Japan, Asia, Australia, Canada and Latin America. Using a "top-down"
approach, the Adviser focuses first on country selection and then on economic
sector and stock selection within individual countries. It considers relative
valuations, fundamental economic conditions, fundamental risk factors and the
global investing environment when making investment decisions.
The Fund may invest in American Depository Receipts (ADRs), Global Depository
Receipts (GDRs), International Depository Receipts (IDRs), and foreign
investment companies as part of its international stock portfolio. The Fund may
also engage in currency hedging to help protect its international stock
investments from the risk of a strong dollar. However, the Fund currently uses a
0% hedged benchmark for this asset class.
U.S. BONDS: The Fund may invest this portion of its assets in U.S. debt
securities, including mortgage and asset-backed securities. The Adviser seeks
total return by focusing on underlying value and interest rate expectations. It
attempts to control risk by investing primarily in higher quality bonds and by
closely monitoring the interest rate sensitivity of the U.S. bond portfolio.
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Approximately 80% of the U.S. bond portfolio will be invested in higher quality
issues rated at least Aa by Moody's Investors Service, Inc. (Moody's) or AA by
Standard & Poor's Corporation (S&P). Up to 10% of this asset class may be
invested in medium grade securities rated Baa or BBB by these services. Although
bonds with a Baa or BBB credit rating are investment grade bonds, they are
riskier than higher grade bonds. For example, changing economic conditions or
other circumstances are more likely to affect the lower-rated bonds' ability to
make principal and interest payments. If the credit rating of a bond falls below
Baa or BBB, the Adviser will decide whether to retain that bond on a case by
case basis. The Fund may also invest in unrated bonds if the Adviser determines
that their credit risk is consistent with that of the Fund's rated bonds. For a
description of bond ratings, please see Appendix A of the Statement of
Additional Information.
INTERNATIONAL BONDS: The Fund may invest this portion of its assets in debt
securities (including mortgage and asset-backed securities) issued by foreign
governments, supra-national entities and foreign companies, based in both
developed and emerging market countries. The Adviser employs a disciplined
"top-down" approach that focuses first on country selection and then on bond
selection within individual countries. It uses a real-yield, value-based model
that factors in currency outlooks. The Adviser seeks to control risk by
investing in higher quality bonds and by closely monitoring the interest rate
sensitivity of the international bond portfolio.
Since Moody's and S&P do not provide credit ratings for many international
bonds, the Adviser will invest primarily in issues that it believes are
comparable in quality to Aa or AA rated U.S. bonds. The Adviser may also invest
up to 5% of the international bond portfolio, and up to 50% of the emerging
market bonds in the portfolio, in securities with a credit risk equivalent to a
Baa or BBB rated U.S. bond. Please see the U.S. BONDS section above for a
discussion of the risks associated with these lower quality bonds.
The Fund may engage in currency hedging to help protect its international bond
investments from the risk of a strong dollar. It currently uses a 50%-hedged
benchmark for this asset class.
U.S. AND INTERNATIONAL CASH EQUIVALENTS: Typically, the Fund will maintain a low
weighting in this asset class to fund redemptions and expenses and for other
liquidity purposes. It may also overweight U.S. and international cash
equivalents for defensive purposes. At a minimum, the Fund will invest in higher
quality cash equivalents with a credit quality comparable to commercial paper
rated A-3 by S&P.
HEDGING TRANSACTIONS: The Fund can buy and sell forward contracts, put and call
options, futures contracts, and options on futures contracts on debt securities,
financial indices and foreign currencies. These are called "hedging
transactions." The Fund can also conduct foreign currency exchange transactions
at the rate prevailing in the foreign currency exchange market (I.E., on a spot
basis). The Fund is not required to use hedging transactions to seek its
objectives. The Fund has placed certain limits on its hedging transactions,
which must not be used for speculative purposes.
The Adviser may use hedging transactions:
* to help protect the Fund from adverse changes in currency exchange or
interest rates or market conditions, or
* as a substitute for an underlying securities or currency position.
For example, the Adviser may use direct, indirect or cross hedges to manage the
foreign currency risk of the Fund's foreign investments. To hedge a risk
associated with or as a substitute for a market, economic sector or industry,
the Adviser may also buy or sell options, futures contracts, or options on
futures contracts involving financial indices. For example, the Adviser may buy
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S&P 500 U.S. stock index put options if it believes the domestic stock market is
at risk of declining.
All of the Fund's hedging transactions involve special risks. If the Adviser
uses a hedging instrument at the wrong time or incorrectly judges market
conditions, the hedging strategy may prevent the Fund from realizing some
potential gains. The Fund could also experience losses if, among other things: o
the prices of its forwards, futures and options positions are not correlated
with its other investments, o the Adviser is unable to close out a position
because of an illiquid market, or o the counterparty (the party on the other
side of the transaction) fails to complete a transaction.
(For more information on hedging transactions, please refer to the Fund's
Statement of Additional Information.)
FOREIGN SECURITIES: The Fund's international stock and bond investments are
subject to special risks. These include:
* Lack of accurate public information
* Different accounting standards
* Less governmental regulation and supervision of issuers, markets and brokers
* Higher transaction costs, less liquidity, and higher price volatility
* The possibility of expropriation, confiscatory taxation, exchange
restrictions, limitations on the removal of assets, and political or economic
instability
These risks are more severe for securities of issuers located in countries
having developing or emerging markets. These countries tend to have less mature
economies and less stable political systems. They may have restrictions on
foreign ownership or the repatriation of assets. In addition, the securities
markets of emerging market countries tend to have more volatility, less
liquidity, higher transaction costs, less sophisticated settlement practices and
less regulatory protection for investors than their developed country
counterparts.
Dividends payable on the Fund's foreign investments may be subject to foreign
withholding taxes that reduce the net amount of income available for
distribution to the Fund's shareholders. The U.S. has signed tax treaties with
certain countries that lower the tax on U.S. taxpayers.
CURRENCY EXCHANGE RATES: Changes in currency exchange rates may increase or
decrease the value of the Fund's international assets. An increase in the U.S.
dollar relative to a foreign currency could result in a substantial decline in
the U.S. dollar value of the Fund's investments denominated in that currency.
The Adviser can use certain hedging techniques to a limited extent to help
minimize this risk. However, there is no guarantee that the Adviser will use
these techniques or that they will fully protect the Fund against adverse
changes in exchange rates. Moreover, to the extent hedging transactions are used
to reduce currency risks, the Fund will not benefit from increases in the value
of the currencies of the countries in which the Fund invests.
The Fund may incur costs in connection with conversions between various
currencies, since foreign exchange dealers will typically offer to buy and sell
a foreign currency at different rates. Fluctuations in exchange rates may also
affect the Fund's income distributions. For example, if foreign exchange losses
exceed other investment company taxable income during a taxable year, the Fund
might not be able to or might determine not to make any further ordinary income
distributions. The Fund might also recharacterize ordinary income distributions
made before the losses were realized as a return of capital to shareholders.
This would reduce each shareholder's cost basis in his Fund shares for U.S. tax
purposes.
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PORTFOLIO TURNOVER: Although the Fund's portfolio turnover rate has been less
than 70% for each of the past four fiscal years, the Fund may engage in
short-term trading if the Adviser believes the sale of securities held for a
short period is advisable. Higher portfolio turnover results in increased
brokerage costs and may generate short-term capital gains that could be subject
to ordinary income tax.
INVESTMENT OBJECTIVES: The Board of Directors may change the Fund's investment
objectives and non-fundamental policies without shareholder approval. Please see
the Statement of Additional Information for a list of fundamental policy
restrictions that may be changed only with the approval of a majority of
shareholders.
YEAR 2000 ISSUE: Due to programming difficulties, some computer systems may not
be able to properly recognize dates after December 31, 1999. This is an issue,
which affects nearly all companies and organizations throughout the world. The
Adviser believes it has taken the appropriate steps to identify and resolve any
potential problems with the computers it uses. The Adviser has also investigated
the level of Year 2000 readiness of each vendor that provides external service
to the Fund and the Adviser. As of this date, the Fund has not been adversely
affected by any Year 2000 related issues. In addition, the Fund cannot predict
whether the Year 2000 issue will have an adverse impact on the Fund's
investments, the global markets or the world's economies in general.
A FINAL NOTE ON RISK: Since the Fund's assets will fluctuate in value, you can
lose money by investing in the Fund. When you redeem shares of the Fund, they
may be worth more or less than your original investment. Moreover, there is no
guarantee that the Fund will achieve its investment objectives. You should
consult with your financial and other advisers regarding the suitability of this
investment for your own particular circumstances.
FUND MANAGEMENT
THE ADVISER: Bailard, Biehl & Kaiser, Inc., located at 950 Tower Lane, Suite
1900, Foster City, California 94404 is the investment adviser (the "Adviser")
for the Fund. The Adviser actively manages the Fund's investments and handles
the day-to-day operations of the Fund, subject to policies established by the
Board of Trustees.
The Adviser has been managing money for institutions and wealthy families since
1971. The Adviser currently has over $1.4 billion in assets under management and
offers individually managed accounts and commingled fund strategies to qualified
investors. Bailard, Biehl & Kaiser offers cash management, domestic bond and
domestic stock strategies on a separate account basis, often in tailored
combinations, as well as international stock and bond strategies. Other funds
managed by the Adviser include the Bailard, Biehl & Kaiser International Equity
Fund, the Bailard, Biehl & Kaiser International Bond Fund and the Bailard, Biehl
& Kaiser Real Estate Investment Trust, Inc.
Bailard, Biehl & Kaiser is committed to providing innovative and enduring
investment solutions to discerning investors. The Fund is just one example of
such innovation. Bailard, Biehl & Kaiser's clients were rewarded by the firm's
early entry into international investing in 1979. They continue to benefit from
Bailard, Biehl & Kaiser's diligence in maintaining cutting edge global
investment practices. Balancing the forces of dynamic financial markets with
changing investor needs requires knowledgeable investment professionals,
sophisticated portfolio engineering, disciplined processes and judgment only
attained over time. Bailard, Biehl & Kaiser has always been willing to ask "Is
this the right thing to do?" -- a philosophy that has served its clients well
for 30 years.
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PORTFOLIO MANAGERS: Peter M. Hill and Arthur A. Micheletti have been primarily
responsible for the asset allocation decisions regarding the Fund's portfolio
since 1995. Mr. Hill directs the team of investment professionals that focuses
on each asset category of the Fund. Mr. Hill has been Chief Investment Officer
of the Adviser since 1995 and has additional institutional portfolio management
responsibilities. From 1992 to 1995, Mr. Hill was Co-President of the Adviser.
He is also Chairman and a Director of the Bailard, Biehl & Kaiser International
Fund Group, Inc. Mr. Micheletti has been primarily responsible for the bond and
cash equivalent portions of the portfolio since 1992. Mr. Micheletti has been
with the Adviser and has managed international and domestic fixed-income
portfolios since 1981. Mr. Micheletti has been a Senior Vice President and the
Chief Economist of the Adviser since 1992.
ADVISORY FEES: For the fiscal year ended September 30, 1999, the Fund paid the
Adviser an advisory fee of 0.95% of the net assets of the Fund. The advisory fee
rate is set forth in the Investment Advisory and Management Agreement between
the Fund and the Adviser.
PRICING OF FUND SHARES
The Fund's net asset value per share, also referred to as the NAV per share, is
the price of a single share of the Fund. Purchases, redemptions and exchanges of
shares are made at the next NAV calculated after the Fund's transfer agent, or
an authorized broker or its designee, has received your purchase or redemption
request in good order.
The Fund values securities for which market quotations are readily available at
their current market value. If market quotations are not readily available,
securities will be valued by, or under the direction of, the Board of Trustees
in such a manner as the Board deems, in good faith, reflects the fair value of
the securities.
The NAV per share is determined by dividing the total market value of the Fund's
assets, less its liabilities, by the number of shares outstanding. The NAV is
calculated as of the regular closing of the New York Stock Exchange ("NYSE")
(generally 4:00 p.m. Eastern Time) on each day the NYSE is open for trading. The
NAV is not calculated on days when the NYSE is closed.
The Fund holds securities that trade on foreign markets that may be open when
the NYSE is closed. As a result, the Fund's asset value may fluctuate
significantly on days when you will not be able to purchase or redeem shares.
HOW TO PURCHASE SHARES
You may purchase shares of the Fund on any day that the NYSE is open. There is
no fee charged when you purchase shares directly from the Fund. However, if you
use a broker/dealer to purchase your shares, the broker/dealer may impose a fee.
Certain Fund services may not be available to shares held in the name of a
broker/dealer or other nominee.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities to any person in any jurisdiction where it is
unlawful to make such an offer.
NEW ACCOUNTS. The minimum initial investment in the Fund is $5,000. The minimum
initial investment for employees and officers of the Adviser and their
relatives, and Trustees of the Trust, is $2,000. The Fund reserves the right to
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waive, reduce or increase the minimum investment for initial and subsequent
investments.
You may open your account by sending your initial purchase by mail or by wire as
indicated below.
BY MAIL: Please complete the Shareholder Application found in the back of this
prospectus and send it by regular mail to the Fund's transfer agent
at:
Chase Global Funds Services Co.
P.O. Box 2798
Boston, MA 02208
or
by express, registered or certified mail to:
Chase Global Funds Services Co.
73 Tremont Street
Boston, MA 02108
Please also include a check for your initial purchase made payable to
Bailard, Biehl & Kaiser Diversa Fund.
BY WIRE: Please contact the Fund's transfer agent directly at 800-541-4366 for
instructions on how to wire your initial purchase. Please note that,
before wiring your investment, a completed Shareholder Application
must be received by the Fund's transfer agent at one of the addresses
above.
The wiring instructions for Fund purchases are:
The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733160
Attn: Bailard, Biehl & Kaiser Diversa Fund
Shareholder's Name: ______________________
Account Number: _________________________
Retirement Accounts: If you wish to establish a retirement account, please
contact BB&K Fund Services at 800-882-8383 to discuss your options and to
request the appropriate paperwork. Please note that the minimum initial
investment amount for retirement accounts is also $5,000.
If a purchase is cancelled because your check or wire transfer does not clear,
you will be responsible for any loss the Fund or the Adviser incurs. If you are
currently a shareholder, the Fund can redeem shares from your account to
reimburse the Fund or the Adviser for any loss. In addition, you may be
prohibited or restricted from making future purchases in the Fund.
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Because of the additional cost to the Fund caused by investors who are trying to
time the market with short-term purchases and redemptions, the Fund discourages
"market timers" from investing in the Fund. The Fund reserves the right to
refuse any purchases.
ADDITIONAL PURCHASES
The minimum amount for subsequent purchases is $100. You may make additional
purchases by mail or by wire by using the addresses and wiring instructions
listed in the previous section entitled New Accounts. Please be sure to include
your account number on your check or wire whenever making additional purchases.
You may also make additional purchases by enrolling in our Automatic Investment
Plan, which allows you to invest a minimum of $100 on a periodic basis directly
from your checking or savings account. For more information and for an
enrollment form, please contact BB&K Fund Services at 800-882-8383.
HOW TO SELL SHARES
You may sell all or a portion of your shares, at no charge, on any day the NYSE
is open. If you use a broker/dealer to sell your shares, the broker/dealer may
impose a fee for this service. The Fund's transfer agent will normally send the
sale proceeds to you within seven days.
Below are your options for redeeming shares. Please note that the Fund's
transfer agent, or an authorized broker or its designee, must receive any
redemption request before 4:00 p.m. Eastern Time in order for the request to be
processed that day. Any request received after that time will be processed on
the next business day.
BY MAIL: You may redeem shares from your account by mailing your written
request directly to the Fund's transfer agent at one of the
addresses listed under How to Purchase Shares. Please reference
your account number and be sure to have all required signers on
the account sign the request. Please note that any written
redemption request for an amount exceeding $50,000 requires a
signature guarantee. A signature guarantee is also required if
you request that the proceeds of your redemption be sent anywhere
other than your address or bank of record. For more information
on how to obtain a signature guarantee, please refer to the
Fund's Statement of Additional Information or contact the Fund's
transfer agent at 800-541-4366.
BY If you have elected Telephone Redemption Privileges for your
TELEPHONE: account either by checking the appropriate box on your
Shareholder Application or by subsequently adding the service to
your account, you may call the Fund's transfer agent directly at
800-541-4366 to request a redemption and have the proceeds sent
to your address or bank of record. Redemption requests by
telephone must be for at least $1,000 and not exceed $150,000.
Neither the Fund nor its transfer agent will be liable for
following telephone instructions that the Fund's transfer agent
reasonably believes to be genuine.
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If you wish to add Telephone Redemption Privileges to your
existing account, please contact the Fund's transfer agent for
the appropriate form. Please note that shares held in individual
retirement plans or issued in certificate form are not eligible
for telephone exchange or redemption privileges.
SYSTEMATIC The Systematic Withdrawal Plan lets you withdraw a minimum of
WITHDRAWAL $100 on a periodic basis. To request this feature, please check
PLAN: the appropriate box on your Shareholder Application or contact
the Fund's transfer agent at the telephone number above for the
appropriate form. Please note that there is a $2 fee for each
withdrawal under this plan. You must have a minimum account size
of $10,000 to participate.
Your options for receiving your redemption proceeds are:
BY CHECK: A check will be sent to your address of record unless you
indicate otherwise on your request.
BY WIRE: You may request to have your redemption proceeds wired directly
to your bank account. Please note that there is a $10 fee for
each wire.
If you are requesting a redemption shortly after a purchase by check was made in
your account, the transfer agent may wait until the check clears before
processing your request.
If the market value of your account should fall under $1,000, the Fund reserves
the right to liquidate your account after providing you with a 30-day written
notice.
If the amount you are redeeming exceeds 1% of the Fund's net assets or $250,000
during any 90-day period, the Fund reserves the right to honor your redemption
request by distributing to you readily marketable securities instead of cash.
You may incur brokerage and other costs in converting to cash any securities
distributed.
EXCHANGING SHARES TO ANOTHER BAILARD, BIEHL & KAISER FUND
You can exchange your Fund shares for shares in any mutual fund offered by
Bailard, Biehl & Kaiser at no charge. You may make your exchange request in
writing directly to the Fund's transfer agent at either of the addresses listed
under HOW TO PURCHASE SHARES. You may also make your request over the telephone
by following the procedures described above regarding telephone redemptions.
Exchanges may only be made between accounts with identical account
registrations.
Exchanges can only be made in states where shares of the fund being purchased
are qualified for sale, and the dollar amount of an exchange must meet the
initial or subsequent minimum investment requirements of the fund being
purchased. The Fund reserves the right to reject any exchange request and to
modify or terminate the exchange privilege at any time.
Before making your exchange, please read carefully the prospectus for the fund
in which you will invest. You may request the prospectus by contacting BB&K Fund
Services at 800-882-8383.
13
<PAGE>
STATEMENTS
You will receive a confirmation statement after your initial purchase and after
each subsequent purchase or sale in your account. You will also receive a
statement after each dividend and capital gain distribution.
DISTRIBUTIONS
The Fund intends to distribute any net investment income and net realized
capital gains to its shareholders. All or a portion of the net investment income
earned by the Fund is distributed as dividends on a quarterly basis. Any
remaining net investment income earned and any short-term and long-term capital
gains realized from the sale of securities from the Fund's portfolio are
distributed annually, generally in December. Gains from investments held by the
Fund for one year or less are short-term gains. Gains from investment held for
over one year are long-term gains.
The amount of net investment income distributed and the characterization of Fund
distributions for tax purposes may be affected, among other factors, by foreign
currency exchange losses.
You have the choice of receiving your distributions from the Fund in cash or
having your distributions reinvested in additional shares for your account. If
you decide to have your distributions paid to you in cash, you may choose to
have the proceeds sent to you by check or wired directly to your bank account.
Unless you note otherwise on your Shareholder Application, your distributions
will automatically be reinvested in additional shares of the Fund. You may
change your distribution option at any time by sending your written request
directly to the Fund's transfer agent. Please allow sufficient time for your
request to be processed. The transfer agent must receive your request at least
five days before the next distribution record date for it to be effective.
TAXES
For income tax purposes, net investment income dividends are generally taxed at
your ordinary income rate. In addition, any net realized short-term capital
gains are also taxable at your ordinary income rate. Net realized long-term
capital gains distributed to you by the Fund are taxed at the long-term capital
gains rate regardless of how long you held your shares. All dividends and
distributions are taxable to shareholders whether the proceeds are received in
cash or reinvested in additional shares. The Fund will inform you of the source
and nature of the distributions at the time they are paid.
If you purchase shares shortly before the Fund makes a distribution, the
distribution may return some of your initial capital to you in a taxable event.
As a result, the Fund does not recommend that you make purchases shortly before
a distribution.
When you sell your shares or exchange your Fund shares for shares in another
fund, you may trigger a taxable event depending on the amount of your sale
proceeds relative to your initial investment, and how long you held your shares.
Any loss recognized upon the sale of shares held for twelve months or less will
be treated as a long-term capital loss to the extent of any distributions of
long-term capital gains during the period the shares were held. Dividends and
distributions payable to shareholders of record as of a date in October,
November or December of any year will be deemed to have been paid by the Fund
and received by shareholders on December 31 if the dividends are paid by the
Fund at any time during the following January.
Investors are urged to consult their own tax advisers to determine the effect of
an investment in the Fund upon their individual tax situations.
14
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal years. Certain information reflects
financial results for a single Fund share. The total returns in this table
represents the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions).
This information has been audited by PricewaterhouseCoopers LLP, whose report,
along with the Fund's financial statements, are included in the Annual Report
for the Fund, which is available upon request.
For a share outstanding throughout the period:
<TABLE>
<CAPTION>
For the Years Ended September 30,
---------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.99 $ 13.91 $ 13.39 $ 13.20 $ 12.01
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.28(1) 0.13(1) 0.40(1) 0.31 0.38(1)
Net Realized/Unrealized Gain (Loss) on
Securities and Foreign Currency 0.90 0.23 1.92 0.96 1.13
------- ------- ------- ------- -------
Total from Investment Operations 1.18 0.36 2.32 1.27 1.51
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
From Net Investment Income (0.13) (0.23) (0.42) (0.32) (0.26)
From Net Realized Gains (0.96) (1.05) (1.38) (0.76) (0.06)
------- ------- ------- ------- -------
Total Distributions (1.09) (1.28) (1.80) (1.08) (0.32)
------- ------- ------- ------- -------
Net Asset Value, End of Period $ 13.08 $ 12.99 $ 13.91 $ 13.39 $ 13.20
======= ======= ======= ======= =======
Total Return 9.25% 2.98% 19.14% 10.09% 12.83%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $34,548 $35,329 $37,471 $36,566 $40,688
Ratio of Expenses to Average Net Assets
Before Expenses Paid Indirectly 1.95% 1.86% 1.84% 1.99% 1.85%
After Expenses Paid Indirectly 1.95% 1.80%(2) 1.84% 1.99% 1.85%
Ratio of Net Investment Income to
Average Net Assets 1.51% 1.34% 1.87% 2.09% 2.97%
Portfolio Turnover Rate 54% 59% 66% 68% 166%
</TABLE>
- ----------
(1) Net investment income per share has been computed before adjustments for
book/tax differences.
(2) The Fund had entered into an agreement with the Custodian where the daily
interest earned from the Fund's cash balance would be applied as a credit
to the custody fees for the Fund. For the year ended 9/30/98 the Fund
earned $23,479 in such credits.
15
<PAGE>
The following information is available by request at no charge:
SHAREHOLDER REPORTS:
Additional information about the Fund's investments and performance is available
in the Fund's Quarterly, Semi-Annual, and . Annual Reports to shareholders. The
Annual Report discusses the market conditions and Investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides further detail about the Fund's investment policies, risks and
operations. It is incorporated by reference into this prospectus, and is legally
a part of this prospectus.
To request this information or make any additional inquiries please contact us
at:
BB&K Fund Services, Inc.
950 Tower Lane, Suite 1900
Foster City, CA 94404-2131
Toll free (800) 882-8383
[email protected]
Information about the Fund may be reviewed and copied at the Securities and
Exchange Commission's (SEC) public reference room in Washington, DC. Information
regarding the operation of the Public Reference Room may be obtained by calling
the SEC at 1-202-942-8090, or sending an email to: [email protected]. Reports
and other information about the Fund are also available at the SEC's Internet
site at http://www.sec.gov. Copies of this information may also be obtained by
writing and paying a duplicating fee to: Public Reference Section, Securities
and Exchange Commission, Washington, DC 20549-0102.
Ticker: DVERX
SEC File Number: 811-4828
<PAGE>
BAILARD, BIEHL & KAISER DIVERSA FUND
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 27, 2000
This Statement of Additional Information is not a Prospectus, but contains
information in addition to that contained in the Prospectus, which may be of
interest to some investors. This Statement of Additional Information should be
read in conjunction with the Prospectus dated January 27, 2000. You can request
the Prospectus by writing directly to us at the address above or by calling us
at (800) 882-8383.
TABLE OF CONTENTS
Page
----
Investment Objectives, Policies and Restrictions.......................... B-2
Net Asset Value........................................................... B-8
Purchases, Exchanges Redemptions.......................................... B-9
Distributions and Taxes................................................... B-10
Trustees and Officers..................................................... B-13
Investment Advisory and Other Services.................................... B-15
Portfolio Transactions and Brokerage Commissions.......................... B-17
Shareholder Information................................................... B-18
Performance Data.......................................................... B-19
Financial Statements...................................................... B-19
Appendix A (Bond and Commercial Paper Ratings)............................ B-20
Appendix B (Hedging and Other Transactions)............................... B-22
This Statement of Additional Information Does Not
Constitute an Offer to Sell Securities.
<PAGE>
THE FUND: The Bailard, Biehl & Kaiser Diversa Fund (the "Fund") is a diversified
series of the Bailard, Biehl & Kaiser Fund Group, an open-end management
investment company organized in 1986 as a Massachusetts business trust.
INVESTMENT POLICIES AND RESTRICTIONS
U.S. STOCKS: The Fund will invest in the common and preferred equity securities
of U.S.-based companies whose activities will normally represent at least eight
of the following eleven economic sectors (each of which includes several
industry groups): BASIC INDUSTRY, CAPITAL GOODS, COMMUNICATION SERVICES,
CONSUMER CYCLICALS, CONSUMER STAPLES, ENERGY AND NATURAL RESOURCES (including
precious metal-related securities), FINANCE (including real estate securities),
HEALTH CARE, HIGH TECHNOLOGY, TRANSPORTATION and UTILITIES. The Fund may also
invest in American Depository Receipts (ADRs) with respect to foreign companies
with significant U.S. operations. A purchase of an unsponsored ADR may have
limited voting rights and the Adviser may receive less information about the
issuer of the underlying security than with a sponsored ADR. The Fund
anticipates that no more than one-third of this asset class will be invested in
companies operating in any one sector, although the Fund may exceed this
guideline from time to time. The Fund will invest in stocks that are listed on
an exchange or that are traded over the counter.
REAL ESTATE SECURITIES: As part of the finance sector, the Fund may invest in
the equity securities of real estate related companies (i.e., companies at least
50% of whose assets consist of real property held for sale or investment or at
least 50% of whose products or services are provided to the real estate
industry), real estate investment trusts and real estate limited partnerships.
All of these securities must be publicly traded. However, the Fund will only
invest in real estate limited partnerships that are listed on the New York Stock
Exchange or the American Stock Exchange.
Investing in real estate securities may subject the Fund to risks associated
with the direct ownership of real estate, such as declines in the value of real
estate, changes in general and local economic conditions and increases in
interest rates. In addition, real estate investment trusts are dependent upon
management skill, are non-diversified (and hence dependent on the success of a
single project or a limited number of projects), and are subject to heavy cash
flow dependency, defaults by borrowers and self liquidation. Equity real estate
investment trusts may be affected by any changes in the value of the underlying
property owned by the trusts. Mortgage real estate investment trusts may be
affected by the quality of any credit extended.
PRECIOUS METALS-RELATED SECURITIES: As part of the energy and natural resources
sector, the Fund may invest in the equity securities of companies that explore
for, extract, process or deal in precious metals like gold, silver, palladium
and platinum. The Fund will purchase such securities when the Adviser believes
they are attractively priced in relation to the value of a company's precious
metal-assets or when the Adviser believes the value of precious metals are
likely to appreciate.
The prices of precious metals-related securities have been very volatile
historically. They may depend on financial conditions and the creditworthiness
of the issuer, as well as the value of the underlying assets. The earnings and
financial condition of precious metals-related companies may also be adversely
affected by volatile precious metals prices.
INTERNATIONAL STOCKS: To the extent practicable, the Fund will invest the
international stock portion of its portfolio in roughly the same eleven economic
sectors that it uses to invest in domestic stocks. The Fund anticipates that no
more than one-third of its international stock portfolio will be invested in any
one economic sector, although the Fund may exceed this guideline from time to
time.
The Fund may invest in American Depository Receipts (ADRs), Global Depository
Receipts (GDRs), and International Depository Receipts (IDRs). A purchaser of an
unsponsored ADR, GDR or IDR may have limited voting rights and may receive less
information about the issuer of the underlying security than with a sponsored
ADR, GDR or IDR.
B-2
<PAGE>
INVESTMENT COMPANIES: The Fund may invest in the equity securities of U.S. and
foreign investment companies. Such securities will be considered either U.S.
stocks or international stocks, respectively, even though the portfolios of the
investment companies may include other types of assets. The Fund's purchase of
securities of another investment company results in the layering of expenses, so
that you will directly bear the expenses of the Fund and indirectly bear a
proportionate share of the expenses of the other investment company. Except as
permitted under the 1940 Act, the Fund will not invest its assets in more than
3% of the outstanding voting stock of any other investment company. In addition,
it will not invest more than 5% of its total assets in any other investment
company or more than 10% of its total assets in investment companies as a group.
The Fund, together with other investment companies having the same investment
adviser, will not invest in more than 10% of the outstanding voting stock of any
closed-end investment company, unless the security is acquired pursuant to a
plan of reorganization or a Securities and Exchange Commission approved offer of
exchange. Finally, the Fund will not purchase the securities of any investment
company that is sponsored or managed by the Adviser.
U.S. CASH EQUIVALENTS: The Fund may invest this portion of its portfolio in the
following instruments with a maturity of less than one year: repurchase
agreements, issues of the U.S. Government and its agencies and instrumentalities
(including Treasury bills, notes and bonds), U.S. banks (including certificates
of deposit, securities backed by letters of credit, bankers' acceptances and
fixed time deposits) and other domestic institutions (including commercial
paper). The Fund will not invest in time deposits maturing in over seven days in
an amount exceeding 10% of its total assets.
REPURCHASE AGREEMENTS: Repurchase agreements represent agreements in which the
Fund acquires securities from a seller who agrees to repurchase such securities
at a later date at a specified time and price. The securities acquired by the
Fund will be U.S. Treasury securities, and the Fund will enter into repurchase
agreements only with registered broker-dealers and with domestic banks or other
financial institutions regulated by the FDIC and having total assets in excess
of $10 billion. The seller's obligation to repurchase is fully collateralized
with other securities in which the Fund can invest. The value of the collateral,
including accrued interest, will be marked to market daily. The Fund's right to
liquidate its collateral in the event of a default by the seller could involve
certain costs, losses on delays, and, to the extent that proceeds from any sale
upon a default of the obligation to repurchase are less than the repurchase
price, the Fund could suffer a loss. If the value of the collateral should
decrease below the resale price of the securities acquired, including accrued
interest, additional collateral is required to be deposited.
INTERNATIONAL CASH EQUIVALENTS: The Fund may invest this portion of its
portfolio in the following securities with a maturity of one year or less: (1)
debt obligations issued or guaranteed by a foreign sovereign government or one
of its agencies or political subdivisions; (2) debt obligations issued or
guaranteed by supra-national organizations such as the World Bank; (3) debt
obligations of foreign banks and bank holding companies; (4) foreign corporate
debt securities; (5) debt obligations of domestic banks and corporations issued
in foreign currencies; (6) foreign commercial paper; and (7) repurchase
agreements involving these securities. Repurchase agreements involving foreign
instruments are subject to restrictions and risks similar to those described
above with respect to domestic securities.
EURO: On January 1, 1999, eleven major European countries participating in the
Economic and Monetary Union adopted a new single currency, the Euro, which will
replace the national currencies of the participating countries. Most of the
affected securities have already been redenominated in Euros. However, no one
knows how smooth the conversion to the Euro will actually be. The monetary
conversion affects clearing and payment systems, as well as financial
institutions' operating systems. These and other factors, including political
and economic risk, could cause market disruptions. Although it is not possible
to fully predict the impact of the Euro on the Fund, the Adviser is taking steps
to make the transition as smooth as possible.
HEDGING TRANSACTIONS: The Fund may hedge foreign currency risk through the use
of direct hedges, indirect hedges and cross hedges. The Fund may directly hedge
a currency risk when it believes that the currency in which a particular
portfolio security is denominated may suffer a substantial adverse movement
B-3
<PAGE>
against the U.S. dollar. For example, to directly hedge a position, the Fund
could sell an amount of such foreign currency, or buy an amount of the U.S.
dollar, approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency.
Indirect hedges are similar to direct hedges, except that in an indirect hedge,
the Fund hedges a portfolio security's currency risk with a different, or proxy,
currency that is expected to trade closely to the portfolio security's
underlying currency. Indirect hedges may be used when the Fund believes that the
currency risk associated with a portfolio position can be hedged more
effectively through the purchase or sale of the proxy currency due to better
liquidity, lower transaction costs and/or relative currency expectations.
The Fund may enter into a cross-hedge when it believes that the currency in
which a particular portfolio security is denominated may suffer a substantial
adverse movement against a currency other than the U.S. dollar. If one currency
is expected to decrease against another currency, the Fund may sell the currency
expected to weaken and buy the currency expected to strengthen. The Fund may
also initiate a foreign currency position that increases the exposure of the
Fund to that currency. Typically, this would be done when the Fund likes the
currency of a country but not the stocks or bonds of that country. To offset an
underweight (or no) securities position in that country, the Fund may add a
foreign currency position that is larger than the securities position. Under
such circumstances, the Fund's foreign currency position in a country will not
exceed that of its neutral weighting for the country.
Generally, to hedge a risk associated with or as a substitute for a market,
economic sector or industry, the Fund may enter into Options, Futures Contracts
or Options on Futures Contracts involving financial indices (including stock,
bond, and U.S. and foreign securities indices). A financial index is a composite
of the market prices of the securities that make up the index. An index may be
broad based (comprised of many securities and designed to be representative of
an overall market, e.g., the CAC-40 Index of French securities) or narrow based
(designed to be representative of a particular industry or market sector, e.g.,
the Morgan Stanley Global Utilities Index). An index may also be composed of
U.S. securities (e.g., the S&P 500 Stock Index) or foreign securities (e.g., the
International Market Index) or a combination of both (e.g., the Morgan Stanley
World Index). Financial indices are used as the underlying value of Options,
Futures Contracts and Options on Futures involving financial indices.
The Fund will not engage in a transaction involving Forward Contracts or Futures
Contracts, and will not write Options or Options on Futures Contracts unless its
position is "covered" by an offsetting position or transaction, or liquid assets
equal to the amount of the Fund's contingent obligations are held by the Fund's
custodian in a segregated account. For a more detailed description of covered
transactions, see Appendix B.
FORWARD CONTRACTS. A Forward Contract is an obligation to purchase or sell a
specific currency for an agreed price at a future date and is individually
negotiated and privately traded by currency traders and their customers. The
precise matching of the Forward Contract amounts and the value of the securities
involved will not generally be possible since 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. Forward Contracts may limit potential
gain from a positive change in the relationship between currencies, and
unanticipated changes in currency prices may result in poorer overall
performance for the Fund than if it had not engaged in such contracts.
OPTIONS. The Fund may purchase and write call and put Options on debt
securities, financial indices and foreign currencies. Call Options on debt
securities and foreign currencies give the holder the right, in exchange for a
premium, to buy the underlying security or currency at a stated price while the
counterparty is obligated, upon exercise, to sell such security or currency. Put
Options on debt securities and foreign currencies give the holder the right, in
exchange for a premium, to sell the underlying security or currency at a stated
price while the counterparty is obligated, upon exercise, to buy such security
or currency. An Option on a financial index is similar to an Option on a
security or foreign currency, except that exercise of the Option results in the
payment of a cash settlement instead of the purchase or sale of securities that
underlie the index. The amount of the cash settlement depends on the change in
the value of the index underlying the Option.
B-4
<PAGE>
The purchase of an Option may constitute an effective hedge against fluctuations
in currency exchange or interest rates, or changes in market conditions,
although, in the event of movements adverse to the Fund's position, the Fund may
forfeit the entire amount of the premium plus related transaction costs. The
writing of Options constitutes only a partial hedge, up to the amount of the
premium received, and the Fund could be required to purchase or sell debt
securities, foreign currencies, or other assets at disadvantageous rates,
thereby incurring losses.
Options written or purchased by the Fund will be traded on U.S. and foreign
exchanges or, provided a sufficiently liquid secondary market exists,
over-the-counter markets. Over-the-counter Options purchased by the Fund and the
value of securities used to cover over-the-counter Options written by the Fund
will be deemed to be illiquid subject to the Fund's policy limits on investments
in illiquid securities.
FUTURES CONTRACTS. Generally, a Futures Contract is an exchange traded contract
for the purchase or sale for future delivery of the underlying asset. A sale of
a Futures Contract on a debt security or foreign currency is the acquisition of
a contractual obligation to deliver the security or currency called for by the
contract at a specified price in a fixed delivery month. A purchase of a Futures
Contract on a debt security or foreign currency means the acquisition of a
contractual obligation to acquire the security or currency called for by the
contract at a specified price in a fixed delivery month. A Futures Contract on a
financial index, like an Option on a financial index, results in the payment of
a cash settlement instead of the delivery of the securities that underlie the
index. The amount of the cash settlement depends on the change in the value of
the index underlying the Futures Contract. The successful use of Futures
Contracts will usually depend on the Fund's ability to correctly predict
currency exchange and interest rate movements and market conditions. Should
rates or markets move in an unexpected manner, the Fund may not achieve the
anticipated benefits of Futures Contracts or may realize losses. Losses from
Futures Contracts are potentially unlimited.
OPTIONS ON FUTURES CONTRACTS. Call Options on Futures Contracts give the holder
the right, in exchange for a premium, to take the position of a buyer in a
specified Futures Contract while the counterparty is obligated, upon exercise,
to take the position of a seller in that Futures Contract. Put Options on
Futures Contracts give the holder the right, in exchange for a premium, to take
the position of a seller in a specified Futures Contract while the counterparty
is obligated, upon exercise, to take the position of a buyer in that Futures
Contract. Depending on the pricing of an Option on a Futures Contract compared
to either the price of the Futures Contract upon which it is based or the price
of the underlying asset, an Option on a Futures Contract may entail more or less
risk than ownership of the Futures Contract upon which it is based or the
underlying asset. Options on Futures Contracts hedge positions and transactions
in a manner similar to Options. For more information on the uses and limits of
Options on Futures Contracts, see "Options."
SPOT TRANSACTIONS. The Fund also engages in foreign currency exchange
transactions on a spot (i.e., current) basis in connection with the investment
of cash balances held by the Fund outside of the United States. The purpose of
these cash balances is to provide liquidity for operations. The Fund expects to
invest its cash balances primarily in bank accounts or similar investments
denominated in foreign currencies in lieu of dollar-denominated bank accounts or
investments. This should permit the Fund to profit from declines in the value of
the dollar during periods when the dollar is declining relative to the foreign
currencies in which its cash balances are invested. There is, however, no
guarantee that the Adviser will correctly anticipate currency fluctuations.
Accordingly, if the Fund's cash balances are maintained in investments
denominated in foreign currencies during periods when the value of the dollar is
appreciating relative to those foreign currencies, the Fund will experience
losses. The Fund will also incur service charges in connection with each
currency conversion.
B-5
<PAGE>
RISKS OF HEDGING TRANSACTIONS: Hedging Transactions cannot eliminate all risks
of loss to the Fund and may prevent the Fund from realizing some potential
gains. The projection of short-term currency exchange and interest rates and
other market movements is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. Among the risks of Hedging
Transactions are: incorrect prediction of the movement of currency exchange and
interest rates and other market conditions; imperfect correlation of currency
movements in cross-hedges and indirect hedges; imperfect correlation in the
price movements of Futures Contracts and Options on Futures Contracts with the
assets on which they are based; lack of liquid secondary markets and the
inability to effect closing transactions; costs associated with effecting such
transactions; inadequate disclosure and/or regulatory controls in certain
markets; counterparty default with respect to transactions not executed on an
exchange; trading restrictions imposed by governments, or securities and
commodities exchanges; and governmental actions affecting the value or liquidity
of currencies, securities and indices. Hedging Transactions may be effected in
foreign markets or on foreign exchanges and are subject to the same types of
risks that affect foreign securities.
Indirect hedges and cross-hedges are more speculative than other hedges because
they are not directly related to the position or transaction being hedged. With
respect to indirect hedges, movements in the proxy currency may not precisely
mirror movements in the currency in which portfolio securities are denominated.
Accordingly, the potential gain or loss on an indirect hedge may be more or less
than if the Fund had directly hedged a currency risk. Similar risks are
associated with foreign currency cross-hedge transactions. In a cross-hedge, the
foreign currency in which a portfolio security is denominated is hedged against
another foreign currency, rather than the U.S. Dollar. Cross-hedges may also
create a greater risk of loss than other Hedging Transactions because they may
involve hedging a currency risk through the U.S. Dollar rather than directly to
the U.S. Dollar or another currency. Moreover, in some cases, the Fund's
exposure to a foreign currency will be greater than its exposure to the
securities of that country.
In order to help reduce certain risks associated with Hedging Transactions, the
Board of Trustees has adopted the requirement that Forward Contracts, Options,
Futures Contracts and Options on Futures Contracts be used as a hedge or as a
substitute for an underlying securities or currency position and not for
speculation. In addition to this requirement, the Board of Trustees has adopted
the following percentage restrictions on the use of Options, Futures Contracts
and Options on Futures Contracts:
(i) The Fund will not write a put or call Option if, as a result thereof,
the aggregate value of the assets underlying all such Options
(determined as of the date such Options are written) would exceed 25% of
the Fund's net assets.
(ii) The Fund will not purchase a put or call Option or Option on a Futures
Contract if, as a result thereof, the aggregate premiums paid on all
Options or Options on Futures Contracts held by the Fund would exceed
20% of the Fund's net assets.
(iii) The Fund will not enter into any Futures Contract or Option on a Futures
Contract if, as a result thereof, the aggregate margin deposits and
premiums required on all such instruments would exceed 5% of the Fund's
net assets.
In order to help reduce the risk of counterparty default in Forward Contracts
and Options traded over-the-counter, the Fund will only enter into such
transactions with registered broker-dealers, or with banks or other financial
institutions regulated by the FDIC or having assets in excess of $1 billion, in
each case having a net worth of at least $20 million. For a more detailed
discussion of the uses, risks and costs of Hedging Transactions, see Appendix B.
FUNDAMENTAL POLICIES: The Fund seeks to limit the risk of investment losses by
adhering to the following "fundamental policies." These investment restrictions
can be changed only with the approval of a vote of a "majority of the
outstanding voting securities" of the Fund as defined in the Investment Company
B-6
<PAGE>
Act of 1940 (the "1940 Act"). This requires a vote of (a) 67% or more of the
shares of the Fund represented at a meeting where more than 50% of the Fund's
shares are represented, or (b) more than 50% of the outstanding shares of the
Fund, whichever is less. The fundamental policies provide that the Fund will
not:
1. Invest in securities of any one issuer (other than cash and cash items, and
securities of the United States Government and its agencies and
instrumentalities), if immediately after and as a result of such investment more
than 5% of the Fund's total assets would be invested in the securities of such
issuer.
2. Invest more than 25% of its total assets in the securities of companies
primarily engaged in any one industry (other than the United States Government
and its agencies and instrumentalities).
For the purposes of this restriction, the Fund currently deems the following
eleven economic sectors, representing the industry groups indicated in
parentheses, to be separate industries: BASIC INDUSTRY (aluminum, chemicals,
containers, fertilizer, paper, steel), CAPITAL GOODS (agricultural machines,
construction machines, electricals, machine tools, miscellaneous capital goods),
COMMUNICATION SERVICES (telecommunications), CONSUMER CYCLICALS (advertising,
auto/parts/tires, broadcasting, entertainment, forest products, home
builders/mobile homes, home furnishings/appliances, hotel/motel, newspapers,
publishing, restaurants, retailing (food, drug, department), waste management),
CONSUMER STAPLES (apparel, brewers, cosmetics, distillers, food, photography,
soft drinks, shoes, soaps, textiles, tobacco, toys), ENERGY AND NATURAL
RESOURCES (coal, domestic oils, exploration (on and offshore), gas
pipelines/distribution, gold and precious metals, international oils, metals,
oil service), FINANCE (banks (NYC/regional), insurers (multi,casualty,life),
finance companies, miscellaneous finance, real estate, savings and loan
companies), HEALTH CARE (drugs, hospital management, hospital supply), HIGH
TECHNOLOGY (business equipment, computer services, defense electronics,
electronic-instrumentation, electronic - semiconductors, electronic warfare),
TRANSPORTATION (air freight, air transport, railroads, trucking), and UTILITIES
(electric, gas pipelines, water).
3. Acquire more than 10% of the outstanding voting securities of any one issuer
or invest for the purpose of exercising control.
4. Invest in companies for the purpose of exercising control or management.
5. Purchase or sell real property; provided that the Fund may invest in publicly
traded securities secured by real estate or interests therein or issued by
companies, which invest in real estate or interests therein.
6. Purchase or sell commodities or commodity contracts or invest in put, call,
straddle or spread options or in interests in oil, gas or other mineral
exploration or development programs; provided, however, that the Fund may invest
in precious metals, in the securities of companies that explore for, extract,
process in precious metals and in asset-based securities related to precious
metals. In addition, this policy will not prevent the purchase, ownership or
sale of warrants or other rights where the grantor of the warrants is the issuer
of the underlying securities ("grantor warrants"); provided that the Fund will
not purchase a grantor warrant if, as a result thereof, the aggregate market
value of all purchased grantor warrants then owned exceed 5% of the total assets
of the Fund or 2% of the total assets of the Fund in the case of warrants which
are not listed on the New York Stock Exchange or the American Stock Exchange.
Moreover, and notwithstanding the restriction, the Fund may purchase and sell
foreign currencies on a current basis, an may engage in interest rate, foreign
currency and market hedging transactions, including investing in, writing and
purchasing forward contracts, options, future contracts and options on futures
contracts on debt securities, financial indices and foreign currencies.
7. Issue senior securities or borrow money, except that the Fund may borrow from
a bank as a temporary measure for extraordinary or emergency purposes in amounts
not exceeding 5% of its total assets and except that the Fund may obtain such
credit as may be necessary for the clearance of purchases or sales of
securities. For the purposes of this restriction, neither margin or collateral
arrangements with respect to forward contracts, options, futures contracts or
options on futures contracts, nor the purchase or sale of forward contracts,
options, futures contracts or options on futures contracts, are deemed to be the
issuance of a senior security or borrowing.
B-7
<PAGE>
8. Mortgage, pledge or in any other manner transfer any of its assets as
security for any indebtedness, except to secure borrowings described above or to
obtain such credit as may be necessary for the clearance of purchases or sales
of securities. For the purpose of this restriction, margin or collateral
arrangements with respect to forward contracts, options, futures contracts and
options on futures contracts, are not deemed to be a pledge of assets.
9. Purchase any securities on margin or effect short sales, except that the Fund
may obtain such credit as may be necessary for the clearance of purchases or
sales of securities. The deposit by the Fund of initial or variation margin in
connection with forward contracts, options, futures contracts and options on
future contracts will not be considered the purchase of a security on margin.
10. Engage in the business of underwriting securities issued by others, or
purchase illiquid securities, i.e., securities subject to contractual
restrictions on disposition or legal restrictions on disposition in all of the
principal markets where traded, repurchase agreements maturing in over seven
days, or securities that are not otherwise readily marketable, if such purchase
will result in more than 10% of the value of its assets then being invested in
such illiquid securities.
11. Invest in securities of an issuer, which, together with any predecessor, has
been in operation for less than 3 years if, as a result, more than 5% of the
Fund's total assets would then be invested in such securities.
12. Participate on a joint or a joint and several basis in any trading account
in securities. (The "bunching" or combining of orders for the sale or purchase
of marketable securities with other accounts under the management of the Adviser
to save brokerage costs or achieve an average price among them is not deemed to
result in a securities trading account.)
13. Make loans of money or securities to any person or firm, except through the
purchase of debt securities in accordance with the Fund's investment objectives
and policies.
14. Purchase securities from or sell securities to its officers or directors or
other "interested persons" of the Fund as defined in the 1940 Act.
15. Purchase or retain the securities of an issuer if, to the Fund's knowledge,
one or more of the officers or directors of the Fund, or one or more of the
officers or directors of the Adviser, individually own beneficially more than
1/2 of 1% of the securities of such issuer or together own beneficially more
than 5% of such securities.
Unless otherwise specified, if a percentage restriction on an investment or
utilization of assets set forth above is adhered to at the time an investment is
made, a later change in percentage resulting from changing values or a similar
event (such as a reduction in the size of the Fund occasioned by the redemption
of shares) will not be considered a violation of the Fund's investment
restrictions.
NET ASSET VALUE
The net asset value per share, on which purchase, exchange and redemption prices
are based, is calculated in accordance with the formula and at the times set
forth in the Prospectus. As of the date of this Statement of Additional
Information, the Fund understands that the New York Stock Exchange will be
closed (and, thus, no net asset value will be calculated) on the following U.S.
holidays: New Year's Day, Martin Luther King, Jr.'s Birthday, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
B-8
<PAGE>
Equity securities traded on an exchange or on the NASDAQ National Market System
are valued at the closing price. If there has been no sale on such date or if
the closing price is not the last sale price, then the security is valued at the
mean of the closing bid and asked prices on such day. Equity securities that are
not traded on an exchange or on the NASDAQ National Market System are valued at
the mean of the closing bid and asked prices.
Short-term debt obligations with a remaining maturity of 60 days or less are
valued at amortized cost. Other debt securities are valued at prices provided by
one or more bona fide market-makers as of the closing of the relevant market.
Options on futures contracts, and exchange-traded options other than index
options, are valued at the last sale price listed on the exchange on which they
are traded, unless no sales of such options have taken place that day, in which
case they will be valued at the mean between their closing bid and asked prices.
Exchange-traded index options are valued at the last sale price only if that
price falls on or between the closing bid and asked prices on that day. If the
last sale price falls outside of the range of the closing bid and asked prices,
or if there has been no sale that day, then the index option will be valued
using the mean of the closing bid and asked prices. Options traded
over-the-counter are valued at the most recent bid quotation in the case of
purchased options and at the most recent asked quotation in the case of written
options. When the Fund writes an option, an amount equal to the premium received
is included as an asset, and an equivalent deferred credit is included as a
liability and marked to market on a daily basis. If a call option written by a
Fund is exercised, the proceeds are increased by the premium received. If a call
option written by the Fund expires, the Fund has a gain in the amount of the
premium. If the Fund enters into a closing purchase transaction, the Fund will
have a gain or loss depending on whether the premium was more or less than the
cost of the closing transaction. If a put option held by the Fund is exercised,
the amount the Fund receives on sale of the underlying investment is reduced by
the amount of the premium paid by the Fund.
Futures contracts are valued at the last settlement price as of the close of the
commodity exchange on which they are traded. Forward currency contracts are
valued based on their amortized forward points and the closing spot price of
their underlying currencies as of 11:00 A.M. New York time. Foreign securities
and cash are converted into U.S. dollar values at the mean of the bid and asked
prices for the underlying currencies as of the same time.
All prices are taken from the primary market in which the portfolio security or
other asset is traded.
The Board of Trustees has delegated to the Fund's Custodian and the Adviser the
authority to make valuations of marketable securities and rate of exchange
determinations in accordance with the standards described above. If market
quotations are not readily available for valuation purposes, portfolio
securities and other assets will be valued by, or under the direction of, the
Board of Trustees in such manner as the Board of Trustees deems, in good faith,
appropriate to reflect the fair value thereof.
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES
You may purchase, redeem or exchange shares on any day the NYSE is open as
provided in the Fund's prospectus.
GOOD ORDER. A purchase, redemption or exchange request is deemed to be received
in good order when all required paperwork, stock powers, monies, signatures and
signature guarantees are received by the transfer agent, or an authorized broker
or its designee.
AUTHORIZED BROKERS. The Fund has authorized one or more brokers to receive
purchase and redemption orders, and to designate other intermediaries to receive
such orders, on its behalf. The Fund will be deemed to have received a purchase
or redemption order when an authorized broker or designee receives the order.
Orders will be priced at the Fund's net asset value next determined after
receipt by an authorized broker or designee in good order.
CERTIFICATES AND STOCK POWERS. Because of the costs and risks involved to
shareholders of holding shares in certificate form, any shares purchased will be
held by the transfer agent and not issued in certificate form unless a
certificate is requested by the shareholder. In the case where a certificate is
B-9
<PAGE>
issued and the shareholder requests a redemption, the certificate and a stock
power endorsed by the shareholder exactly as the shares are registered must be
returned to the Fund's transfer agent before the redemption request will be
processed.
SIGNATURE GUARANTEE. Some redemption requests may require a signature guarantee
depending on the amount being requested and where the proceeds are to be sent. A
signature guarantee is a widely accepted way to protect shareholders and the
Fund by verifying the signature on the request. Signature guarantees should not
be qualified in any way, whether by date or otherwise. Signatures must be
guaranteed by an "Eligible Guarantor Institution" and not by a notary public or
any other person or entity. An "Eligible Guarantor Institution" means a bank,
trust company, broker, dealer, municipal or government securities broker or
dealer, credit union, national securities exchange, registered securities
association, clearing agency or savings association that is a participant in the
Securities Transfer Agents Medallion Program ("STAMP") endorsed by the
Securities Transfer Association.
AUTOMATIC INVESTMENT AND SYSTEMATIC WITHDRAWAL PLANS. You or the Fund may
terminate the Automatic Investment Plan or Systematic Withdrawal Plan at any
time upon written notice to the other. The Plans will also be terminated by the
Fund's transfer agent on receipt of satisfactory evidence of your death or
incapacity. Until it has received such notice, the Fund's transfer agent will
not be liable for any deductions or payments in accordance with either Plan.
TELEPHONE TRANSACTIONS. Interruptions in telephone service may mean that you
will be unable to effect a transaction by telephone when desired. When telephone
transactions are difficult to implement, you should mail or send by overnight
delivery a written request directly to the Fund's transfer agent. By making
telephone exchanges or redemptions you may be giving up a measure of security
that you may have had if such transactions had been in writing. The Fund and its
transfer agent will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Fund and its transfer agent may be
liable for any losses due to unauthorized or fraudulent instructions if such
procedures are not followed. For your protection, the Fund's transfer agent
records all telephone calls. Exchanges by telephone can only be made if your
account registration has not changed within 30 days. Redemption proceeds are
sent only to a shareholder's registered address or to a bank account previously
designated by the shareholder. It is also the Fund's policy to mail a written
confirmation to you at your address of record within five business days after
any telephone transaction. The Fund or its transfer agent may refuse to honor
any telephone transaction request if the Fund or its transfer agent believes,
for any reason, that the request is unauthorized. You will be promptly notified
of any refused telephone transaction request. Neither the Fund nor its transfer
agent will be liable for following telephone instructions that the Fund's
transfer agent reasonably believes to be genuine. Since you may bear the risk of
loss in the event of an unauthorized telephone transaction, you should verify
the accuracy of telephone transactions immediately upon receipt of the written
confirmation.
Telephone transaction procedures may be modified or suspended without notice
during periods of drastic economic or market changes, and may be modified or
terminated on 60 days' notice to stockholders at any time.
DISTRIBUTIONS AND TAXES
For the fiscal year ended September 30, 1999, the Fund believes that it has
qualified as a "regulated investment company" ("RIC") under Subchapter M of the
Internal Revenue Code of 1986 (the "Code") and intends to be able to continue to
so qualify in future years. Qualification as a RIC allows the Fund to qualify
for "pass-through" treatment under the federal income tax laws, which means the
Fund, subject to certain conditions and requirements, will not be subject to
U.S. federal income tax on amounts it distributes to shareholders.
To qualify as a RIC, the Fund must, among other things, (a) derive in each
taxable year at least 90% of its gross income from dividends, interest, gains
from the sale or other disposition of stocks, securities or foreign currencies,
or certain other sources, (b) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
total assets is represented by cash and cash items, U.S. government obligations,
B-10
<PAGE>
securities of other regulated investment companies and other securities limited
in respect of any one issuer to an amount not greater than 5% of the Fund's
total assets and not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. government obligations or
the securities of other regulated investment companies), and (c) distribute in
each year at least 90% of its taxable and net tax-exempt income to shareholders.
For any year in which it does not qualify as a RIC, (a) the Fund will be taxed
as an ordinary corporation, (b) distributions to shareholders will not be
deductible by the Fund in computing taxable income, and (c) the Fund's
distributions, to the extent made out of the Fund's current or accumulated
earnings and profits, will be taxable to shareholders as dividends (regardless
of whether they would otherwise have been considered long-term capital gains).
Should the Fund be deemed a personal holding company, its undistributed income
would be taxed at the highest marginal rate applicable to corporations and it
could be subject to an additional personal holding company tax generally equal
to 39.6% of its net undistributed dividend and interest income.
RICs are subject to a nondeductible 4% excise tax on the excess (if any) of the
"required distribution" for a calendar year over the "distributed amount" for
such year. To avoid imposition of such tax, a RIC generally will have to
distribute in each calendar year at least 98% of its ordinary income for such
calendar year and at least 98% of its capital gains for the 12-month period
ending on October 31 of such year. The Fund intends to make sufficient
distributions each year to avoid imposition of the excise tax.
Events subsequent to a dividend or distribution may cause the dividend or
distribution to be recharacterized, in whole or in part, for U.S. federal income
tax purposes. For example, if the fund incurs foreign currency losses that
eliminate its tax-basis "earnings and profits," then distributions made during
the year may be recharacterized as return of capital distributions for U.S.
income tax purposes, rather than income distributions, thereby reducing each
shareholder's basis in his Fund shares.
HEDGING AND OTHER TRANSACTIONS. The Fund is currently authorized to engage in
Forward Contracts and to invest in or write Options, Futures Contracts and
Options on Futures Contracts to hedge against changes in interest and foreign
currency exchange rates and market movements and as a substitute for an
underlying investment ("Hedging Transactions"). Certain of these transactions
may be "Section 1256 contracts." Gains or losses on Section 1256 contracts
generally are treated as 60% long-term and 40% short-term ("60/40") capital
gains or losses. Also, any Section 1256 contracts that are held by the Fund at
the end of a taxable year (and, generally, for purposes of the 4% excise tax, on
October 31 of each year) are "marked-to-market" with the result that unrealized
gains or losses are treated as though they were realized and the resulting gain
or loss is generally treated as a 60/40 gain or loss.
Generally, any Hedging Transactions undertaken by the Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains or losses realized by the Fund. For example, Hedging
Transactions may convert gains, which would otherwise be taxable as long-term
capital gain into short-term capital gain, which is taxed as ordinary income
when distributed to shareholders. In addition, any losses realized by the Fund
on positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the taxable income
for the taxable year in which such losses are realized. Because the straddle
rules are complex and their interpretation unclear, the tax consequences to the
Fund of Hedging Transactions are uncertain.
The Fund may make one or more of the elections available under the Code that are
applicable to straddles. If the Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
elections made. The rules applicable under certain of the elections may operate
to accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders, and that will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased as compared to a fund that
did not engage in Hedging Transactions.
B-11
<PAGE>
In addition, under the "conversion transaction" provisions of the Code, certain
gains derived from the Fund's hedging or other activities may be recharacterized
as ordinary income for federal income tax purposes. While some regulations have
been issued under these provisions, the application of these provisions is
expected to be further defined by additional regulations to be issued by the
Treasury Department. The Adviser will take these provisions, regulations and any
subsequent regulations into account in assessing the hedging and other
strategies of the Fund.
The diversification and income requirements applicable to the Fund's assets and
other restrictions imposed on the Fund by the Code may limit the extent to which
the Fund will be able to engage in transactions in Forward Contracts, Options,
Futures Contracts or Options on Futures Contracts.
CURRENCY FLUCTUATIONS -- "SECTION 988" GAINS OR LOSSES. Under the Code, gains or
losses attributable to fluctuations in exchange rates that occur between the
time the Fund accrues interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Gains or losses with respect to Forward
Contracts and certain Options, Futures Contracts and Options on Futures
Contracts are generally treated as ordinary income or loss, although an election
is available under certain circumstances that would result in capital gain or
loss treatment. In addition, gains or losses on the disposition of debt
securities denominated in a foreign currency attributable to fluctuations in the
value of the foreign currency between the date of acquisition of the security
and the date of disposition are generally treated as ordinary gain or loss.
These gains or losses, referred to under the Code as "Section 988" gains or
losses, may increase or decrease the amount of the Fund's investment income to
be distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's capital gains or losses.
CERTAIN FOREIGN TAX CONSEQUENCES. Foreign securities, such as those to be
purchased by the Fund, may be subject to foreign taxes that could reduce the
yield on such securities although a shareholder otherwise subject to United
States federal income taxes may be entitled to claim a credit or deduction for
such tax purposes, subject to certain limitations.
Dividends and interest received by the Fund in connection with its foreign
securities investments may give rise to withholding and other taxes imposed by
foreign countries, generally at rates from 10% to 35%. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes.
Investors may be entitled to claim U.S. foreign tax credits with respect to such
taxes, subject to the limitations of the Code. Foreign countries generally do
not impose taxes on capital gains in respect of investments by foreign
investors.
Some investments made by the Fund may be treated as "passive foreign investment
companies" ("PFICs") for U.S. income tax purposes. Investment by the Fund in
PFICs could accelerate the stockholders' taxation, alter the timing or
characterization of certain distributions to shareholders or subject the Fund to
federal income tax or other charges in certain circumstances.
BACKUP TAX WITHHOLDING. Certain shareholders may be subject to backup tax
withholding at a 31% rate. Generally, a shareholder will be subject to backup
withholding if the shareholder fails to provide the Fund with its correct
taxpayer identification number, or if the IRS notifies the Fund that the
shareholder has underreported interest or dividends. In addition, shareholders
that fail to certify that they are not subject to backup withholding (on the
grounds only of underreporting and notice from the IRS) will be subject to
backup withholding. Accordingly, to avoid being subject to backup withholding,
investors who acquire shares in the Fund must certify that they have provided
their correct taxpayer identification numbers and that they are not subject to
backup withholding in the appropriate spaces on the application at the end of
the Prospectus.
The discussion in the Prospectus, together with the foregoing, is a general and
abbreviated summary of the tax consequences of investment in the Fund. Investors
are urged to consult their own tax advisors to determine the effect of
investment in the Fund upon their individual tax situations.
B-12
<PAGE>
TRUSTEES AND OFFICERS
The management of the Trust in accordance with the laws of the state of
Massachusetts, including the general overall supervision of the Fund's portfolio
transactions, is the responsibility of the Board of Trustees. The names,
business addresses and ages of the Trustees and officers of the Trust and their
principal occupations and other affiliations during the past five years are set
forth below:
<TABLE>
<CAPTION>
Principal Occupations
Position(s) Held and Other Affiliations
Name, Address and Age With the Fund During the Past 5 Years
- --------------------- ------------- -----------------------
<S> <C> <C>
Thomas E. Bailard(1) (57) Chairman of the Board, Chairman, CEO and President of BB&K Holdings, Inc.
950 Tower Lane, Suite 1900 Chief Executive Officer ("Holdings"). Chairman and Chief Executive Officer
Foster City, CA 94404 and Trustee of Bailard, Biehl & Kaiser, Inc., the Fund's
investment adviser (the "Adviser"). Chairman of BB&K
Fund Services, Inc., The Fund's distributor (the
"Distributor") Chairman of Bailard, Biehl & Kaiser
Real Estate Investment Trust, Inc. (the "REIT").
Burnice E. Sparks, Jr.(1) (51) President Director, officer and currently President of the
950 Tower Lane, Suite 1900 Adviser. Director and Chief Executive Officer of the
Foster City, CA 94404 Distributor since June 1992. President and Director
of the Bailard, Biehl & Kaiser International Fund
Group, Inc. (the "International Fund Group").
Barbara V. Bailey(1) (41) Treasurer Treasurer of BB&K Holdings, Inc. and Senior Vice
950 Tower Lane, Suite 1900 President and Treasurer/ Secretary of the Adviser
Foster City, CA 94404 since December 1995. Treasurer of the International
Fund Group since September 1996. Secretary of the
Distributor, and Treasurer and Secretary of the REIT
since January 1996. Management consultant from
September 1995 to December 1995. Account
Manager/Consultant at Watson Wyatt Worldwide from
December 1994 to September 1995.
Janis M. Horne(1) (44) Secretary and Chief Senior Vice President, Investment Counselor and Chief
950 Tower Lane, Suite 1900 Compliance Officer Compliance Officer of the Adviser. Secretary and
Foster City, CA 94404 Chief Compliance Officer of the International Fund
Group.
Sofi Kyriakidis(1) (27) Assistant Treasurer and Employee of the Adviser since November 1995, most
950 Tower Lane, Suite 1900 Assistant Secretary recently as Vice President. Assistant Treasurer and
Foster City, CA 94404 Assistant Secretary of the International Fund Group
since September 1996. Assistant Treasurer of the
REIT since June 1996. Treasurer of the Distributor
since January 1996. Correspondence Specialist at
Franklin Resources, Inc. from July 1994 to May 1995.
Shirley L. Clayton(2) (62) Trustee President of Raven Biotechnologies, a biotechnology
122 Campo Bello Lane firm, since January 1999. Chief Financial Officer of
Menlo Park, CA 94025 Orquest, a biotechnology firm, from May 1998 to
January 1999. President and Chief Operating Officer
of TopoMetrix, a manufacturer of scanning probe
microscopes from June 1993 to 1998. Director of the
International Fund Group.
</TABLE>
B-13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Scott F. Wilson(2) (55) Trustee General Partner of Transcontinental Capital Partners,
Transcontinental Capital an investment banking firm, since 1991. Shareholder
Partners of Milbank Winthrop & Co., an investment adviser,
540 Cowper Street, Ste. 200 since 1981. Director of the International Fund Group.
Palo Alto, CA 94301
James C. Van Horne(2) (64) Trustee A.P. Giannini Professor of Finance at Graduate School
Graduate School of Business of Business of Stanford University from September
Stanford University 1976 to the present. Director of Sanwa Bank
Stanford, CA 94305 California and Montgomery Street Income Securities,
Inc., a registered investment company. Director of
the International Fund Group.
</TABLE>
- --------
(1) "Interested person" of the Company, as defined in the 1940 Act.
(2) Member of the Audit Committee.
The following table sets forth the compensation paid to the Trust's Trustees
during the fiscal year ended September 30, 1999.
COMPENSATION TABLE
Pension or Total
Retirement Estimated Compensation
Benefits Annual From Trust and
Aggregate Accrued as Benefits Fund Complex (1)
Name of Person Compensation Part of Trust Upon Paid to
and Position From Trust Expenses Retirement Trustees
------------ ---------- -------- ---------- --------
Thomas E. Bailard
Trustee $ 0(2) $0 $0 $ 0
Shirley L. Clayton
Trustee $6,667(3) $0 $0 $20,000
Scott F. Wilson
Trustee $6,667(3) $0 $0 $20,000
James C. Van Horne
Trustee $6,667(3) $0 $0 $20,000
The Trust and the International Fund Group reimburse each Director and Trustee
for travel and other out-of-pocket disbursements incurred in connection with
attending Board meetings. The Trust and the International Fund Group also
reimburse other travel expenses of Directors, Trustees and officers, including
international travel expenses, incurred incident to the performance of duties as
a Director, Trustee or officer.
- ----------
(1) A Fund Complex consists of investment companies that hold themselves out to
investors as related companies for purposes of investment and investor
services, have a common investment adviser or have an investment adviser
that is an affiliated person of the investment adviser of any other
investment companies. The Trust and the International Fund Group are
considered to be part of the same Fund Complex.
(2) Does not include fees paid to the Adviser pursuant to the Management
Agreement as described below under "INVESTMENT ADVISORY AND OTHER
SERVICES".
(3) Consists of a $4,000 annual trustee fee plus $667 for each Board meeting
attended in person.
B-14
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGEMENT AGREEMENT
The Fund has entered into an Investment Management Agreement (the "Management
Agreement") with Bailard, Biehl & Kaiser, Inc., a California corporation (the
"Adviser" or "Bailard, Biehl & Kaiser") for investment advisory and certain
portfolio transaction and administrative services dated March 15, 1990. The
Adviser, subject to the general supervision of the Fund's Board of Trustees, is
responsible for the overall management of the Fund's portfolio in accordance
with the Fund's investment objectives, policies and restrictions. The Adviser is
also responsible for making investment recommendations as to securities to be
acquired, purchased or sold, for reviewing and selecting firms to effect the
execution of portfolio transactions and for reviewing the execution of such
transactions to ensure their overall reasonableness. In addition, the Adviser
provides certain administrative services to the Fund, including the oversight of
the various agents, records and reports of the Fund.
The Adviser receives a monthly fee calculated at an annual rate equal to .95% of
the average net assets of the Fund up to $75 million, .80% of the next $75
million, and .65% of the average net assets in excess of $150 million. While the
initial rate is higher than the rate charged by most other advisers, the Fund
believes that it is justified by the complexity of the services provided by the
Adviser. For the fiscal years ended September 30, 1997, 1998, and 1999, the
total fees paid to the Adviser amounted to $350,110, $356,891 and $354,190,
respectively
The Management Agreement may be terminated at any time, without penalty upon 60
days' written notice, by majority vote of the Board of Trustees of the Fund or
by a vote of the holders of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund. The Management Agreement may also be
terminated by the Adviser upon not less than 180 days' written notice to the
Fund and terminates automatically upon its assignment (as defined in the 1940
Act).
The Adviser has granted the Fund the right to use the designation "Bailard,
Biehl & Kaiser" in its name and has reserved the right to withdraw its consent
to the use of such designation by the Fund under certain conditions, including
the condition that Bailard, Biehl & Kaiser ceases to act as the Fund's
investment adviser, and to grant the use of such name to others, including any
other investment company.
EXPENSES OF THE FUND
The Fund pays all of its own expenses (except for those expressly to be paid by
the Adviser) including without limitation the following: all costs and expenses
incident to the registration, including the maintenance of registration, of the
Fund under the 1940 Act or the qualification of the shares of the Fund for sale
under federal, state or other securities laws; printing or other reproduction
and distribution of any prospectuses and any other documents necessary and
incident to any public offering (other than costs incident to the reproduction
and distribution of prospectuses to prospective new investors and the
advertising of Fund shares, which are payable by the Adviser); charges and
expenses of any registrar or custodian of the Fund; all auditing, accounting,
bookkeeping and record keeping charges and expenses; transfer agent and dividend
agent charges and expenses; all commissions payable on portfolio securities
transactions; all taxes and organizational fees payable by the Fund to any
federal, state or other governmental agencies; the costs of preparing and
printing stock certificates; all expenses of meetings of shareholders and
Trustees and of preparing, printing and mailing proxy statements and any reports
to shareholders; fees and travel expenses of officers and Trustees; fees and
expenses incident to any dividend or distribution reinvestment program; all
charges and expenses of legal counsel for the Fund; fees and expenses incurred
in obtaining rulings, advice or other information or counseling relating to the
taxation of the Fund or its shareholders; all association dues; all interest
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payable on Fund borrowings; and all costs of information obtained from sources
other than the Adviser or its affiliated persons (as defined in the 1940 Act)
relating to the pricing and valuation of securities.
The Adviser pays certain expenses incurred in the Fund's day-to-day management,
including the costs of office space and other facilities used by the Adviser,
and salaries and expenses of personnel of the Adviser. As an accommodation to
the Fund, from time to time, the Adviser directly pays certain expenses of the
Fund (such as insurance premiums, Trustees' fees, and fees relating to state
securities law filings) for which the Adviser is later reimbursed by the Fund.
Disbursements by the Adviser on behalf of the Fund and their subsequent
reimbursement by the Fund are effected only upon the prior approval of an
officer of the Trust. For the fiscal year ended September 30, 1999, the Fund
reimbursed the Adviser approximately $35,627.
OTHER SERVICES
BB&K Fund Services, Inc., 950 Tower Lane, Suite 1900, Foster City, California
94404 (the "Distributor"), is a registered broker/dealer and serves as the sole
distributor for the Fund's shares pursuant to an agreement with the Fund. The
Distributor receives no commission or other compensation from the Fund. The
Fund's shares may also be purchased directly from the Fund.
The Adviser and the Distributor are wholly owned subsidiaries of BB&K Holdings,
Inc. ("Holdings"), which may be deemed to be a controlling person of the Adviser
and the Distributor. In addition, Thomas E. Bailard and his spouse, Terri, may
be deemed to be controlling persons of the Adviser and the Distributor, by
virtue of their beneficial ownership of more than 25% of the securities of
Holdings, as individuals or trustees.
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
acts as Custodian of the Fund's assets and has been authorized to cause
securities and other assets of the Fund to be held in separate accounts with
various subcustodians in conformity with Section 17(f) of the 1940 Act and the
rules thereunder. As part of the Custodian Agreement, the Fund's Custodian has
agreed to act as the Fund's financial agent, and will maintain certain books and
records for the Fund, perform the calculations necessary to compute the value of
the Fund's investment securities and other assets and the net asset value of the
Fund's shares, confirm all share purchases and redemptions to the Fund's
Transfer Agent, provide financial reports to the Fund necessary to prepare its
financial statements, and provide additional services of a similar nature. For
services performed by the Custodian during the 1997, 1998 and 1999 fiscal years,
the Fund paid $151,411, $144,197 and $146,629, respectively.
The Trust, on behalf of the Fund, has entered into an Administration Agreement
dated as of April 1, 1994, as amended, with Investment Company Administration
LLC ("ICA"), 2020 E. Financial Way, Suite 200, Glendora, California 91741.
Pursuant to such agreement, ICA provides certain administrative services in
connection with the management of the Fund's operations. Such services include:
(i) assisting the Fund's accountants in preparing financial reports, (ii)
assisting the Fund's attorneys in preparing amendments to the Fund's
registration statement, any proxy materials and other forms and reports to be
filed with the SEC, (iii) preparing periodic reports to stockholders, (iv)
monitoring compliance with the Fund's investment policies and restrictions, and
(v) other administrative matters. As compensation for such services, the Fund
pays ICA an annual fee of $32,500.
Transfer agent and dividend paying agent services are provided by Chase Global
Funds Services Company ("CGFSC"), P.O. Box 2798, Boston, Massachusetts 02208, an
affiliate of The Chase Manhattan Bank, N.A. CGFSC also files applications under
state law to register the Fund's shares for sale, and to register the Trust
and/or the Trust's officers to sell the Fund's shares. For services performed by
CGFSC during the 1997, 1998 and 1999 fiscal years, the Fund paid $36,898,
$37,420 and $35,821, respectively.
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PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, California 94105,
serves as the Trust's independent accountants, providing audit services,
including review and consultation in connection with various filings by the
Trust with the Securities and Exchange Commission and tax authorities.
PERSONAL SECURITIES TRANSACTIONS
Officers, Directors, Trustees and employees of the Trust, the Distributor and
the Adviser are permitted to invest in securities for their own account,
including securities that may be purchased or held by the Fund. To address
potential conflicts with the interests of the Fund that might arise from
personal securities transactions, the Trust, the Distributor and the Adviser
have adopted codes of ethics pursuant to Rule 17j-1 under the 1940 Act. These
codes include certain preclearance and reporting procedures and certain
restrictions on contemporaneous and short-term trading and on purchases of
securities in private placements and initial public offerings.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser is responsible for the allocation of brokerage and reviews the
efficiency of execution and reasonableness of the commissions charged. In
effecting portfolio transactions, the Adviser seeks to obtain the best net
results for the Fund, taking into account such factors as price, size of order,
difficulty of execution and operational facilities of the firm involved. The
Adviser generally seeks reasonably competitive commission rates in domestic and
foreign transactions. Ordinarily, the Adviser purchases securities from the
primary market, whether over-the-counter or listed, and listed securities may be
purchased in the over-the-counter market if, in the judgment of the Adviser, it
is the primary market.
Within the framework of the above policies, the Adviser may also consider
research, investment information and other related services, such as price
quotations, provided by brokers. In recognition of research services, the
Adviser has the authority to cause the Fund to pay brokerage commissions (which
are negotiated in the case of domestic stock exchange transactions, but which
are often fixed in the case of foreign stock exchange transactions) in excess of
that which other brokers might charge for effecting the same transaction. As a
consequence, the Fund could pay a broker that furnishes research services for
the Adviser a higher commission than that which might be paid to another broker
that does not furnish research services, or that furnishes research services
deemed to be of lesser value, if such commission is deemed reasonable in
relation to the value of the brokerage and research services provided by the
broker, viewed in terms of either that particular transaction or the overall
responsibilities of the Adviser with respect to the Fund. Research services that
could be provided could include analyses of industries, statistical or economic
information or analyses of issuers. The Fund may also place orders for
securities transactions with its Custodian in return for a discount on the
Fund's custodial fees. This practice will have the effect of reducing the amount
of expenses reported in the Fund's financial statements. The Adviser will
review, from time to time, brokerage commissions paid on behalf of the Fund with
a view to determining their reasonableness in relation to brokerage commissions
paid by other similarly situated investors.
The extent to which commissions charged by brokers may reflect an element of
value for research services cannot be determined. To the extent that research
services of value are provided by brokers through whom the Fund places portfolio
transactions, the Adviser may be relieved of expenses that it might otherwise
bear. Research services furnished by brokers could be useful and of value to the
Adviser in serving its other clients as well as the Fund. On the other hand,
certain research services obtained by the Adviser as a result of the placement
of portfolio brokerage of other clients could be useful and of value to it in
serving the Fund. It is not the Fund's practice to allocate portfolio securities
business on the basis of sales of its shares. For the fiscal year ended
September 30, 1999, the Adviser estimates that the Fund paid $23,603 in
brokerage commissions, involving $8,609,336 of portfolio transactions, to
brokers with whom the Adviser had an arrangement to receive research or related
services.
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There are occasions on which portfolio transactions for the Fund may be executed
as part of concurrent authorizations to purchase or sell the same security for
other accounts served by the Adviser, some of which accounts have investment
objectives similar to the Fund's investment objectives. Although such concurrent
authorizations potentially could be either advantageous or disadvantageous to
the Fund, they will be effected only when the Adviser believes that to do so
will be in the best interest of the Fund. When such concurrent authorizations
occur, the objective will be to allocate the executions in a manner that is
deemed equitable by the Adviser to the accounts involved, including the Fund.
The Adviser has adopted a Trade Policy to ensure that all clients will be
treated fairly when trades are aggregated
No brokerage commissions will be paid to any broker that was at the time of the
transaction an "affiliated person" of the Fund or indirectly affiliated with the
Fund through a common "affiliated person" as that term is defined in the 1940
Act. Neither the Adviser nor any of its affiliates receives any brokerage
commissions from portfolio transactions. During the Fund's fiscal years ended
September 30, 1997, 1998 and 1999, the Fund paid brokerage commissions on
portfolio transactions of approximately $79,880, $79,108 and $68,180,
respectively.
SHAREHOLDER INFORMATION
As of October 19, 1999 all officers and Trustees of the Trust as a group held of
record and beneficially less than 1% of the outstanding shares of the Fund. No
stockholders held of record or, to the Fund's knowledge, beneficially in excess
of 5% of the outstanding shares of the Fund on that date.
DESCRIPTION OF CAPITAL STOCK
The Fund is a diversified series of the Bailard, Biehl & Kaiser Fund Group, an
open-end management investment company organized in August 1986 as a
Massachusetts business trust (the "Trust"). The Trust is authorized to issue an
unlimited number of shares in one or more series. Currently, the Fund is the
only series within the Trust. Additional series may be added, but the Trust has
no immediate plans to do so.
Each share in the Fund is entitled to participate equally in dividends and
distributions of the Fund, including the distribution of assets upon liquidation
of the Fund. When issued, the shares will be fully paid and non-assessable and
will have no preemptive, conversion or exchange rights.
Shareholders of the Fund are entitled to one vote per share. In the event that
the Trust issues additional series, shareholders of the Fund will vote with
shareholders of the other funds within the Trust, except with respect to matters
affecting only the rights of a particular fund. The shares have noncumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Trustees can elect all of the Trustees if they choose to do
so. In such an event, the holders of the remaining shares so voting will not be
able to elect any Trustees. The Trustees may be removed by a vote of not less
than two-thirds of the outstanding shares of the Fund. The Fund is not required
to hold annual meetings for the election of Trustees or otherwise. Special
meetings may be called by the Board of Trustees or by holders of 25% of the
shares entitled to vote. In addition, holders of 10% of the Fund's shares may
call a meeting for the purpose of voting on the question of the removal of a
Trustee. The Fund will assist in shareholder communications with respect to any
meeting duly called by the holders of its shares.
Under certain circumstances, shareholders of the Fund may be held personally
liable for the obligations of the Trust. The Declaration of Trust provides that
shareholders will not be subject to any personal liability for the acts or
obligations of the Trust and that every written agreement, obligation or other
undertaking made or issued by the Trust will contain a provision to the effect
that the shareholders are not personally liable thereunder. The Declaration of
Trust provides for indemnification out of the Fund's assets against claims
against such shareholders as shareholders of the Trust and any legal and other
expenses incident thereto. Accordingly, the risk of any shareholder incurring
financial loss beyond his investment due to personal liability is limited to
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circumstances in which the Fund itself would be unable to meet its obligations.
The Adviser believes that, in view of the above, the risk of personal liability
to shareholders is remote.
PERFORMANCE DATA
The Fund may compute their average annual compounded rate of total return during
specified periods that would equate a hypothetical initial investment of $1,000
to the ending redeemable value of such investment by (a) adding one to the
computed average annual total return, (b) raising the sum to a power equal to
the number of years covered by the computation and (c) multiplying the result by
$1,000 (which represents the hypothetical initial investment). The ending
redeemable value is determined by assuming a complete redemption at the end of
the periods covered by the average annual total return computation.
The annual compounded rate of total return for the Fund for the one year period
ended September 30, 1999 was 9.25%. The average annual compounded rates of total
return for the Fund for the five year period from October 1, 1994 to September
30, 1999 was 10.71%. The average annual compounded rate of total return for the
Fund for the ten year period from October 1, 1989 to September 30, 1999 was
7.62%.
The above figures assume that all dividends and distributions by the Fund were
reinvested at net asset value on the reinvestment dates.
These figures represent past performance and an investor should be aware that
past performance is no indication of future results, and that the investment
return and principal value of an investment in the Fund will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
FINANCIAL STATEMENTS
Incorporated by reference herein are portions of the Fund's annual report to
shareholders for the fiscal year ended September 30, 1999 under the headings:
"SCHEDULE OF INVESTMENTS BY COUNTRY," "SCHEDULE OF INVESTMENTS BY INDUSTRY,"
"STATEMENT OF ASSETS AND LIABILITIES," "STATEMENT OF OPERATIONS," "STATEMENT OF
CHANGES IN NET ASSETS," "FINANCIAL HIGHLIGHTS," "NOTES TO FINANCIAL STATEMENTS,"
and "REPORT OF INDEPENDENT ACCOUNTANTS." Copies of the annual report are
available upon request and without charge by contacting BB & K Fund Services,
Inc., 950 Tower Lane, Suite 1900, Foster City, California 94404, (800) 882-8383.
The Prospectus and this Statement of Additional Information, together, do not
contain all of the information set forth in our registration statement filed
with the Securities and Exchange Commission. Certain information is omitted in
accordance with rules and regulations of the Commission. The registration
statement may be inspected at the Public Reference Room of the Commission at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and
copies thereof may be obtained from the Commission
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APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
BONDS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S"): Bonds rated Aaa by Moody's are
judged by Moody's to be of the highest quality by all standards. Together with
bonds rated Aa, they comprise what are generally known as high-grade bonds. Aa
bonds are rated lower than Aaa bonds because margins of protection may not be as
large as those of Aaa bonds, or fluctuations of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger than those applicable to Aaa securities.
Bonds that are rated A by Moody's possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present that suggest a susceptibility to impairment sometime in the future.
Moody's Baa rated bonds are 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 length of time. Such bonds lack
outstanding investment characteristics and may have speculative characteristics
as well. They are still considered investment grade bonds.
STANDARD & POOR'S CORPORATION ("S&P"): Bonds rated AAA are considered by S&P to
be the highest grade obligations, and the capacity to pay interest and principal
is extremely strong. Bonds rated AA by S&P are judged by S&P to have a very
strong capacity to pay interest and principal and differ only in a small degree
from issues rated AAA. Bonds rated A by S&P have a strong capacity to pay
principal and interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
S&P's BBB rated bonds, or medium-grade category bonds, are regarded as having
adequate capacity to pay principal and interest. Whereas BBB bonds normally
exhibit adequate protection parameters, adverse economic conditions or changes
in circumstances are more likely to lead to a weakened capacity to pay interest
and principal. They are still considered investment grade bonds.
COMMERCIAL PAPER
MOODY'S: The Prime rating is the highest commercial paper rating assigned by
Moody's. Issuers within this Prime category may be given ratings 1, 2 or 3,
depending on their capacity for repayment. Issuers rated Prime-1 (or supporting
institutions) have a superior ability for repayment of senior short-term debt
obligations. Prime 1 repayment ability will often be evidenced by the issuer's
leading market position in well-established industries, high rates of return on
funds employed, conservative capitalization structures with moderate reliance on
debt, and ample asset protection. Also, a Prime-1 issuer may have broad margins
in earnings coverage of fixed financial charges, high internal cash generation
and a well established access to a range of financial markets and assured
sources of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong capacity for
repayment of senior short-term debt obligations. Issuers rated Prime-2 will
evidence many of the characteristics of Prime-1 issuers, although to a lesser
degree. Earnings trends and coverage ratios are sound but more subject to
variation. Capital characteristics may be more affected by external conditions.
Ample alternative liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable capacity
for repayment. The effects of industry characteristics and market composition
may be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements. Adequate alternative
liquidity is maintained.
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S&P: Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. Issues rated A are regarded as having
the greatest capacity for timely payment. Issues in this category are further
refined with the designations 1, 2, and 3 to indicate the relative degree of
safety. Issues rated A-1 have a very strong degree of safety regarding timely
payment. Issues rated A-2 have a strong capacity for timely payment. However,
the relative degree of safety is not as overwhelming as for issues designated
A-1. Issues rated A-3 have a satisfactory capacity for timely payment. They are,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
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APPENDIX B
HEDGING AND OTHER TRANSACTIONS
FORWARD CONTRACTS. The Fund may enter into forward foreign currency exchange
contracts to attempt to minimize the risk to the Fund from adverse changes in
currency exchange rates and as a substitute for an underlying currency position
("Forward Contracts"). All Forward Contracts will be covered. In the case of a
Forward Contract obligating the Fund to purchase a foreign currency (a "long
position"), the Fund may establish a segregated account containing liquid assets
("Liquid Assets") equal to the purchase price of the Forward Contract due on the
settlement date (less any margin on deposit). Liquid Assets include cash, U.S.
Government securities and other securities determined by the Adviser to be
liquid in accordance with guidelines adopted by the Board of Trustees.
Alternatively, the Fund may cover a long position by purchasing a put option on
the same Forward Contract with a strike price as high or higher than the price
of the Forward Contract held by the Fund (or, if lower than the price of the
Forward Contract held by the Fund, the Fund may segregate Liquid Assets equal to
the difference).
In the case of a Forward Contract obligating the Fund to sell a foreign currency
(a "short position"), the Fund may segregate Liquid Assets equal to the market
value of the currency underlying the Forward Contract (less any margin on
deposit, but not less than the market price at which the short position was
established). Alternatively, the Fund may cover the Forward Contract by (i)
entering into an offsetting position or transaction, (ii) owning the currency
underlying the Forward Contract or (iii) holding a call option permitting the
Fund to purchase the same Forward Contract at a price no higher than the price
at which the short position was established (or, if higher, the Fund may
segregate Liquid Assets equal to the difference).
OPTIONS ON DEBT SECURITIES AND FOREIGN CURRENCIES. The Fund may write covered
call and put options and purchase call and put options ("Options") on debt
securities and foreign currencies that are traded on United States and foreign
exchanges and over-the-counter, to attempt to minimize the risks to the Fund
from adverse changes in currency exchange and interest rates, and market
conditions and as a substitute for an underlying securities or currency
position.
For example, a decline in the value of a foreign currency in which portfolio
securities are denominated will reduce the value of such securities in U.S.
Dollars, even if their value in the foreign currency remains constant. In order
to protect against such reductions in the value of portfolio securities, the
Fund may purchase put Options on the foreign currency. If the value of the
foreign currency does decline, the Fund will have the right to sell such
currency for a fixed amount and will thereby offset, in whole or in part, the
adverse effect on its portfolio that otherwise would have resulted.
Conversely, when the Fund predicts an increase in the value of a currency in
which securities to be acquired are denominated, the Fund may purchase call
Options on the foreign currency. The purchase of such Options could offset, at
least partially, the effects of the adverse movements in exchange rates.
However, the benefit to the Fund derived from purchases of Options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
predicted, the Fund could sustain losses that would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
The Fund may also purchase Options on debt securities to hedge against interest
rate changes that adversely affect the value of a portfolio security. For
example, when the Fund anticipates a decline in the market value of a portfolio
security due to rising interest rates, it may purchase put Options on the
security. If the value of the security does decline, the Fund will have the
right to sell the security for a fixed amount and will thereby offset, in whole
or in part, the adverse effect that would otherwise have been caused by rising
interest rates.
Where the Fund predicts a change in the market value of a security to be
acquired that would increase the cost of such security, the Fund may purchase
call Options thereon. The purchase of such Options could offset, at least
partially, the effect of declining interest rates. The use of Options to hedge
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against adverse movements in interest rates is subject to the same limitations
and risks of loss as the use of Options to hedge against adverse movements in
exchange rates.
The Fund may write put and call Options for the same types of hedging purposes.
For example, when the Fund anticipates a decline in the value of foreign
currency-denominated securities due to adverse fluctuations in exchange rates it
could, instead of purchasing a put Option, write a call Option on the relevant
currency. If the expected decline occurs, the Option will most likely not be
exercised and the diminution in value of portfolio securities will be fully or
partially offset by the amount of the premium received. Similarly, instead of
purchasing a call Option to hedge against an anticipated increase in the cost of
securities to be acquired, the Fund could write a put Option on the relevant
currency that, if rates move in the manner projected, will expire unexercised
and allow the Fund to hedge such increased cost up to the amount of premium. The
writing of an Option constitutes only a partial hedge up to the amount of the
premium, and only if interest or exchange rates move in the expected direction.
If this does not occur, the Option may not be offset by the amount of the
premium. Through the writing of Options, the Fund may also be required to forego
all or a portion of the benefits that might otherwise have been obtained from
favorable movements in interest or exchange rates.
All put and call Options written by the Fund will be covered. The Fund may cover
a put Option by (i) establishing a segregated account containing Liquid Assets
equal to the strike price of the put Option written by the Fund (less any margin
on deposit), (ii) selling short the security or currency underlying the put
Option at the same or higher price than the strike price of the put Option
written by the Fund (or, if lower, the Fund may segregate Liquid Assets equal to
the difference), or (iii) purchasing a put Option with a strike price the same
as or higher than the strike price of the put Option sold by the Fund (or, if
lower, the Fund may segregate Liquid Assets equal to the difference).
The Fund may cover a call Option by (i) segregating Liquid Assets equal to the
market value of the security or currency underlying the call Option (less any
margin on deposit) but not less than the strike price of the call Option, (ii)
owning the security or currency underlying the Option or (iii) purchasing a
separate call Option on that security or currency with a strike price no higher
than the strike price of the Option sold by the Fund (or, if higher, the Fund
may segregate Liquid Assets equal to the difference).
If the Fund, as the writer of an Option, wishes to terminate its obligation, it
may effect a closing purchase transaction. This is accomplished by buying an
Option of the same series as the Option previously written. The effect of the
purchase is that the Fund's position will be canceled. However, a writer may not
effect a closing purchase transaction after being notified of the exercise of an
Option. Likewise, where the Fund holds an Option, it may liquidate its position
by effecting a closing sale transaction. This is accomplished by selling an
Option of the same series as the Option previously purchased. There is no
guarantee that either a closing purchase or a closing sale transaction can be
effected.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the Option or is more
than the premium paid to purchase the Option; the Fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the Option or is less than the premium paid to purchase
the Option. Because increases in the market price of a call Option will
generally reflect increases in the market price of the underlying security or
currency, any loss resulting from the purchase of a call Option to close out a
previously written call Option is likely to be offset in whole or in part by
appreciation of the Fund's portfolio securities denominated in such currency.
OPTIONS ON FINANCIAL INDICES. The Fund may write covered put and call Options
and purchase put and call Options on financial indices to attempt to minimize
the risks to the Fund from adverse changes in interest rates and market
conditions and as a substitute for an underlying investment. Options on
financial indices are similar to Options on debt securities and foreign
currencies. For additional information on the risks and benefits of Options on
financial indices, see "Options on Debt Securities and Foreign Currencies."
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Call Options on indices written by the Fund will be covered (i) by segregating a
portfolio of securities substantially replicating the movement of the index,
(ii) by holding a call Option on the same index with a strike price no higher
than the strike price of the Option written by the Fund or (iii) in such other
manner as may be in accordance with the rules of the exchange on which the
Option is traded and applicable laws and regulations.
The Fund will cover put Options on indices by (i) segregating Liquid Assets
equal to the Option's exercise price, (ii) holding a put Option on the same
index with a strike price no higher than the strike price of the put Option
written by the Fund or (iii) in such other manner as may be in accordance with
the rules of the exchange on which the Option is traded and applicable laws and
regulations.
The Fund will receive a premium for writing a put or call Option that will
increase the Fund's gross income in the event the Option expires unexercised or
is closed out at a profit. If the value of an index on which the Fund has
written a call Option falls or remains the same, the Fund will realize a profit
in the form of the premium received (less transaction costs) that will offset
all or a portion of any decline in the value of the securities it owns. If the
value of the index rises, however, the Fund will realize a loss in its call
Option position, which will reduce the benefit of any unrealized appreciation in
the Fund's securities holdings. By writing a put Option, the Fund assumes the
risk of a decline in the index. To the extent that the price changes of
securities owned by the Fund correlate with changes in the value of the index,
writing covered put Options on indices will increase the Fund's losses in the
event of a market decline, although such losses will be offset in part by the
premium received for writing the Option.
FUTURES CONTRACTS ON DEBT SECURITIES, FINANCIAL INDICES AND FOREIGN CURRENCIES.
The Fund may enter into exchange-traded contracts for the purchase or sale for
future delivery of debt securities, financial indices and foreign currencies to
attempt to minimize the risk to the Fund from adverse changes in currency
exchange and interest rates, and market conditions and as a substitute for an
underlying investment ("Futures Contracts").
The acquisition or sale of Futures Contracts is designed to protect the Fund
from fluctuations in currency exchange and interest rates, and market movements
without actually buying or selling the underlying currencies or securities. For
example, if the Fund owns long-term bonds, and interest rates were expected to
increase, the Fund might enter into a Futures Contract for the sale of debt
securities. Such a sale would have much the same effect as selling an equivalent
value of long-term bonds owned by the Fund. If interest rates did increase, the
value of the debt securities in the portfolio would decline, but the value of
the Futures Contract to the Fund would increase at approximately the same rate,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. The Fund could accomplish similar results by selling bonds
with long maturities and investing in bonds with short maturities. However,
since the futures market generally is more liquid than the cash market, the use
of Futures Contracts as an investment technique allows the Fund to maintain a
defensive position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contract should be similar to that of long-term bonds, the Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had been established. At that time, the
Futures Contract could be liquidated and the Fund could then buy long-term bonds
on the cash market.
All Futures Contracts to which the Fund is a party will be covered. A Futures
Contract obligating the Fund to purchase a security, financial index or currency
is covered if the Fund segregates, in a special account with the Custodian,
Liquid Assets equal to the price of the Futures Contract due on the settlement
date (less any margin on deposit). The Fund may also cover a long position by
purchasing a put Option on the same Futures Contract with an exercise price as
high or higher than the price of the Futures Contract held by the Fund (or, if
lower, the Fund may segregate Liquid Assets equal to the difference).
B-24
<PAGE>
A Futures Contract in which the Fund has the position of a seller is covered if
the Fund segregates Liquid Assets equal to the market value of the security,
index or currency underlying the Futures Contract (less any margin on deposit,
but not less then the market price at which the position was established).
Alternatively, the Fund may cover such a Futures Contract by (i) owning the
security or currency underlying the Futures Contract, or, in the case of a
financial index, segregating a portfolio of securities substantially replicating
the movement of the index or (ii) holding a call Option permitting the Fund to
purchase the same Futures Contract at a price no higher than the price at which
the position was established (or, if higher, the Fund may segregate Liquid
Assets equal to the difference).
If the Fund enters into a Futures Contract, it will be subject to initial and
variation margin requirements. At the time a Futures Contract is purchased or
sold, the Fund must allocate cash or securities as an initial margin deposit
("initial margin"). It is expected that initial margin will be approximately
1-1/2% to 5% of a Futures Contract's face value. A Futures Contract is valued
("marked to market") daily. The Fund will be required to increase its margin
deposit ("variation margin") when the value of a Futures Contract decreases and,
conversely, the Fund will receive payment for any increase in the Futures
Contract's value.
At the time of delivery of securities pursuant to such a contract, adjustments
may be made to recognize differences in value arising from the delivery of
securities with a different interest rate from that specified in the contract.
In some (but not many) cases, securities called for by a Futures Contract may
not have been issued when the contract was written.
Although Futures Contracts, by their terms, call for the actual delivery or
acquisition of an asset, in most cases the contractual obligation is fulfilled
(or "offset") before the expiration date of the Futures Contract without having
to make or take delivery of the underlying asset. Offset of a Futures Contract
is accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical Futures Contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the underlying asset.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions that may
prevent the Fund from successfully using Futures Contracts. First, all
participants in the futures markets are subject to initial and variation margin
requirements. Rather than meeting variation margin requirements, investors may
close Futures Contracts through offsetting transactions, which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures markets depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
make or take delivery, liquidity in the futures markets could be reduced, thus
producing distortion. Third, from the point of view of speculators, margin
requirements in the futures market are less onerous than margin requirements in
the cash market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility of
distortion, a correct prediction of general interest and currency exchange rates
or market conditions by the Fund may not result in a successful transaction.
If the Fund's judgment about the general direction of interest or currency
exchange rates or market conditions is incorrect, the Fund's overall performance
would be poorer than if it had not entered into any such contract. If the Fund
has hedged against the possibility of a movement in interest or exchange rates
or market conditions that would adversely affect the price of its portfolio
securities and such rates or markets did not move as anticipated, the Fund would
lose part or all of the benefit of the increased value of its securities that it
has hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash and were unable
to effect a closing transaction, it might have to sell securities from its
portfolio to meet daily variation margin requirements. Such sales of securities
may, but will not necessarily, be at increased prices that reflect the rising
market. The Fund may also have to sell securities at a time when it may be
disadvantageous to do so.
B-25
<PAGE>
OPTIONS ON FUTURES CONTRACTS ON DEBT SECURITIES, FINANCIAL INDICES AND FOREIGN
CURRENCIES. The Fund may purchase and write options on Futures Contracts to
attempt to minimize the risk to the Fund from adverse changes in currency
exchange and interest rates, and market conditions and as a substitute for an
underlying investment ("Options on Futures Contracts").
A call Option on a Futures Contract written by the Fund constitutes a partial
hedge against declining prices of the asset that is deliverable upon exercise of
the Futures Contract. If the price of the Futures Contract at expiration of the
Option is below the exercise price, the Fund will retain the full amount of the
Option premium, which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio. A put Option on a Futures Contract written by
the Fund or constitutes a partial hedge against increasing prices of the asset
that is deliverable under the Futures Contract. If the price of the Futures
Contract at expiration of the Option is higher than the exercise price, the Fund
will retain the full amount of the Option premium, which provides a partial
hedge against an increase in the price of securities that the Fund intends to
purchase.
If a put or call Option on a Futures Contract that the Fund has written is
exercised, the Fund will incur a loss, which will be reduced by the amount of
the premium the Fund received. Depending on the degree of correlation between
changes in the value of its portfolio securities and changes in the value of its
futures positions, the Fund's losses from Options on Futures Contracts may be
reduced or increased by changes in the value of its portfolio securities.
All Options on Futures Contracts written by the Fund will be covered. In the
case of the sale of a call Option on a Futures Contract, the Fund may cover by
(i) entering into a long position on the same Futures Contract at a price no
higher than the strike price of the call Option on the Futures Contract (or, if
higher, the Fund may segregate Liquid Assets equal to the difference), (ii)
owning the security or currency underlying the Futures Contract on which the
Fund holds the Option, or, with respect to a financial index, a portfolio of
securities substantially replicating the movement of the index, or (iii) holding
a separate call Option permitting the Fund to purchase the same Futures Contract
at a price no higher than the strike price of the call Option on the Futures
Contract sold by the Fund (or, if higher, the Fund may segregate Liquid Assets
equal to the difference.)
In the case of the sale of a put Option on a Futures Contract obligating the
Fund to buy a Futures Contract, the Fund may establish a segregated account
containing Liquid Assets equal to the settlement value of the Futures Contract
underlying the Option on a Futures Contract. Alternatively, the Fund may cover
the Option on a Futures Contract by holding a put Option permitting the Fund to
sell the same Futures Contract at a price the same as or higher than the strike
price of the put Option sold by the Fund (or, if lower, the Fund may segregate
Liquid Assets equal to the difference).
The amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of such an
option also entails the risk that changes in the value of the underlying Futures
Contract will not be fully reflected in the value of the option purchased.
ADDITIONAL RISKS OF FORWARD CONTRACTS, OPTIONS ON DEBT SECURITIES AND FOREIGN
CURRENCIES, OPTIONS ON FINANCIAL INDICES, FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS. Hedging transactions may be effective to protect the Fund
against certain changes in interest and currency exchange rates or market
movements. However, such transactions do not eliminate fluctuations in the
prices of portfolio securities or prevent losses if the prices of such
securities decline.
The Fund's ability to hedge all or a portion of its portfolio through
transactions in Forward Contracts, Options, Futures Contracts and Options on
Futures Contracts depends on the degree to which price movements in underlying
currencies and securities correlate with price movements in the relevant portion
of the Fund's portfolio. In addition, the use of Futures Contracts and Options
on Futures Contracts involves the risk of imperfect correlation of movements in
B-26
<PAGE>
the prices of Futures Contracts and Options on Futures Contracts, and movements
in the prices of the underlying assets. If the price of a Futures Contract or an
Option on a Futures Contract moves more or less than the price of the hedged
asset, the Fund will experience a gain or loss that may not be completely offset
by movements in the price of the asset that is the subject of the hedge.
The Fund may cover index Options that it has written, index Futures Contracts to
which it is a party, and Options on index Futures Contracts that it has written
through the segregation of a portfolio of securities that substantially
replicates the movement of the underlying index. The portfolio of securities
used to cover such transactions may not match the actual composition of the
index. In that event, the Fund will not be fully covered and would be subject to
a risk of loss in the event of adverse changes in the value of the index.
The Fund's ability to engage in transactions involving Options, Futures
Contracts and Options on Futures Contracts will depend on the degree to which
liquid secondary markets in such instruments exist. Reasons for the absence of a
liquid market include the following: (i) there may be insufficient trading
interest in a particular instrument; (ii) restrictions may be imposed by an
exchange on opening transactions or closing transactions or both; (iii) trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of Options, Futures Contracts or Options on Futures
Contracts; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation ("OCC"), which effects the settlement of exchange traded
Options, may not at all times be adequate to handle current trading volume; or
(vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of a particular
instrument (or a particular class or series of such instrument). There can be no
assurance that a liquid secondary market will exist for any particular
investment at any specific time. Thus it may not be possible for the Fund to
close certain of its positions.
The costs to the Fund of hedging transactions vary among the various hedging
techniques and also depend on such factors as the security, currency or index
involved, market conditions and the length of the contract or option period.
Forward Contracts are usually conducted on a principal basis, and no fees or
commissions are therefore involved. However, the Fund will incur brokerage
commissions and related transaction costs when it purchases, writes or invests
in Options, Futures Contracts and Options on Futures Contracts. Furthermore, the
Fund's ability to engage in hedging transactions may be limited by tax
considerations.
Forward Contracts and Options on foreign currencies are not traded on markets
regulated by the Commodity Futures Trading Commission ("CFTC") or (with the
exception of certain Options traded on national securities exchanges) by the
Securities and Exchange Commission ("SEC"), but are traded through financial
institutions acting as market-makers. In an over-the-counter trading
environment, many of the protections afforded to exchange participants are not
available. For example, there are no daily price fluctuation limits, and adverse
market movements could therefore continue to an unlimited extent over a period
of time. Although the purchaser of an Option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, because the performance of over-the-counter Options and Forward
Contracts is not guaranteed by the OCC or any other settlement agency, there is
a risk of counterparty default. The Option writer and the trader of Forward
Contracts could also lose amounts substantially in excess of his or her initial
investments, due to the margin and collateral requirements associated with such
positions.
Options traded on national securities exchanges are within the jurisdiction of
the SEC, as are other securities traded on such exchanges. As a result, many of
the protections provided to traders on organized exchanges are available with
respect to such transactions. In particular, all Options entered into on a
national securities exchange are cleared and guaranteed by the OCC, thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
Options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
B-27
<PAGE>
Exchange-traded Options involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such Options
must be made exclusively through the OCC, which has established banking
relationships in certain foreign countries for that purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions or taxes would
prevent the orderly exercise or settlement of such Options, or would result in
undue burdens on the OCC or its clearing members, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of delivery,
the fixing of dollar settlement prices or prohibitions on exercise.
The exchanges on which Options, Futures Contracts and Options on Futures
Contracts are traded may impose additional limitations governing the maximum
number of positions on the same side of the market and involving the same
underlying instrument that may be held by a single investor, whether acting
alone or in concert with others (regardless of whether such positions are held
or written on the same or different exchanges or held or written in one or more
accounts or through one or more brokers). In addition, the CFTC and the various
markets have established limits, referred to as "speculative position limits,"
on the maximum net long or net short positions that any person may hold or
control in a particular Futures Contract or Option on a Futures Contract. An
exchange may order the liquidation of positions found to be in violation of
these limits and it may impose other sanctions or restrictions. The Fund does
not believe that these trading and position limits will have an adverse impact
on the strategies for hedging the portfolio of the Fund.
Forward Contracts, Options, Futures Contracts and Options on Futures Contracts
may be traded in foreign markets or on foreign exchanges. Such transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies. The value of such positions also could be adversely
affected by, among other things, (i) other foreign political and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (v) lesser
trading volume.
B-28
