PART A
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AMERICAN GAS INDEX FUND, INC.
Prospectus
August 1, 1999
The American Gas Index Fund, Inc. (the "Fund") is a no-load mutual
fund designed to provide investment results that replicate the
performance of the American Gas Association Stock Index ("Index"),
an index monitored by the American Gas Association ("A.G.A."), a
national trade association of natural gas companies. The Index
consists of approximately 100 publicly traded common stocks of
natural gas distribution, gas pipeline, diversified gas, and
combination gas and electric companies headquartered in the United
States.
This Prospectus contains important information about the Fund and
should be read before investing. Please keep the Prospectus on file
for future reference.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
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TABLE of CONTENTS
Page
Risk and Return Summary:
Investments, Risks, and Performance
Risk/Return Bar Chart and Table
Performance Table
Fees and Expenses
Investment Objectives, Principal
Investment Strategies, and Related Risks
Management's Discussion of Fund
Performance
Performance Comparison
Shareholder Information
How to Invest in the Fund
How to Redeem Your Investment
Additional Information About the Fund
Exchanging Fund Shares
Pricing of Fund Shares
Dividends and Distributions
Tax Consequences of Investing in the Fund
Management, Organization, and Capital
Structure
Investment Adviser
Year 2000 Preparations
Financial Highlights
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RISK and RETURN SUMMARY
Investments, Risks, and Performance
Fund Investment Objective
The American Gas Index Fund's investment objective is income and
capital appreciation.
Principal Fund Investment Strategy
Designed as an index fund, the Fund intends to provide investment
results that replicate the performance of the American Gas Association
Stock Index ("Index"), an index monitored by the American Gas
Association ("A.G.A."), a national trade association of natural gas
companies. The Index consists of approximately 100 publicly traded
common stocks of natural gas distribution, gas pipeline, diversified
gas, and combination gas and electric companies headquartered in the
United States. The stocks included in the Fund are chosen solely on
the statistical basis of their weightings in the Index.
Principal Risks of Investing in the Fund
Because the Fund principally invests in the common stocks of companies
with gas operations, the Fund is concentrated in a single industry and
is therefore subject to risks associated with the gas industry. Among
the primary risks is the competitive risk associated with the prices
of alternative fuels, such as coal and oil. Weather is another risk
that may affect the Fund; a warmer winter could decrease the amount of
gas used by heating customers and thereby reduce the earnings of
companies that comprise the Index. Additionally, the gas industry is
also sensitive to increased interest rates because of the industry's
capital intensive nature. Typically, a significant portion of the
financing of the industry's assets is obtained through debt. As
interest rates increase, such debt scheduled to be refinanced would be
acquired at higher rates thereby adversely affecting earnings.
Considering these risks, there is a risk you could lose as well as
make money by investing in the Fund. As with any fund, there is no
guarantee that the Fund's performance will be positive over any period
of time, either short-term or long-term. Also, please note that an
investment in the Fund is not a deposit of the bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
Risk/Return Bar Chart and Table
The chart and table below shows the annual calendar-year returns and
the performance of the Fund. The Fund commenced operations on May 10,
1989, and has a fiscal year-end of March 31. The information in the
chart and the table provides some indication of the risks of investing
in the Fund by showing changes in Fund performance from year to year.
The chart and the table below assume the reinvestment of dividends and
distributions. Please keep in mind that how the Fund has performed in
the past does not necessarily indicate how the Fund will perform in
the future.
1990 -10.5%
1991 3.2%
1992 11.4%
1993 16.6%
1994 -9.8%
1995 30.5%
1996 20.8%
1997 24.2%
1998 5.3%
Best Quarter: 15.14% 1st Qtr of 1993
Worst Quarter: (6.95)% 4th Qtr of 1993
The Fund's year-to-date total return as of June 30, 1999 was 2.59%.
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Performance Table
Average Annual Total Returns
(for Periods Ended December 31, 1998)
American Gas Dow Jones
Index Fund Utility Average
One Year 5.26% 18.66%
Five Years 13.21% 12.26%
Since Inception 11.19% 11.08%
FEES and EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees 0.40%
Other Expenses* 0.45%
-----
Total Annual Fund Operating Expenses 0.85%
* "Other Expenses" includes an annual fee of 0.35% paid to Rushmore
Trust and Savings, FSB, the provider of transfer agency, dividend-
disbursing, custodial and other shareholder services to the Fund. The
American Gas Association serves as administrator for the Fund. As
administrator, A.G.A. is responsible for monitoring the Fund's Index
and providing the Fund with information concerning the natural gas
industry. For its services, A.G.A. is paid a fee of 0.10%.
If your monthly account balance averages $500 or less due to
redemptions you may be charged a $5 fee.
Example
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated below and then redeem all of your shares at the end
of those periods. The Example also assumes that your investment has a
5% return each year, that all dividends are reinvested, and that the
Fund's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would
be:
1 year 3 years 5 years 10 years
$ 87 $ 271 $ 471 $ 1,049
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INVESTMENT OBJECTIVES, PRINCIPAL
INVESTMENT STRATEGIES, and RELATED RISKS
Fund Investment Objective
The American Gas Index Fund's investment objective is income and
capital appreciation.
Principal Investment Strategies
The Fund is designed as a common stock index fund and intends to
invest at least 85% of its net assets in natural gas distribution and
transmission companies including members of the A.G.A. The A.G.A.
Stock Index (the "Index") contains approximately 100 publicly traded
stocks of gas companies headquartered in the United States. The Index
is composed of gas distribution companies, gas pipeline companies,
diversified gas companies and combination gas and electric companies.
No attempt is made to manage the Fund's portfolio actively in the
traditional sense, using economic, financial and market analysis; nor
will the adverse financial situation of a company directly result in
its elimination from the portfolio unless the company is removed from
the Index. The stocks included in the Fund are chosen solely on the
statistical basis of their weightings in the Index. Each stock's
proportion of the Index is based on that stock's market
capitalization, that is, the number of shares outstanding multiplied
by the market price of the stock. Such computation is also weighted
to reduce the effect of assets not connected with natural gas
distribution and transmission revenue. The percentage of the Fund's
assets to be invested in each company's stock contained within the
Index is approximately the same as the percentage the stock represents
in the Index. To avoid deviation in the Fund's performance from the
Index, the Fund will seek to invest substantially all of its assets in
the stocks of the Index. Although there is no predetermined
acceptable range of deviation between the performance of the Index and
that of the Fund, the Fund attempts to achieve in both rising and
falling markets a correlation of approximately 95% between the
capitalization weighted total return of its assets before expenses and
the Index. One-hundred percent correlation would mean the total
return of the Fund's assets would increase and decrease exactly the
same as the Index. If a deviation occurs, it may be the result of
various expenses incurred by the Fund, such as management fees,
transaction costs and other operating expenses.
Generally up to 10% of the Fund's assets may be maintained in short-
term investments to provide for liquidity, although in so doing, the
Fund may not achieve its investment objective. These short-term
investments will be in the form of U.S. Government securities, high
quality bank money market instruments and repurchase agreements.
Although not a principal investment strategy, the Fund may also lend
portfolio securities for the purpose of earning additional income.
Principal Risks of Investing in the Fund
The adviser of the Fund does not select stocks for investment based on
a judgment of their individual future returns, but generally invests
in the issues included in the Index. By employing a statistical
approach that concentrates all investments in a single industry, the
Fund is subject to those risks associated with the natural gas
distribution and transmission industry. Among the primary risks is
the competitive risk associated with prices of alternative fuels. For
example, major gas customers such as industrial users and electric
power generators often have the ability to switch between the use of
coal, oil or gas. During periods when competing fuels are less
expensive, revenues to gas utility companies may decline with a
corresponding impact on earnings. Additionally, weather may also
affect gas company earnings. For example, a warmer winter could
decrease the amount of gas used by heating customers and reduce
earnings.
The gas industry also is sensitive to increased interest rates because
of the capital intensive nature of the industry. Typically, a
significant portion of the financing of the gas industry's assets is
obtained through debt. As interest rates increase, such debt
scheduled to be refinanced would be acquired at higher rates thereby
adversely affecting earnings.
MANAGEMENT'S DISCUSSION of FUND PERFORMANCE
Two consecutive near record warmer than average winters reduced gas
heating demand in the residential, commercial and industrial sectors.
As a result, gas company financial results were dismal and gas stocks
were jettisoned by short-term market traders. According to one
veteran industry analyst, "The good news is that the odds for a repeat
performance in 1999/00 are very slim." Consequently, the fiscal year
ending March 31, 1999 was the Fund's low point in performance, since
the Fund was launched in May of 1989.
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For the fiscal year ended March 31, 1999, the Fund's total return was
a negative 6.35%. Net asset value (NAV) at the beginning of the
period was $18.59 and reached an all time high of $18.95 on April 2.
As the financial impact of the first of the warm winters became
widespread and was compounded by the second warm winter the Fund's NAV
steadily declined to a low of $16.27 on February 16,1999. During the
fiscal year, the Fund provided an income return of 6.08% composed of a
regular dividend of $0.5070 cents and capital gains distributions of
$0.6832 cents per share. Six of the Fund's ten largest holdings
declined during the fiscal year, as did 78% of total portfolio. As a
result, the Fund lagged behind most market benchmarks.
The American Gas Association forecasts that with normal weather, gas
demand will grow by 5% this year and increase by 32% by the year 2010.
Similar predictions have been promulgated by American and Canadian
governmental bodies and energy "think tanks". The industry is
preparing for this growth by expanding pipeline delivery capacity,
increasing storage facilities, and maintaining domestic and Canadian
gas reserves. New technology, especially in power generation and
climate control, is expected to account for much of the growth. In
addition, new construction and conversion of non-gas heated homes
represent a huge and profitable market for gas utilities. This
positive long term industry outlook combined with the deregulation of
gas and electric power companies and depressed stock prices has
accelerated merger and acquisition activity by growth oriented
management. Several major announced "deals" are being finalized.
This activity has increased investor interest in the Fund's holdings
and should be a bonus for the Fund by providing financial rewards for
Fund shareholders. You can follow the Fund's progress on our web site
www.rushmorefunds.com or contact us directly. We welcome your
interest and participation in the Fund.
Performance Comparison
Assuming a $10,000 initial investment, the following graph compares
the Fund's total return to the performance of the Dow Jones Utility
Average ("Utility Average") and the Dow Jones Gas Utilities Index
("Gas Utilities Index") since the Fund began operating on May 10,
1989. The Gas Utilities Index was used in the performance comparison
in the preceding year; however, the companies that comprise the
Utility Average best represent the Fund's top holdings. Consequently,
going forward, an investment in the Fund will only be compared to a
hypothetical investment in the Utility Average rather than the Gas
Utilities Index. Please remember that past performance does not
necessarily reflect how the Fund may perform in the future.
American Gas Dow Jones Dow Jones Gas
Index Fund Utility Average Utilities Index
5/10/89 $10,000 $10,000 $10,000
3/31/90 $11,655 $11,385 $11,415
3/31/91 $11,241 $12,320 $11,041
3/31/92 $10,917 $12,452 $8,759
3/31/93 $14,779 $15,519 $11,918
3/31/94 $13,985 $13,368 $10,738
3/31/95 $14,645 $13,700 $11,199
3/31/96 $18,081 $16,472 $13,987
3/31/97 $20,901 $17,881 $17,298
3/31/98 $27,092 $24,380 $22,365
3/31/99 $25,373 $23,085 $18,753
Average Annual Total Returns as of March 31, 1999
One Year (6.35)%
Five Year 12.65 %
Since Inception 9.87 %
6
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SHAREHOLDER INFORMATION
Facts To Know Before You Invest:
The minimum initial investment is $2,500
Retirement accounts may be opened with a $500 minimum investment
There are no minimum amounts for subsequent investments
There are no sales charges
The Funds reserve the right to reject any purchase order
All shares are electronically recorded; the Fund will not issue
certificates
A $10 fee may be charged for items returned for insufficient or
uncollectible funds
How to Invest In The Fund
Invest By Mail
Complete an application and make a check payable to "American Gas
Index Fund." Send your completed and signed application and check
drawn on a U.S. bank to:
American Gas Index Fund
4922 Fairmont Avenue
Bethesda, Maryland 208l4
Invest By Bank Wire
Speak to the branch manager of your bank. Request a transfer of
Federal funds to Rushmore Trust and Savings, FSB, instructing the
bank to wire transfer the money before 4:00 P.M., Eastern time to:
Rushmore Trust and Savings, FSB
Bethesda, Maryland
Routing # 0550-71084
Specify the Fund name, your account number (if assigned), and the
name(s) in which the account is registered.
After instructing your bank to transfer Federal funds, you must
telephone Shareholder Services at (800) 622-1386 or (301) 657-1510
between 8:30 A.M. and 4:00 P.M. Eastern time and tell us the amount
you transferred and the name of the bank sending the transfer.
Your bank may charge a fee for its services. Remember that it is
important to complete the wire transfer before 4:00 P.M. Eastern
time.
Invest Through Brokers
You may also invest in the Fund by purchasing shares through
registered broker-dealers, banks or other financial institutions
that purchase securities for their customers. When an authorized
third party, such as those mentioned, accepts an order, the Fund
will be deemed to have received the order. Orders accepted by an
authorized third party will be priced at the Fund's net asset value
next computed after acceptance. Such third parties who process
orders may charge a fee for their services. Certain third party
organizations may receive compensation from the Fund, the Fund's
transfer agent, or the Fund's Adviser for the shareholder services
they provide.
How To Redeem Your Investment
Redeem By Telephone
Contact Shareholder Services at (800) 622-1386
between the hours of 8:30 A.M. and 4:30 P.M., Eastern time
For your protection, we will take measures to verify your identity
by requiring some form of personal identification prior to acting
on telephone instructions and may also record telephone
transactions. A written confirmation will be mailed to you within
five business days after your redemption. Please note that we may
terminate or modify telephone redemption privileges upon 60 days
notice.
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Redeem By Mail or Fax
Mail your instructions for Fax your instructions for
redemption to: redemption to:
Rushmore Trust and Savings, FSB (301) 657-1520
4922 Fairmont Avenue Attn: Shareholder Services
Bethesda, MD 20814
Attn: Shareholder Services
Include the following information in your redemption request:
the name of the Fund and account number you are redeeming from;
your name(s) and address as it appears on your account;
the dollar amount or number of shares you wish to redeem;
your signature(s) as it appears on your account; and
a daytime telephone number.
Additional Information You Should Know When You Redeem:
There are no fees charged for redemptions.
You may receive redemption proceeds by bank wire, check, or
through the Automated Clearing House System (ACH). When the amount to
be redeemed is at least $5,000, we will, upon instruction, wire
transfer the amount to your commercial bank or brokerage account
specified in your account application. For amounts less than $5,000,
you may have redemption proceeds deposited directly into an account
specified on the account application or request that a redemption
check be delivered by mail to your address of record.
If you request payment of redemptions to a third party or to a
location other than an address on record, the request must be in
writing and your signature must be guaranteed by an eligible
institution (eligible institutions generally include banking
institutions, securities exchanges, associations, agencies or
broker/dealers, and "STAMP" program participants).
Normally, payment for all shares redeemed will be issued within
one business day. However, withdrawal requests on investments that
have been made by check may be delayed up to ten calendar days
following the investment or until the check clears, whichever occurs
first. This delay is necessary to assure us that investments made by
check are good funds. You will receive redemption proceeds promptly
upon confirmation of receipt of good funds.
If your monthly account balance averages less than $500 you may
be charged a $5 fee. The fee will not be imposed on accounts
established under the Uniform Gifts or Transfers to Minors Acts.
Additionally, we reserve the right to involuntarily redeem accounts
which fall below $500 after providing 60 days written notice.
The right of redemption may be suspended, or the date of payment
postponed during the following periods: (a) periods during which the
New York Stock Exchange (NYSE) is closed (other than customary weekend
or holiday closings); (b) periods when trading on the NYSE is
restricted, or an emergency exists, as determined by the Securities
and Exchange Commission, so that disposal of the Fund's investments or
determination of net asset value is not reasonably practicable; or (c)
for such other periods as the Commission, by order, may permit for
protection of the Fund's investors.
The Fund is not meant to afford market timers a way to speculate
on short-term movements in the market. Accordingly, to reduce the
negative impact of excessive trading on the Fund's performance and to
minimize transaction costs, the Fund restricts excessive trading.
Trading by shareholders (and those managing multiple accounts) will
not be deemed excessive if limited to five redemptions per year.
Shareholders or account managers who exceed these limitations may be
prohibited from making additional investments. These policies do not
prohibit you from redeeming shares of the Fund.
8
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ADDITIONAL INFORMATION ABOUT THE FUND
Exchanging Fund Shares
You may exchange shares of the Fund, without cost, for shares of any
of the following Rushmore Funds: Fund for Government Investors, U.S.
Government Bond Portfolio, Tax-Free Money Market Portfolio, Maryland
Tax-Free Portfolio, or the Virginia Tax-Free Portfolio. You may also
exchange shares of the Fund for shares of the Cappiello-Rushmore
Emerging Growth, Growth and Utility Income Funds. The fund you are
exchanging into must be available for sale in your state and the
registration for both accounts must be identical. You should obtain a
current prospectus for the fund into which you are exchanging by
calling (800) 343-3355. Exchanges will be effected at the respective
net asset values of the Funds involved as next determined after
receipt of the exchange request. The Fund may change or cancel their
exchange policies at any time, upon 60 days' notice to shareholders.
Pricing of Fund Shares
The price of the Fund's shares is its net asset value per share. This
figure is computed by dividing the total value of the Fund's
investments and other assets, less any liabilities, by the number of
Fund shares outstanding. The net asset value per share of the Fund is
determined as of 4:00 P.M. Eastern time on days when the New York
Stock Exchange is open for business. Orders accepted by the Fund
directly or by an authorized third party will be priced at the next
computed net asset value after the orders are received. This means
that if you place a purchase or redemption order after 4:00 P.M.
Eastern time, it will be effected at the next calculation of net asset
value, normally 4:00 P.M. the next business day.
The Fund values its portfolio securities based on their market value.
Each security held by the Fund is valued at the last quoted sale price
for a given day, or if a sale is not reported for that date, at the
mean between the most recent quoted bid and asked prices. Price
information on each listed security is taken from the exchange where
the security is primarily traded. Unlisted securities for which
market quotations are readily available are valued at the last sales
prices. The value of assets for which no quotations are readily
available, including any restricted securities, are valued at fair
value in good faith by the Board of Directors or at the direction of
the Directors.
Dividends and Distributions
Dividends of the Fund will be declared on the next to last business
day of each calendar quarter (the declaration and record date).
Investors will receive dividends in additional shares at the net asset
value at the end of the last business day of the quarter (the ex-
dividend date) unless they elect in writing to receive cash.
Dividends paid in cash to those investors so electing will be mailed
by the second business day of the following month. Capital gains, if
any, will be distributed on an annual basis. Statements of account
showing dividends and distributions paid will be sent at least
quarterly. To change the method of receiving dividends, investors
must notify the Fund in writing. Dividends and distributions will be
paid in cash or reinvested at the net asset value per share calculated
on the ex-dividend date. Dividends and distributions are taxable to
shareholders, as discussed below, whether they are reinvested in
shares of the Fund or received in cash.
"Undeliverable" or "Uncashed" Dividend Checks
If you elect to receive dividends and distributions in cash and the
payment (1) is returned and marked as "undeliverable" or (2)
remains uncashed for six months, your cash election will be changed
automatically and future dividends will be reinvested in the Fund
at the per share net asset value determined as of the date of
payment. In addition, any undeliverable checks or checks that
remain uncashed for six months will be canceled and then reinvested
in the Fund at the per share net asset value determined as of the
date of cancellation.
Tax Consequences of Investing
Taxability of Distributions
As long as the Fund meets the requirements for being tax-qualified
regulated investment company, which the Fund intends to do, the
Fund pays no federal income tax on the earnings distributed to
shareholders. As a result, dividends and any short-term capital
gains you receive, whether reinvested or taken as cash, are
generally considered taxable as ordinary income. The Form 1099 that
is mailed to you each January details your dividends and their
federal tax category, although you should verify your tax liability
with your tax professional.
Taxability of Transactions
Any time you sell or exchange shares of the Fund, it is considered
a taxable event for you. For example, if you exchange shares of
the Fund for shares of another Rushmore or Cappiello-Rushmore fund,
the transaction would be treated as a sale. Consequently, any gain
resulting from the transaction would be subject to federal income
tax.
9
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Shareholders are required by law to certify that their tax
identification number is correct and that they are not subject to
back-up withholding. In the absence of this certification, the
Fund is required to withhold taxes at the rate of 31% on
dividends, capital gains distributions, and redemptions.
Shareholders who are non-resident aliens may be subject to a
withholding tax on dividends earned.
MANAGEMENT, ORGANIZATION and CAPITAL STRUCTURE
Investment Adviser
Money Management Associates ("Adviser"), 100 Lakeshore Drive, Suite
1555, North Palm Beach, Florida 33408, has served as the Fund's
investment adviser since the Fund commenced operations on May 10,
1989. Established in 1974, the Adviser manages six no-load mutual
funds (including the Fund) with total assets under management of
approximately $900 million.
Subject to the general supervision of the Board of Directors of the
Fund, the Adviser manages the investment and reinvestment of the
assets of the Fund and is responsible for the overall management of
the Fund's business affairs. An Adviser Group makes investment
decisions; therefore, no one person is primarily responsible for
making investment decisions. For the advisory services performed, the
Adviser received 0.40% of the average net assets of the Fund for the
fiscal year ended March 31, 1999.
Year 2000 Preparations
The day-to-day operations of the Fund are dependent upon the Fund's
service providers, principally the Adviser, Rushmore Trust and
Savings, FSB, Rushmore Services, Inc. and the American Gas Association
(collectively, the "Servicers"), and upon the smooth functioning of
the computer systems that they utilize. Many computer systems
currently cannot properly recognize or process date-sensitive
information relating to the year 2000 and beyond. Like other mutual
funds and financial and business organizations around the world, the
Fund, therefore, could be adversely affected if the computer systems
used by these Servicers, and their vendors, do not properly process
and calculate date-related information and data on and after January
1, 2000. The Servicers have been evaluating the impact that the year
2000 issue may have on the computer systems that they utilize and are
making appropriate modifications to these systems in order to assure
that they will be prepared for the year 2000. The Fund and the
Servicers expect that any further modifications to their computer
systems necessary to address the year 2000 issue will be made and
tested in a timely manner. The Servicers also are working with their
outside vendors, and other persons whose systems are linked to those
of the Fund and the Servicers, to obtain satisfactory assurances
regarding the year 2000 issue. The costs of this systems remediation
will not be paid directly by the Fund. Inadequate remediation could
have an adverse effect on the Fund's operations, including pricing and
securities trading and settlement, and the provision of shareholder
services. Although, at this time, there can be no assurance that the
remedial action taken by the Servicers will be sufficient or timely,
the Servicers do not anticipate that the transition to the 21st
century will have a material impact on the ability of the Servicers to
continue to service the Fund at current levels.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you
understand the Fund's financial performance for the past five years.
Certain information reflects financial results for a single Fund
share. The total returns in the table represent the rate that you
would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, whose report, along with the
Fund's financial statements, is included in the annual report, which
is available upon request.
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<TABLE>
<CAPTION>
For the Years Ended March 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 18.59 $ 14.84 $ 13.25 $ 11.13 $ 11.08
---------- ---------- ---------- ---------- ----------
Income from Investment Operations:
Net Investment Income 0.51 0.47 0.45 0.45 0.44
Net Realized and Unrealized Gain
on Investments (1.63) 3.87 1.60 2.13 0.05
---------- ---------- ---------- ---------- ----------
Total from Investment Operations (1.12) 4.34 2.05 2.58 0.49
---------- ---------- ---------- ---------- ----------
Less Distributions:
Dividends (from net investment income) (0.51) (0.47) (0.46) (0.46) (0.44)
Distributions (from net realized capital gain) (0.68) (0.12) - - -
---------- ---------- ---------- ---------- ----------
Total Distributions (1.19) (0.59) (0.46) (0.46) (0.44)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period $ 16.28 $ 18.59 $ 14.84 $ 13.25 $ 11.13
===================================================================
Total Investment Return (6.35)% 29.62 % 15.60 % 23.46 % 4.72 %
Ratios and Supplemental Data:
Net Assets at End of Year (in thousands) $200,317 $244,368 $213,058 $204,000 $188,544
Ratio of Expenses to Average Net Assets 0.85 % 0.85 % 0.85 % 0.85 % 0.85 %
Ratio of Net Income to Average Net Assets 2.84 % 2.83 % 3.06 % 3.71 % 4.04 %
Portfolio Turnover Rate 10.4 % 12.9 % 8.2 % 10.0 % 8.5 %
</TABLE>
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In addition to this prospectus, the following information is available
to assist you in making an investment decision:
Information Available Upon Request Description
Statement of Additional Information A document that includes
additional information about the
Fund.
Annual and Semiannual Reports Reports that contain information
about the Fund's investments.
The reports also discuss the
market conditions and investment
strategies that significantly
affected the Fund's performance
during its last fiscal year.
There are a variety of ways to receive the above information and make
other inquiries of the Fund. You may contact the Fund directly by
telephone at 1-800-343-3355, visit our internet site at
http://www.rushmorefunds.com, or you may send a written request to the
Fund's offices at 4922 Fairmont Avenue, Bethesda, Maryland 20814.
Additional information about the Fund can also be reviewed and copied
at the Securities and Exchange Commission's Public Reference Room in
Washington D.C. (for hours of operation please call the Commission at
(800) SEC-0330). You may also obtain copies of the information by
visiting the Commission's internet site at http://www.sec.gov, or,
upon payment of a duplicating fee, by writing the Public Reference
Section of the Commission at 450 Fifth Street, N.W. Washington, D.C.
20549.
American Gas Index Fund, Inc. Investment Company Act File No. 811-5702
12
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PART B
Statement of Additional Information
<PAGE>
AMERICAN GAS INDEX FUND, INC.
4922 Fairmont Avenue, Bethesda, MD 20814
(800) 343-3355
(301) 657-1500
Statement of Additional Information
August 1, 1999
This Statement of Additional Information is not a Prospectus. It
should be read in conjunction with the Fund's Prospectus, dated August
1, 1999. A copy of the Fund's Prospectus may be obtained without
charge by writing or telephoning the Fund at the above address or
telephone numbers.
The audited financial statements of the Fund, for the Fund's fiscal
year ended March 31, 1999, are included in the Fund's 1999 Annual
Report to Shareholders, which has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. Copies
of the Fund's 1999 Annual Report are available, without charge, by
request by writing or telephoning the Fund at the above address or
telephone numbers.
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STATEMENT OF ADDITIONAL INFORMATION
Table of Contents
Page in
Statement of
Additional Page in
Information Prospectus
Fund Description, Investments, and Risks
Investment Limitations -
Management of the Fund
Control Persons and Principal Holders of -
Securities
Investment Advisory and Other Services
Brokerage Allocation and Portfolio -
Transactions
Taxation of the Fund -
Calculation of Performance Data -
Financial Statements
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FUND DESCRIPTION, INVESTMENTS and RISKS
Description
The American Gas Index Fund (the "Fund") is an open-end, diversified
management investment company incorporated in the State of Maryland on
November 21, 1988.
Investments
Discussion of Index Methodology
The American Gas Association Stock Index (the "Index") is comprised of
approximately 100 of the publicly traded companies including members
of the American Gas Association ("A.G.A.") and headquartered in the
United States. These companies are engaged in the distribution and/or
transmission of natural gas. The Index is computed by multiplying the
number of outstanding shares of common stock of each company by the
closing market price per share at the Index date. This product then
is multiplied by the percentage of each company's assets devoted to
natural gas distribution and transmission. This process, completed at
least annually, is done to recognize the natural gas component of the
company's asset base. The result is each company's "gas market
capitalization value". The sum of all the companies' "gas market
capitalization values" is totaled. This summation results in a base
number called the "industry's gas market capitalization value". Each
company's stock percentage within the Index is determined by dividing
the company's "gas market capitalization value" by the "industry's gas
market capitalization value". The "gas market capitalization value"
for each company will be recalculated at least quarterly. In
computing the Index, individual stocks will be limited to no more than
5% of the Index. Therefore in calculating the Index, any
representation in the Index exceeding 5% will be reallocated. Money
Management Associates (the "Adviser") seeks to purchase sufficient
shares of each company's stock such that its proportion of the Fund's
assets will substantially equal that stock's proportion of the Index.
The Adviser will monitor the Fund's securities holdings so that those
holdings reflect the composition of the Index. As market conditions
dictate, and as significant shareholder purchases and redemptions
occur, the Adviser will buy or sell stocks to maintain holdings of
each stock to reflect proper weightings within the Index. In both
rising and falling markets, the Fund attempts to achieve a correlation
of approximately 95% between the capitalization weighted total return
of its assets before expenses and the Index. One-hundred percent
correlation would mean the total return of the Fund's assets would
increase and decrease exactly the same as the Index.
Since the Index weightings change in very small amounts during the
trading day, continual small adjustments would be needed to track the
Index exactly. Furthermore, purchases and sales of every stock within
the Index would be necessary as contributions and redemptions to the
Fund are made. To minimize brokerage and transaction expenses, the
Adviser will make adjustments to the Fund as follows:
Comparison of the actual composition of the Fund to the theoretical
target will be made daily. Generally, adjustments to the holdings
of any single stock will be made at least weekly whenever the
actual proportion of that stock in the Fund varies by more than
0.5% of the weighting of that stock in the Index. The percentage
of each stock holding is based on the Fund's net asset value. For
example, if Stock A represented 3% of the total weighting in the
Index at the close of business, adjustments to the holdings of
Stock A will be made if the value of Stock A is greater than 3.5%
or less than 2.5% of the net assets. Adjustments may be made at
other times even though these tolerances are not exceeded if the
adjustment can be made without incurring unreasonable transaction
expenses.
Non-Principal Investment Strategies and Risks
As stated in the Fund's prospectus and discussed above, the Fund is
designed as a common stock index fund and intends to invest at
least 85% of its net assets in natural gas distribution and
transmission companies according to the Index monitored by A.G.A.
In addition to the Fund's principal investment strategies,
generally the Fund may also invest up to 10% of the Fund's assets
in short-term investments to provide for liquidity. These short-
term investments will be in the form of U.S. Government securities,
high quality bank money market instruments and repurchase
agreements. A description of these investments and their
corresponding risks follow.
3
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U.S. Government Securities
The term "government securities" is defined broadly in the rules that
regulate investment companies. There are, in fact, three major
classifications, each of which the Fund may invest in:
U.S. Treasury Securities
U.S. Treasury securities are direct obligations of the U.S.
Government and are backed by the full faith and credit of the U.S.
Treasury. U.S. Treasury securities differ only in their interest
rates, maturities, and dates of issuance. Treasury Bills have
maturities of one year or less. Treasury Notes have maturities of
one to ten years, and Treasury Bonds generally have maturities of
greater than ten years at the date of issuance. Yields on short-,
intermediate-, and long-term U.S. Treasury securities are dependent
on a variety of factors, including the general conditions of the
money and bond markets, the size of a particular offering, and the
maturity of the obligation.
Government Agency Securities
Government agency securities, often called agencies, are indirect
obligations of the U.S. government, and are issued by federal
agencies and government-sponsored corporations under authority from
Congress. Government agency securities may be backed by the full
faith and credit of the federal government, which is the case with
Government National Mortgage Association and Small Business
Administration certificates, but are more often guaranteed by the
sponsoring agency with the implied backing of Congress. Examples
of government agency securities include, Export-Import Bank of the
United States, the Federal Home Loan Bank, and the Government
National Mortgage Association.
Government-Sponsored Enterprises
Government-sponsored enterprises are characterized as being
privately owned and publicly chartered. These entities were
created by the U.S. Government to help certain important sectors of
the economy reduce their borrowing costs. The U.S. Government does
not back government-sponsored enterprise securities. However, the
fact that the government sponsored the enterprise creates the
assumption that the federal government would not let the entity go
into default. The Student Loan Marketing Association, the Federal
National Mortgage Association, and Federal Home Loan Banks are
examples of government-sponsored enterprise securities.
Risks Associated with Investing in U.S. Government Securities
The U.S. Government is considered to be the best credit-rated
issuer in the debt markets. Since Treasury securities are direct
obligations of the U.S. Government, there is no credit risk. While
most other government-sponsored securities are not direct
obligations of the U.S. Government (some are guaranteed), they also
offer little, if any, credit risk.
However, another type of risk that may effect the Fund is market
and/or interest rate risk. For example, debt securities with
longer maturities tend to produce higher yields and are generally
subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower
yields. The market value of U.S. Government securities generally
varies inversely with changes in market interest rates. An
increase in interest rates, therefore, would generally reduce the
market value of any U.S. Government securities held by the Fund,
while a decline in interest rates would generally increase the
market value of these investments.
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Bank Money Market Instruments
What is a Bank Money Market Instrument?
Bank money markets are insured by federally sponsored agencies and
provide high liquidity and a relatively risk-free way to earn
interest on cash reserves.
Risks of Bank Money Market Instruments
Bank deposits and CDs are insured to $100,000 per depositor by the
Bank Insurance Fund and the Savings Association Insurance Fund,
units of the Federal Deposit Insurance Corporation ("FDIC"), and by
the National Credit Union Administration ("NCUA"). The FDIC and
NCUA are federally sponsored agencies. Consequently, bank money
market instruments offer little risk.
Repurchase Agreements
What is a Repurchase Agreement?
A repurchase agreement is an agreement where a Fund acquires a
money market instrument from a commercial bank or broker/dealer
with the understanding that the Fund will sell the instrument
back at an agreed-upon price and date (normally, the next
business day). Essentially, a repurchase agreement may be
considered a loan backed by securities. The resale price
reflects an agreed-upon interest rate effective for the period
the instrument is held by the Fund. In these transactions, the
value of the securities acquired by the Fund (including accrued
interest earned) must be greater than the value of the repurchase
agreement itself. The securities are held by the Fund's
custodian bank until repurchased.
Why Would the Fund Use Repurchase Agreements?
The Fund may invest in repurchase agreements secured by
securities issued or guaranteed by the U.S. Government, its
agencies and government-sponsored enterprises: (i) for defensive
purposes due to market conditions; or (ii) to generate income
from the Fund's excess cash balances. The Fund will only enter
into repurchase agreements with member banks of the Federal
Reserve system or primary dealers of U.S. Government securities.
Risks of Repurchase Agreements
The use of repurchase agreements involves certain risks. For
example, if the other party to the agreement defaults on its
obligations to repurchase the underlying security at a time when
the value of the security has declined, the Fund may incur a loss
when the security is sold. If the other party to the agreement
becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine
that the underlying security is collateral for a loan by the Fund
not within the control of the Fund. Consequently, the Fund may
not be able to substantiate its interest in the underlying
security and may be deemed an unsecured creditor of the other
party to the agreement. While the Fund's investment adviser
acknowledges these risks, it is expected that these risks can be
controlled through monitoring procedures. These procedures
include effecting repurchase transactions only with large, well-
capitalized and well-established financial institutions whose
condition will be continually monitored. In addition, the value
of the collateral underlying the repurchase agreement will always
be at least equal to the repurchase price, including any accrued
interest earned in the repurchase agreement.
Lending of Securities
The Fund may lend its securities to qualified institutional investors
(i.e., brokers, dealers, banks or other financial institutions) who
need to borrow securities in order to complete certain transactions,
such as covering short sales, avoiding failures to deliver securities,
or completing arbitrage operations.
Why Would the Fund Lend its Securities?
By lending its portfolio securities, the Fund attempts to
increase its net investment income through the receipt of
interest on the loan. Any gain or loss in the market price of
the securities loaned that might occur during the term of the
loan would be for the account of the Fund. The Fund may pay
reasonable finders, borrowers, administrative and custodial fees
in connection with the loan.
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To lend securities, the following requirements must be met:
1. the borrower must pledge and maintain with the Fund collateral
consisting of cash, a letter of credit issued by a domestic U.S. bank,
or securities issued or guaranteed by the federal government having at
least equal the value of the securities loaned;
2. the borrower must add to the collateral whenever the price of the
securities loaned rises;
3. the Fund must be able to terminate the loan at any time; borrowed
securities must be returned when the loan is terminated.
4. the Fund should receive reasonable interest on the loan (which
may include the Fund's investing any cash collateral in portfolio
securities, thereby earning additional income), any distribution on
the loaned securities, and any increase in the market value of the
loaned securities; and,
Risks of Lending
A Fund will enter into securities lending and repurchase
transactions only with nationally recognized brokers, banks,
dealers or other financial institutions. In the event of a
default or bankruptcy by a seller or borrower, the Fund will
promptly liquidate collateral. However, the exercise of the
Fund's right to liquidate such collateral could involve certain
costs or delays and, to the extent that proceeds from any sale of
collateral on a default of the seller or borrower were less than
the seller's or borrower's obligation, the Fund could suffer a
loss.
INVESTMENT LIMITATIONS
The following investment limitations are fundamental and may not be
changed without prior approval of a majority of the Fund's outstanding
voting shares.
As defined in the Investment Company Act of 1940, the term "majority"
means the vote of the lesser of (a) 67% of the shares of the Fund at a
meeting where more than 50% of the outstanding shares are present in
person or by proxy; or (b) more than 50% of the outstanding shares of
the Fund.
The Fund may not:
1. issue senior securities.
2. make short sales of securities or purchase securities on margin.
3. borrow money except as a temporary measure to facilitate
redemptions. Such borrowing may not exceed 30% of the Fund's total
assets, taken at current value, before such borrowing. The Fund may
not purchase securities if a borrowing by the Fund is outstanding.
4. underwrite securities of any other issuer, nor purchase or sell
restricted securities.
5. purchase or sell real estate or real estate mortgage loans.
6. buy or sell commodities or futures contracts.
7. invest in oil, gas or other mineral leases.
8. make loans except through repurchase agreements provided the
borrower maintains collateral equal to at least 100% of the value of
the borrowed security, and marked to market daily.
9. purchase securities of any issuer if, as a result of such a
purchase, such securities would account for more than 5% of the Fund's
assets.
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The following restrictions are not fundamental and may be changed by
the Board of Directors:
The Fund may not:
1. invest in warrants;
2. invest more than 15% of the Fund's net assets in illiquid
securities.
MANAGEMENT OF THE FUND
A Board of Directors governs the Fund. The Directors are responsible
for overseeing the management of the Fund's business affairs and play
a vital role in protecting the interests of Fund shareholders. Among
other things, the Directors approve and review the Fund's contracts
and other arrangements and monitor Fund performance and operations.
The names, ages and addresses of the Directors and officers of the
Fund, together with information as to their principal business
occupations during the past five years are set forth below.
<TABLE>
<CAPTION>
Position Held Principal Occupation(s)
Name, Age, Address With Fund During Past 5 Years
<S> <S> <S>
Richard J. Garvey*, 66 Chairman, Limited partner of Money Management Associates
730 Southwest 67th Place President, 1975-1998. Vice President of Rushmore Services,
Portland, OR 97225 Treasurer and Inc. 1992-1998. Director of four Rushmore Fund
Director Boards.
Philip Borish*, 71 Director Employee of Rushmore Services, Inc., a
4922 Fairmont Avenue subsidiary of the Adviser, since 1991.
Bethesda, MD 20814
Bette Clemons, 75 Director President of Consumer Affairs Associates, a
315 Market St. management consulting firm providing advice on
New Cumberland, PA 17070 consumer trends since 1978.
Louis T. Donatelli, 62 Director President of Donatelli and Klein, Inc., engaged
7200 Wisconsin Avenue in the acquisition of real estate, primarily
Bethesda, MD 20814 office buildings and multi-family housing
projects since 1993.
George H. Lawrence, 73 Director Retired. Of Counsel Akin, Gump, Strauss, Hauer
8707 Eaglebrook Court & Feld, 1991-1998. Retired President of
Alexandria, VA 22308 American Gas Association.
Carl Levin, 86 Director Semi-Retired. Public Affairs Consultant since
5450 Whitley Park Terrace, #809 1986. Executive Director for the U.S. Council
Bethesda, MD 20814 for Coconut Research until 1992.
Patrick F. Noonan, 57 Director Chairman and Chief Executive Officer of the
11901 Glen Mill Drive Conservation Fund since 1986. Vice Chairman,
Potomac, MD 20854 American Farmland Trust and Trustee, American
Conservation Association since 1985. President,
Conservation Resources, Inc. since 1981.
Director of four Rushmore Fund Boards.
Daniel L. O'Connor*, 57 Director General Partner of Money Management Associates,
100 Lakeshore Drive registered investment adviser of the Rushmore
Suite 1555 Funds, since 1975. Director, Rushmore Trust and
North Palm Beach, FL 33408 Savings, FSB, the Trust's transfer agent and
custodian. Director of four Rushmore Fund
Boards. Director of the Cappiello-Rushmore
Trust.
David N. Parker*, 59 Director President and Chief Executive Officer, American
400 North Capital Street, N.W. Gas Association since September, 1997.
Washington, D.C. 20001 President, Aluminum Association, 1989-1997.
Eugene A. Tracy, 71 Director Retired since 1992. Chairman of the Executive
1424 Sequoia Trail Committee, Peoples Energy Corporation until
Glenview, IL 60325 1992.
David J. Muchow*, 53 Vice President Attorney and Counselor at Law and Energy
4449 North 38th Street and Secretary Consultant since 1998. Special Counsel,
Arlington, VA 22207 American Gas Association since 1998. Formerly
General Counsel and Corporate Secretary,
American Gas Association 1976-1998.
Timothy N. Coakley, CPA*, 32 Vice President Chief Financial Officer and Treasurer, Rushmore
4922 Fairmont Avenue Trust and Savings, FSB, since 1995. Vice
Bethesda, MD 20814 President of four Rushmore Funds and the
Cappiello-Rushmore Trust (collectively, the
"Funds"). Controller of the Funds, 1995-1997.
Formerly Audit Manager, Deloitte & Touche LLP
until 1994.
Edward J. Karpowicz, CPA*, 36 Controller Vice President of Rushmore Trust and Savings,
4922 Fairmont Avenue FSB, since 1997. Controller of the Funds.
Bethesda, MD 20814 Treasurer, Bankers Finance Investment Management
Corp., August 1993 to June 1997.
Stephenie E. Adams*, 30 Assistant Manager, Fund Administration and Marketing,
4922 Fairmont Avenue Secretary Rushmore Services, Inc., from July 1994 to
Bethesda, MD 20814 Present. Secretary of three Rushmore Funds and
the Cappiello-Rushmore Trust. Assistant
Secretary of one Rushmore Fund.
* Indicates an "interested" person. An interested person has any
one of several close business or family ties to the Fund, the
Fund's investment adviser, or an affiliated company of the Fund.
</TABLE>
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The aggregate compensation paid to the Directors serving during the
fiscal year ended March 31, 1999, is set forth in the table below:
<TABLE>
<CAPTION>
Total Compensation
Paid to Directors
Aggregate Pension or Estimated Annual for Services to the
Name of Person Compensation Retirement Benefits Benefits Upon Fund and Fund
and Position Paid Accrued Retirement Complex
<S> <C> <C> <C> <C>
Richard J. Garvey,*
Chairman, President,
Treasurer and Director $0 $0 $0 $0
Philip Borish, *
Director $0 $0 $0 $0
Bette Clemons,
Director $1,000 $0 $0 $0
Louis T. Donatelli,
Director $1,000 $0 $0 $0
George H. Lawrence,
Director $1,000 $0 $0 $0
Carl Levin,
Director $1,000 $0 $0 $0
Patrick F. Noonan,
Director $1,000 $0 $0 $10,000
Daniel L. O'Connor, *
Director $0 $0 $0 $0
David N. Parker, *
Director $0 $0 $0 $0
Eugene A. Tracy,
Director $1,000 $0 $0 $0
* Indicates an "interested" person. An interested person has any
one of several close business or family ties to the Fund, the Fund's
adviser, or an affiliated company of the Fund.
</TABLE>
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CONTROL PERSONS and PRINCIPAL HOLDERS of SECURITIES
As of July 19, 1999, the following party was the only owner of record
owning 5% or more of the shares of the Fund.
Controlling Party or
Principal Holder of
Securities Shares % Owned
Address Outstanding
Charles Schwab & Co., Inc. 1,612,154.719 14.004%
101 California Street
San Francisco, CA 94101
Officers and Directors of the Fund, as a group, owned, of record and
beneficially, less than 1% of the outstanding shares of the Fund.
INVESTMENT ADVISORY and OTHER SERVICES
Investment Adviser
Money Management Associates (the "Adviser"), 100 Lakeshore Drive,
Suite 1555, North Palm Beach, Florida 33408, has served as the Fund's
investment adviser since the Fund commenced operations on May 10,
1989. The Adviser provides investment advice to the Fund and oversees
its day-to-day operations, subject to direction and control by the
Fund's Board of Directors. For its services, the Adviser receives a
fee at an annual rate based on 0.40% of the net assets of the Fund.
For the fiscal years ended March 31, 1999, 1998, and 1997, the Funds
paid the investment advisory fees to the Adviser of $901,335,
$877,926 and $863,761, respectively.
The Adviser also advises: Fund for Government Investors, a money
market fund established in 1975 that invests only in U.S. Treasury
securities; The Rushmore Fund, Inc., which was established in 1985 and
currently consists of one series, the U.S. Government Bond Portfolio;
and Fund for Tax-Free Investors, Inc., which was established in 1983
and currently consists of three series, each of which invests
primarily in securities the interest on which is exempt either from
federal income tax or from state income tax. As of March 31, 1999,
total assets under the Adviser's management were approximately $900
million.
Fund expenses which are paid by the Adviser include, but are not
limited to: the expenses of shareholders and directors meetings, the
cost of office space, and the preparation, filing, printing and
distribution of the Fund's prospectus and Statement of Additional
Information. Additionally, the Adviser may, from its own resources,
including profits from advisory fees received from the Fund provided
such fees are legitimate and not excessive, make payments to broker-
dealers and other financial institutions for their expenses in
connection with the distribution of Fund shares.
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Administrator
Under an Administrative Services Agreement between the Fund and
Rushmore Trust and Savings, FSB ("RTS"), 4922 Fairmont Avenue,
Bethesda, Maryland 20814, a majority-owned subsidiary of the Adviser,
RTS provides transfer agency, dividend-disbursing, fund accounting and
administrative services to the Fund. Under the Administrative
Services Agreement with RTS, which has been approved by the Board of
Directors, RTS receives an annual fee of 0.35% of average daily net
assets of the Fund for the services it provides. For the fiscal years
ended March 31, 1999, 1998, and 1997, the Fund paid the following
administrative services fees to the RTS: $788,668, $768,186 and
$755,792, respectively.
As the Administrator, RTS is responsible for all costs of the Fund
except for the investment advisory fee, extraordinary legal expenses,
interest and the expenses paid by the Adviser. Specifically, RTS pays
costs of registration of the Funds' shares with the Securities and
Exchanges commission and the various states, all expenses of dividend
and transfer agent services, outside auditing and legal fees,
preparation of shareholders reports, and all costs incurred in
providing custodial services.
Other Administrator
The American Gas Association also provides administrative services to
the Fund. These administrative services include overseeing the
calculation of the Index. A.G.A. will not furnish other securities
advice to the Fund or the Adviser or make recommendations regarding
the purchase or sale of securities by the Fund. Under the terms of an
agreement approved by the Board of Directors, A.G.A. provides the
Adviser with current information regarding the common stock
composition of the Index no less than quarterly but may supply such
information more frequently. In addition, A.G.A. provides the Fund
with information on the natural gas industry. The Fund pays A.G.A. in
its capacity as administrator a fee at an annual rate of 0.10% of the
average daily net assets of the Fund. For the years ended March 31,
1999, 1998 and 1997, the administration fees were $225,334, $219,482
and $215,941.
Other Servicer
Under an agreement between the Adviser and Rushmore Services, Inc.
("RSI"), 4922 Fairmont Avenue, Bethesda, Maryland 20814, a wholly-
owned subsidiary of the Adviser, certain administrative services
provided to the Fund by the adviser, such as prospectus preparation,
are provided by RSI.
Custodian and Independent Public Accountant
RTS is the Fund's custodian and is responsible for safeguarding and
controlling the Fund's cash and securities, handling the securities,
and collecting interest on the Fund's investments.
Independent certified public accountants, Deloitte & Touche LLP,
University Square, 117 Campus Drive, Princeton, New Jersey 08540, are
responsible for auditing the annual financial statements of the Fund.
Brokerage Allocation and Other Practices
Brokerage commissions are normally paid on common stock transactions.
Such brokerage commissions as well as other Fund expenses will reduce
the overall performance of the Fund relative to the Index. Orders for
transactions in portfolio securities are placed for the Fund with a
number of brokers and dealers. It is the policy of the Fund to obtain
the best price and execution for all of its security transactions.
For the years ended March 31, 1999, 1998, and 1997, the Fund paid
$66,437, $122,024, and $70,000, respectively, in brokerage
commissions.
TAXATION OF THE FUND
The Fund currently qualifies, and will seek to continue to qualify, as
a regulated investment company (a "RIC") under Subchapter M of the
U.S. Internal Revenue Code of 1986, as amended (the "Code"). As a RIC,
the Fund will not be subject to federal income taxes on the net
investment income and capital gains that the Fund distributes to its
shareholders. The distribution of net investment income and capital
gains by the Fund to a Fund shareholder will be taxable to the
shareholder regardless of whether the shareholder elects to receive
these distributions in cash or in additional shares. Distributions
reported to a Fund shareholder as long-term capital gains shall be
taxable as such, regardless of how long the shareholder has owned the
shares. Fund shareholders will be notified annually by the Fund as to
the federal tax status of all distributions made by the Fund.
Distributions may be subject to state and local taxes.
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<PAGE>
If the Fund fails to qualify as a RIC for any taxable year, the Fund
would be taxed in the same manner as an ordinary corporation. In that
event, the Fund would not be entitled to deduct the distributions
which the Fund had paid to shareholders and, thus, would incur a
corporate income tax liability on all of the Fund's taxable income
whether or not distributed. The imposition of corporate income taxes
on the Fund would directly reduce the return a shareholder would
receive from an investment in the Fund.
CALCULATION OF PERFORMANCE DATA
Average Annual Total Return Quotations
For purposes of quoting and comparing the performance of the Fund to
that of other mutual funds and to other relevant market indices in
advertisements or in reports to shareholders, performance may be
stated in terms of total return. Under the rules of the Securities
and Exchange Commission (the "SEC Rules"), Fund advertising stating
performance must include total return quotes calculated according to
the following formula:
n
P (1+T) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1-, 5-, or
10-year periods at the end of the 1-, 5-, or 10-year
periods (or fractional portion thereof).
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the
most recent quarter prior to submission of the advertising for
publication, and will cover 1, 5, and 10 year periods or a shorter
period dating from the effectiveness of the Registration Statement of
the Fund. In calculating the ending redeemable value, all dividends
and distributions by the Fund are assumed to have been reinvested at
net asset value as described in the Prospectus for the Fund on the
reinvestment dates during the period. Total return, or "T" in the
formula above, is computed by finding the average annual compounded
rates of return over the 1, 5, and 10 year periods (or fractional
portion thereof) that would equate the initial amount invested to the
ending redeemable value.
The Fund, from time to time, also may include in such advertising a
total return figure that is not calculated according to the formula
set forth above in order to compare more accurately the performance of
the Funds with other measures of investment return. For example, in
comparing the total return of the Fund with data published by Lipper
Analytical Services, Inc., or with the performance of the Dow Jones
Utility Average, as appropriate, the Fund calculates its aggregate
total return for the specified periods of time by assuming the
investment of $10,000 in the Fund's shares and assuming the
reinvestment of each dividend or other distribution at net asset value
on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value
and by dividing the remainder by the beginning value. Such
alternative total return information will be given no greater
prominence in such advertising than the information prescribed under
SEC Rules.
11
<PAGE>
The Fund's average annual compounded rates of return, assuming the
reinvestment of all dividends and distributions as of March 31, 1999,
are as follows:
One Year (6.35)%
Five Years 12.65 %
Since Inception 9.87 %
Financial Statements
Copies of the Fund's audited financial statements for the fiscal year
ended March 31, 1999, may be obtained without charge by contacting the
Fund at 4922 Fairmont Avenue, Bethesda, Maryland 20814, or by
telephoning the Fund at (800) 343-3355 or (301) 657-1500.
12
