THE YEAR 2000 ("Y2K") FUND
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PROSPECTUS DATED OCTOBER 30, 1997
THE YEAR 2000 ("Y2K") FUND MAILING 1857 WILLIAM PENN WAY
EMERALD ADVISERS, INC. ADDRESS P.O. BOX 10666
INVESTMENT ADVISER LANCASTER, PA 17605-0666
PHONE (888) Y2K-FUND - TOLL-FREE
(717) 396-1116 - LOCAL &
INTERNATIONAL
INVESTMENT OBJECTIVES AND POLICIES
The Year 2000 ("Y2K") Fund (the "Y2K Fund" or "Fund") is a series
of the HomeState Group (the "Trust"), an open-end management
company organized on August 26, 1992 as a common law trust under
Pennsylvania law. The Trust currently operates three series.
Information about the other two series can be obtained by
contacting the Trust at the telephone numbers listed above. The
information contained in this prospectus relates only to The Y2K
Fund.
The Fund seeks capital appreciation by investing primarily in
equity securities of public companies which have stated, or been
reported as possessing, an intention of developing or supporting
marketable solutions to problems stemming from the susceptibility
of various business and other computer application programs or
systems to fail, or to produce inappropriate results, regarding
data, calculations or other processing involving dates subsequent
to December 31, 1999. Under normal conditions, the Fund will
invest not less than 65% of its total assets in a non-diversified
portfolio of equity securities of these "Y2K companies". (See
pages 5-6 for a description of these companies.) The Fund's
adviser may engage in option and short-selling, as well as
conventional securities, strategies to gain short as well as long
investment exposure to companies that do not meet the criteria of
being treated as a "Y2K company", but which the adviser believes
will also be impacted, favorably or unfavorably, by efforts to
solve Year 2000 computer system related problems.
PURCHASE INFORMATION
Shares of the Fund can be purchased through any independent
securities dealer having a sales agreement with the Fund's
Distributor, at the then-current net asset value plus a sales
charge of 2.90%. There are several ways to purchase shares at a
reduced sales charge. See "How to Purchase Shares of the Fund"
for more information. The required minimum initial investment in
the Fund is $500 and the minimum subsequent investment is $50.
The minimum initial and subsequent investment amounts are $50
under the Fund's AutoInvest Plan.
ADDITIONAL INFORMATION
This Prospectus sets forth the information a prospective investor
should know before investing. Please read it carefully and retain
it for future reference. A Statement of Additional Information,
dated October 30, 1997 has been filed with the Securities and
Exchange Commission and is incorporated by reference into this
Prospectus. The Statement of Additional Information includes a
description of the Fund's trustees and officers, further
discussion of investment policies, restrictions and other details
regarding the management and operations of the Fund, and is
available at no charge by writing or calling the Fund at the
address or phone numbers listed above.
For further information concerning a new account, call the Fund
at (888) Y2K-FUND. For questions about an established account,
call Rodney Square Management Corporation, the Fund's shareholder
services agent, at (800) 892-1351.
Shares of the Fund are not insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other
agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE YEAR 2000 ("Y2K") FUND
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TABLE OF CONTENTS
WHERE TO FIND INFORMATION CONCERNING PAGE NUMBER
- ------------------------------------ -----------
Investment Objectives and Policies................ 1
Purchase Information.............................. 1
Additional Information............................ 1
Expenses Summary.................................. 3
Investment Objective, Policies and Risks.......... 4
Investment Policies and Techniques................ 4
Risk Factors...................................... 9
Investment Restrictions........................... 10
How to Purchase Shares of the Fund................ 11
How to Redeem Shares of the Fund.................. 13
Valuing the Fund's Shares......................... 14
Management of the Fund............................ 15
Brokerage Allocation.............................. 17
Appendix: Year 2000 Technology and Support Companies 20
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THE YEAR 2000 ("Y2K") FUND
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THE Y2K FUND EXPENSES SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(As a percentage of Maximum offering price)......... 2.90%1
Sales Load Imposed on Reinvested Dividends............ None
Deferred Sales Load................................... None
Redemption Fees....................................... None
Exchange Fees......................................... None
Wire Transfer of Redemption Proceeds Fee.............. $12.00
ANNUAL FUND OPERATING EXPENSES 2
(AS A PERCENTAGE OF AVERAGE NET ASSETS
Management Fees (After Waiver)................... 0.96%4
12b-1 Fees(3).................................... 0.70%
Other Expenses (After Reimbursement)............. 1.24%4
TOTAL OPERATING EXPENSES......................... 2.90%4
EXAMPLE OF EXPENSES
An investor would have directly or indirectly paid the following
expenses at the end of the periods shown on a hypothetical $1,000
investment in the Fund, assuming a 5% annual return and
redemption at the end of each period:
ONE THREE
YEAR YEARS
----- -----
$57 $116
This table is provided to help you understand the expense of
investing in the Fund and your share of the operating expenses
which the Fund incurs. The table does not represent past or
future expense levels. Actual expenses may be greater or less
than those shown. Federal regulations require the Example to
assume a 5% annual return, but the Fund's actual annual returns
will vary.
1 The rules of the Securities and Exchange Commission (the "SEC")
require that the maximum sales charge (in the Fund's case,
2.90% of the offering price) be reflected in the above table.
However, there are several methods by which the sales charge
can be reduced. See "How to Purchase Shares of the Fund" for
more information.
2 The table shows estimated expenses for The Y2K fund based on
Average Net Assets of $15,000,000.
3 Because of the 12b-1 fee, long-term shareholders may indirectly
pay more than the economic equivalent of the maximum permitted
front-end sales charge.
4 Because The Y2K Fund is newly organized, its percentages shown
for "Management Fee" and "Other Expenses" are estimated and
have been computed giving effect to the Adviser's agreement to
limit the Fund's ordinary operating expenses to no more than
2.90% at least through and including June 30, 1998. Absent that
limitation, the "Management Fee" and "Total Operating Expenses"
would be estimated to be 1.00% and 2.94%, respectively. The Y2K
Fund commenced operations on October 30, 1997. Its operations
up to October 30, 1997 were limited to the issuance of 100
shares at $10.00 to the Fund's investment adviser.
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THE YEAR 2000 ("Y2K") FUND
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INVESTMENT OBJECTIVE, POLICIES AND RISKS
The investment objective of the Fund is to seek capital
appreciation by investing primarily in equity securities of
public companies which have stated, or been reported as
possessing, an intention of developing or supporting marketable
solutions to problems stemming from the susceptibility of various
business and other computer application programs or systems to
fail, or to produce inappropriate results, regarding data,
calculations or other processing involving dates subsequent to
December 31, 1999. The Fund can invest a larger percentage of
its assets in a particular company. The Fund's annual portfolio
turnover rate is expected to not exceed 200%. The Fund's
objective may not be changed without a vote of the holders of a
majority of the outstanding shares of the Fund. There can be no
guarantee the investment objective of the Fund will be achieved.
The principal risk factor associated with an investment in the
Fund is that the market value of the Fund's portfolio securities
may decrease and result in a decrease in the value of a
shareholder's investment. The Fund is likely to pursue active
securities, options, futures and short-selling trading
strategies, and may not be suitable for all investors. For a
fuller discussion of the risks posed by an investment in the
Fund, see "Risk Factors" below.
Due to the relatively limited number of companies in which the
Fund will principally invest, the Fund may not become fully
invested until up to 60 days following the commencement of the
public offering of its shares. In the interim, the Fund may
invest proceeds of its offering in the shares of money market
mutual funds which will cause investors to incur duplicate
investment management fees and other expenses.
Before or during the last six months of calendar year 2000, the
Board of Directors of the Fund plan to consider (1)
implementation of an offer of exchange whereby investors would be
afforded the opportunity to exchange shares of the Fund for
shares of one or more other registered investment companies,
and/or (2) solicitation of Fund shareholders for proxies
regarding a vote upon one or more of the following options, as
the Board may then determine to be in the best interests of all
Fund shareholders, as a group: (a) a change in the Fund's
investment objective and/or fundamental investment policies; (b)
a merger into or consolidation with another registered investment
company; or (c) dissolution and liquidation of the Fund's assets.
Under current laws and regulations, proceeding pursuant to the
exchange offer or dissolution options (see (1) and (2.c) above)
would result in taxable events, for federal income tax purposes,
to Fund investors. Changing the Fund's investment objective and
policies (see (2.a) above) would have no specific federal income
tax consequences at the Fund or investor level, while a merger or
consolidation transaction with another investment company (see
(2.b) above) might or might not constitute a federal income
taxable event for the Fund and Fund investors, depending upon how
the transaction was structured and pursued.
INVESTMENT POLICIES AND TECHNIQUES
EQUITY SECURITIES
Under normal conditions, the Fund will invest not less than 65%
of its total assets in a non-diversified portfolio of equity
securities of public companies identified by the Fund's adviser
as being actively engaged in developing, or supporting the
development or implementation of, marketable solutions to the
"Year 2000 Problem". The Fund will invest principally in common
stocks, but may also invest in preferred stocks and convertible
securities of Y2K, as well as other, companies.
THE YEAR 2000 PROBLEM - The "Year 2000 Problem" stems mainly from
system design decisions made over a decade ago, when the
requirement to save cost by storing the year of date fields as
two digits instead of four far outweighed the consideration for
what would happen in the year 2000. In these designs, the year
2000 ("00") will appear to be 1900 ("00"), 2001 will appear to be
1901, etc. Whereas the difference between the year 1996 and 2006
is ten years in a four-digit system, in a two-digit system it is
90. Some of the manifestations of the Year 2000 Problem may
include: credit cards with an expiration date of 01/00 will
appear to have expired and will be rejected; mortgages, interest
payments, forecasting systems where time periods are calculated
will all produce incorrect results, etc. Left uncorrected, all
date sensitive calculations involving the years 2000 or later
will result in massive computer malfunctions. The costs of
correcting the problem have been estimated at anywhere from $200
to $800 billion or more worldwide. The estimate given greatest
credibility by the Fund's adviser is the range of $300 billion to
$600 billion, generated by the Gartner Group, a
computer/technology consulting firm of which representatives
testified before a U.S. House of Representatives subcommittee
exploring the Y2K issue. Total costs include hardware and
software conversion, replacement systems, lost productivity and
litigation.
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THE YEAR 2000 ("Y2K") FUND
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The Fund will primarily target small systems integrators, tool
vendors and conversion factories. Companies targeted as possible
investment opportunities include computer/technology firms and
others which support the Y2K solutions offered.
Computer/technology companies may increase revenues through the
following Y2K-related activities: 1. Assessment of a company's
potential Y2K impact on systems; 2. Planning to
correct/prioritize Y2K problems; 3. Actual correction of Y2K
problems; 4. Testing of Y2K solutions. Many different firms may
be involved in each of these tasks for any one company's Y2K
problems. Companies which may increase revenues based on Y2K work
also include staffing companies to provide information technology
workers to assist in the correction process and disaster recovery
companies which can sell excess system time to customers at
premium prices. See "Appendix: Year 2000 Technology and Support
Companies" for a listing of the companies which the Fund's
adviser has identified as currently being involved in Y2K problem
solving activities. The listing is based on information derived
from publicly available sources, is furnished only as a present
illustrative guide to Y2K problem-solving companies, and does not
purport to be a complete listing of these companies, as a whole,
or of the companies which are currently (or which may, at any
time in the future) be represented within the portfolio of The
Y2K Fund.
SMALL COMPANIES - The Fund's portfolio will typically include
equity securities of smaller companies, i.e., those having a
total market capitalization (as determined by the Fund's
investment adviser) of less than $1 billion ("small cap
companies"). Small cap companies are not as widely followed by
institutional investment analysts as larger companies such as
those listed on the New York Stock Exchange. During some
periods, the securities of small cap companies, as a class, have
performed better than the securities of larger companies, and in
some periods they have performed worse. Over 60 percent of all
companies listed on the NASDAQ Stock Exchange and American Stock
Exchange have two or fewer analysts following the company. The
Funds' adviser believes that this lack of available information
about small cap companies presents an opportunity for investment
managers who provide their own research analysis to spot
developing trends before such information is widely distributed
among the larger investment community.
CONVERTIBLE SECURITIES - The Fund may invest in securities
convertible into common stock, but only when the Fund's
investment adviser believes that the expected total return upon
such a security exceeds the expected total return of common
stocks eligible for inclusion in the Fund's portfolio. The Fund
will purchase only those convertible securities which have
underlying common stock with potential for long-term growth in
the adviser's opinion. The Fund will only invest in investment-
grade convertible securities, i.e., those rated in the top four
categories by either Standard & Poor's Corporation ("S & P") or
Moody's Investor Services, Inc. ("Moody's"). For more
information regarding rating categories, see "Appendix A:
Description of Ratings" in the Statement of Additional
Information.
FIXED INCOME SECURITIES
The Fund may invest up to 35% of the value of its total assets in
investment-grade corporate bonds and notes, United States
Government securities (including mortgage related instruments),
and high-quality short-term debt securities such as commercial
paper, bankers' acceptances, certificates of deposit, repurchase
agreements, obligations insured or guaranteed by the United
States Government or its agencies, and demand and time deposits
of domestic banks and United States branches and subsidiaries of
foreign banks. The Fund will make use of short-term instruments
primarily under circumstances where it has cash to manage for a
brief time period (e.g., after receiving dividend distributions,
proceeds from the sale of portfolio securities or money from the
sale of Fund shares to investors).
The Fund will not engage in direct investment in real estate or
real estate mortgage loans, but may invest in mortgage related
instruments issued or guaranteed by the United States Government.
For more information regarding these instruments, see the
Statement of Additional Information.
OPTIONS, FUTURES AND SHORT-SELLING STRATEGIES
In managing the Fund, the adviser may engage in options, futures
and short-selling strategies to hedge various market risks or to
enhance potential gain. Certain special characteristics of and
risks associated with using these strategies are discussed below.
Use of options, futures and short-selling is subject to
applicable regulations of the SEC and the several options and
futures exchanges upon which these instruments may be traded.
The Board of Trustees has adopted investment guidelines
(described below) reflecting these trading regulations.
The Fund will not use leverage in its options, futures or short-
selling strategies. Accordingly, the Fund will comply with
guidelines established by the SEC with respect to "coverage" of
these strategies and will either (1) set aside liquid,
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THE YEAR 2000 ("Y2K") FUND
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unencumbered, daily marked-to-market assets in the prescribed
amount(s) in one or more segregated accounts with the Fund's
custodian; or (2) hold securities or other options or futures
contracts whose values are expected to offset ("cover") its
obligations thereunder. Assets used for cover cannot be sold or
closed out while the position for which they serve as cover is
outstanding, unless they are replaced with similar assets. As a
result, there is a possibility that the use of up to 25% of the
Fund's assets as cover may impede portfolio management, or the
Fund's ability to meet redemption requests or other current
obligations.
OPTIONS STRATEGIES - The Fund may purchase and write (sell)
options on securities and securities indices that are traded on
U.S. exchanges and in the over-the-counter ("OTC") market. The
Fund may purchase call options on securities in which it is
authorized to invest in order to fix the cost of a future
purchase. Call options also may be used as a means of enhancing
returns by, for example, participating in an anticipated price
increase of a security. In the event of a decline in the price
of the underlying security, use of this strategy would serve to
limit the potential loss to the Fund to the option premium paid.
Conversely, if the market price of the underlying security
increases above the exercise price and the Fund either sells or
exercises the option, any profit eventually realized would be
reduced by the premium paid. The Fund may also write covered
call options on securities in which it is authorized to invest
for hedging purposes or to increase return in the form of
premiums received.
The Fund may purchase put options on securities that it holds in
order to hedge against a decline in the market value of the
securities held or to enhance return. The put option enables a
Fund to sell the underlying security at the predetermined
exercise price. Thus, the potential for loss to the Fund below
the exercise price is limited to the option premium paid. If the
market price of the underlying security is higher than the
exercise price of the put option, any profit the Fund realizes on
the sale of the security is reduced by the premium paid for the
put option less any amount for which the put option may be sold.
The Fund may also write covered put options on securities in
which it is authorized to invest for hedging purposes or to
increase return in the form of premiums received.
The Fund may purchase put and call options and write covered put
and call options on indexes in much the same manner as the more
traditional options discussed above. The Fund may purchase and
write covered straddles on securities or indexes. The Fund may
purchase put and call warrants with values that vary depending on
the change in the value of one or more specified indexes ("index
warrants"). For a more complete discussion of these and other
hedging techniques, investors are directed to the Fund's
Statement of Additional Information (including Appendix B
thereof).
OPTIONS GUIDELINES - The Fund has adopted the following
investment guidelines to govern its use of options strategies.
These guidelines may be modified by the Board of Trustees without
shareholder approval:
1. The Fund will write only covered options, and each such
option will remain covered so long as the Fund is obligated
thereby.
2. The Fund will not write options (whether on securities
or securities indexes) if aggregate exercise prices of
previously written outstanding options, together with the
value of assets used to cover all outstanding short-sale
positions, would exceed 25% of its total net assets.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING - The Fund
may effectively terminate its right or obligations under an
option by entering into a closing transaction. Closing
transactions essentially permit the Fund to realize profits or
limit losses on its options positions prior to the exercise or
expiration of the option. If the Fund is unable to effect a
closing purchase transaction with respect to options it has
acquired, the Fund will have to allow the options to expire
without recovering all or a portion of the option premiums paid.
If the Fund is unable to effect a closing purchase transaction
with respect to covered options it has written, the Fund will not
be able to sell the underlying securities or currencies or
dispose of assets used as cover until the options expire or are
exercised, and the Fund may experience material losses due to
losses on the option transaction itself and in the covering
securities.
In considering the use of options to enhance returns or for
hedging purposes, particular note should be taken of the
following:
1. The value of an option position will reflect, among
other things, the current market price of the underlying
security or index, the time remaining until expiration, the
relationship of the exercise price to the market price, the
historical price volatility of the underlying security or
index and general market conditions.
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THE YEAR 2000 ("Y2K") FUND
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2. Options normally have expiration dates of up to three
years.
3. A position in an exchange-listed option may be closed
out only on an exchange that provides a secondary market for
identical options. Closing transactions may be effected
with respect to options traded in the OTC market only by
negotiating directly with the other party to the option
contract or in a secondary market for the option if such
market exists.
4. With certain exceptions, exchange listed options
generally settle by physical delivery of the underlying
security or currency.
5. The Fund's activities in the options markets may result
in a higher portfolio turnover rate and additional brokerage
costs; however, the Fund also may save on commissions by
using options as a hedge rather than buying or selling
individual securities in anticipation of, or as a result of,
market movements.
FUTURES AND RELATED OPTIONS STRATEGIES - The Fund may engage in
futures strategies for hedging purposes to attempt to reduce the
overall investment risk that would normally be expected to be
associated with ownership of the securities in which it invests.
The Fund may also engage in futures strategies to enhance
potential gain, subject to certain voluntary, as well as
regulatory, percentage limitations as discussed below.
The Fund may sell securities index futures contracts in
anticipation of a general market or market sector decline that
could adversely affect the market value of the Fund's securities
holdings. The Fund may purchase index futures contracts if a
significant market or market sector advance is anticipated. The
Fund may purchase a call option on an index futures contract to
hedge against a market advance in securities that the Fund plans
to acquire at a future date. The Fund may write covered put
options on index futures as a partial anticipatory hedge, and may
write covered call options on index futures as a partial hedge
against a decline in the prices of securities held by the Fund.
The Fund also may purchase put options on index futures
contracts.
FUTURES AND RELATED OPTIONS GUIDELINES - The Fund has adopted the
following investment guidelines to govern its use of such
strategies. These guidelines may be modified by the Board of
Trustees without shareholder vote.
1. The Fund will engage only in covered futures
transactions, and each such transaction will remain covered
so long as the Fund is obligated thereby.
2. The Fund will not purchase or sell non-hedging futures
contracts or related options if aggregate initial margin and
premiums required to establish such positions would exceed
5% of the Fund's total assets. For purposes of this
limitation, unrealized profits and unrealized losses on any
open contracts are taken into account, while the in-the-
money amount of an option that is, or was, in-the-money at
the time of purchase is excluded.
3. The Fund will not write options (whether hedging or non-
hedging) on futures contracts if aggregate exercise prices
of previously written outstanding options (whether on
securities or securities indexes), together with the value
of assets used to cover all outstanding short-sale
positions, would exceed 25% of its net assets.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS
TRADING - In considering the Fund's use of futures contracts and
related options, particular note should be taken of the
following:
1. Successful use by the Fund of futures contracts and
related options will depend upon the adviser's ability to
predict movements in the direction of the securities
markets, which requires different skills and techniques than
predicting changes in the prices of individual securities.
Moreover, futures contracts relate not only to the current
price level of the underlying securities, but also to
anticipated price levels at some point in the future. If
the price of the futures contract moves more than the price
of the underlying securities, the Fund will experience
either a loss or a gain on the futures contract that may or
may not be completely offset by movements in the price of
the securities that are the
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THE YEAR 2000 ("Y2K") FUND
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subject of the hedge. As a
result, a correct forecast of general market trends may not
result in successful hedging through the use of futures
contracts over the short term. In addition, activities of
large traders in both the futures and securities markets
involving arbitrage and other investment strategies may
result in temporary price distortions.
2. Movements in the prices of futures contracts may not
correlate perfectly with movements in the prices of the
hedged securities due to price distortions in the futures
market. As a result, a correct forecast of general market
trends may not result in successful hedging through the use
of futures contracts over the short term. In addition,
activities of large traders in both the futures and
securities markets involving arbitrage and other investment
strategies may result in temporary price distortions.
3. Positions in futures contracts may be closed out only on an
exchange or board of trade that provides a secondary
market for such futures contracts. Although the Fund
intends to purchase and sell futures only on exchanges or
boards of trade where there appears to be an active
secondary market, there is no assurance that a liquid
secondary market on an exchange or board of trade will exist
for any particular contract at any particular time. In such
event, it may not be possible to close a futures position,
and in the event of adverse price movements, the Fund would
continue to be required to make variation margin payments
and thereby be exposed to a loss not limited by the amount
of its initial investment.
4. Like options on securities, options on futures contracts
have limited life. The ability to establish and close out
options on futures will be subject to the development and
maintenance of liquid secondary markets on the relevant
exchanges or boards of trade. There can be no certainty
that such markets for all options on futures contracts will
develop.
5. As is the case with options, the Fund's activities in
the futures markets may result in a higher portfolio
turnover rate and additional transaction costs in the form
of added brokerage commissions. However, the Fund also may
save on commissions by using futures contracts or options
thereon as a hedge rather than buying or selling individual
securities in anticipation of, or as a result of, market
movements.
SHORT-SELLING - If the Fund anticipates that the price of a
security will decline, it may sell the security short and borrow
the same security from a broker or other institution to complete
the sale. The Fund may realize a profit or loss depending upon
whether the market price of a security decreases or increases
between the date of the short sale and the date on which the Fund
must replace the borrowed security. As a hedging technique, the
Fund may purchase options to buy securities sold short by the
Fund. Such options would lock in a future purchase price and
protect the Fund in case of an unanticipated increase in the
price of a security sold short by the Fund.
SHORT-SELLING GUIDELINE - The Fund has adopted the following
investment guideline to govern its use of short-selling
strategies. This guideline may be modified by the Board of
Trustees without shareholder approval.
The Fund will not initiate a short-sale position if the value of
assets used to cover all outstanding short-sale positions,
together with the aggregate exercise prices of outstanding
options written by the Fund, would exceed 25% of the Fund's total
net assets.
SPECIAL CHARACTERISTICS AND RISKS OF SHORT-SELLING - Short-
selling is a technique that may be considered speculative and
involves risk beyond the initial capital necessary to secure each
transaction. In addition, the technique could result in higher
operating costs for the Fund. Investors should carefully consider
the risks of such investments before investing in the Fund.
OTHER INVESTMENT TECHNIQUES
On those occasions when, in the opinion of the Fund's investment
adviser, market conditions warrant a temporary defensive
approach, the Fund may invest more than 35 percent of its total
assets in short-term obligations, including the following:
securities issued or guaranteed by the U.S. government,
commercial paper and bankers acceptances. During intervals when
the Fund has adopted a temporary defensive position it will not
be achieving its stated investment objective.
The Fund may from time to time engage in repurchase agreements.
That is, a seller may sell securities to the Fund and agree to
repurchase the securities at the Fund's cost plus interest within
a specified period (normally one day). The arrangement
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THE YEAR 2000 ("Y2K") FUND
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results in a fixed rate of return that is not subject to market
fluctuations during the period that the underlying security is
held by the Fund. Repurchase agreements involve certain risks,
including the seller's default on its obligation to repurchase
or the seller's bankruptcy.
RISK FACTORS
INDUSTRY CONCENTRATION
Under normal market conditions, the Fund will concentrate its
investments in equity securities of publicly traded companies
within the information technology (i.e., computer, semiconductor,
software, industrial and diversified technology) group of
industries. By doing so, the Fund will be exposed to the risk of
incurring substantial losses, as well as the opportunity of
earning substantial gains, depending upon the markets' reception
of these companies, overall, and not only with respect to their
Y2K problem-solving activities. While companies in the same
industry are often faced with the same obstacles, issues or
regulatory burdens, and their securities may react similarly to
and move in unison with these or other market conditions, equity
securities of companies within the information technology
industry group may display increased price volatility due to the
heightened competition and rapid pace of change that is commonly
experienced within that industry group. A portfolio of
information technology company stocks is likely to be more
volatile in price than one that includes investments in companies
operating in a wider number of industry groups or sectors.
LIMITED TIME AND INVESTMENT HORIZONS
The Fund is unusual insofar as it will have a specific and
limited time period within which to pursue its current Year 2000
related investment objective. Unlike most other equity funds,
the Y2K Fund will have a comparatively brief time interval, and a
comparatively narrow investment universe, within which to make
its investment decisions and to achieve its investment objective.
Also due to the Fund's investment time horizon constraint, the
Fund's adviser intends to principally pursue the objective of
capital appreciation by capturing short-term trading gains,
rather than holding portfolio securities for longer term
appreciation. Such an active trading strategy is likely to
result in higher brokerage commission expenses, at the Fund
level, and potentially greater taxable ordinary income for
investors (to the extent that there are distributable short-term
gains, if any, at the Fund level) than are displayed by most
other registered investment companies. The Fund, accordingly,
may not be suitable for all investors and should not be regarded,
standing alone, as a complete investment program.
EQUITY SECURITIES OF SMALL COMPANIES
Stocks of small cap companies tend to be more volatile and less
liquid than stocks of large companies. Small cap companies, as
compared to larger companies, may have a shorter history of
operations, may not have as great an ability to raise additional
capital, may have a less diversified product line making them
more susceptible to market pressure, may have a smaller public
market for their shares, and may not be nationally recognized.
NON-DIVERSIFICATION
As a "non-diversified" Fund, The Y2K Fund has the ability to
invest a larger percentage of its assets in the stock of a
smaller number of companies than a "diversified" fund. Because
the appreciation or depreciation of a single portfolio security
may have a greater impact on the net asset value of the Fund, the
net asset value per share of the Fund can be expected to
fluctuate more than that of a comparable "diversified" fund. See
Investment Restriction No. 1, below.
FIXED-INCOME SECURITIES
The price of fixed-income securities in which the Fund invests
are likely to decrease in times of rising interest rates.
Conversely, when rates fall, the value of the Fund's debt
securities may rise. Price changes of these debt securities held
by the Fund have a direct impact on the net asset value per share
of the Fund. The Fund invests only in securities that are rated,
at the time of purchase, in the four highest rating categories by
a nationally recognized statistical rating organization such as
Moody's or S&P or, if not rated, are determined by the Adviser to
be of comparable quality. Ratings represent the rating agency's
opinion regarding the quality of the security and are not a
guarantee of quality. Not even the highest rating constitutes
assurance that the security will not fluctuate in value or that
the Fund will receive the anticipated yield on the security.
Moreover, ratings may change after a security is purchased.
Moody's considers securities in the fourth highest rating
category (Baa) to have speculative characteristics. Such
securities tend to have higher yields, but changes in economic
conditions or other circumstances are more likely to lead to a
weakened capacity of the issuer to make principal and interest
<PAGE>
THE YEAR 2000 ("Y2K") FUND
===============================================================================
payments than is the case for more highly rated securities of
similar maturities. A change in the rating of a security, in the
issuer's ability to make payments of interest and principal, in a
credit provider's ability to provide credit support or in the
market's perception of those factors will affect the value of the
security, and the Fund's adviser will reevaluate the security to
determine whether the Fund should continue to hold it under the
changed conditions.
CONVERTIBLE SECURITIES
The value of convertible securities will usually vary with the
value of the underlying common stock, and will normally fluctuate
inversely with interest rates. A principal risk associated with
the purchase of convertible securities is that the conversion
price of the common stock will not be attained.
OPTIONS, FUTURES, RELATED OPTIONS AND SHORT-SELLING STRATEGIES
Options, futures, related options and short-selling strategies
may be considered speculative and may involve risks beyond the
initial capital necessary to secure each transaction. See the
discussion at pages 4 - 7 (and, in particular, the three segments
captioned "Special Characteristics and Risks") for a discussion
of risks posed by these strategies. Further discussion of these
strategies appears at "Appendix B: Options, Futures and Short-
Selling Strategies" in the Statement of Additional Information.
Investors should carefully consider the risks of these techniques
before investing in the Fund.
INVESTMENT RESTRICTIONS
The Fund is subject to specific fundamental investment
restrictions, which may not be changed without a vote of a
majority of their outstanding shares. Following is a discussion
of some of these fundamental restrictions: The Fund may not:
1. Invest more than 25% of the value of its total assets in
the equity or debt of one issuer (other than obligations
issued or guaranteed by the United States Government), nor,
with respect to 50% of its total assets, invest more than 5%
of the value of such assets in the equity or debt of one
issuer (other than obligations issued or guaranteed by the
U.S. Government).
2. Invest more than 25% of total assets in one industry,
except that the Fund shall, under normal conditions, invest
not less than 25% of its total assets in securities of
companies operating within the information technology
industry group.
3. Acquire more than 10% of the outstanding voting
securities of any issuer.
4. Issue or sell senior securities, except that the Fund
may engage in options, futures and/or short-selling
strategies provided the Fund complies with certain anti-
leverage (or so-called "cover") guidelines of the SEC.
Securities or other options or futures contracts used for
cover will not be sold or closed out while such strategies
are outstanding, unless they are replaced with similar
assets.
5. Borrow money, except from a bank or for purposes of
purchasing securities on margin (provided that such
purchases may not exceed 120% of total assets taken at
current value). Such borrowing will be limited to no more
than 5% of total net assets.
The foregoing investment limitations are considered as applying
at and as of the time when purchases, sales, short sales or other
transactions initially occur.
See the Fund's Statement of Additional Information for the full
text of these policies and the Fund's other fundamental policies,
as well as a listing of non-fundamental policies which the Board
of Trustees may change without shareholder approval.
<PAGE>
THE YEAR 2000 ("Y2K") FUND
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HOW TO PURCHASE SHARES OF THE FUND
Shares of the Fund are available for purchase through selected
financial service firms (such as broker-dealer firms) that have
signed a selling agreement with Rodney Square Distributors, Inc.
(the "Distributor"), the Fund's principal distributor. If an
investor would like assistance in locating a dealer, he or she
should contact the Fund. Shares can be purchased by mail or by
wire, as described below. The minimum initial investment is $500,
and the minimum subsequent investment is $50.
Shares of the Fund are purchased at net asset value per share
next determined after an order is received (See "Valuing the
Fund's Shares"), plus any applicable sales charge as described
below, which is known as the "offering price." Fund shareholders
pay an ongoing distribution services fee at an annual rate of up
to 0.70% of the Portfolio's aggregate average daily net assets
attributable to Funds shares (See "Management of the Fund - The
Distribution Plan").
The Offering Price is calculated as follows:
SALES CHARGE AS A
PERCENTAGE OF DEALER'S CONCESSION
DOLLAR AMOUNT INVESTED OFFERING PRICE N.A.V. (AS A % OF OFFERING PRICE)
- ---------------------- ------------------ ------ --------------------------
Less Than $100,000 2.90% 2.99% 2.40%
$100,000 to $250,000 1.90% 1.94% 1.40%
$250,000 to $500,000 1.00% 1.01% 0.90%
$500,000 & Above 0.00% 0.00% 0.50%
REDUCED SALES CHARGE
There are several ways for shareholders to qualify to pay a lower
sales charge:
1. Reach "Break Points" - Increase the initial investment
amount to reach a higher discount level, as listed above.
2. Right of Accumulation - Add to an existing shareholder
account so that the current offering price value of the
total combined holdings reach a higher discount level, as
listed above.
3. Sign a Letter of Intent - Inform the Fund or its Agent
that you wish to sign a non-binding "Letter of Intent" (the
"Letter") to purchase an additional number of shares so that
the total equals at least $50,000 over the following 13-
month period. Upon the Fund's receipt of the signed Letter,
the shareholder will receive a discount equal to the dollar
level specified in the Letter. If, however, the purchase
level specified by the shareholder's Letter has not been
reached at the conclusion of the 13-month period, each
purchase will be deemed made at the sales charge appropriate
for the actual purchase amount.
4. Combined Purchase Privilege - Combine the following
investor accounts into one "purchase" or "holding" to
qualify for a reduced sales charge:
(i) An individual or "company," as defined in Section
2(a)(8) of the Act; (ii) an individual, his spouse and
children under age 21; (iii) a trustee or other fiduciary
for certain trusts, estates, and certain fiduciary
accounts; or (iv) the employee benefit plans of a single
employer. The Fund's Transfer Agent, Rodney Square
Management Corporation (the "Transfer Agent") must be
advised of the related accounts at the time the purchase
is made.
5. Purchases at Net Asset Value - Additionally, the Board
of Trustees has determined that the following shareholders
shall be permitted to purchase shares of the Funds without
paying a sales charge:
(i) Existing shareholders, upon reinvestment of their
dividend income or capital gains distributions as
dividends and capital gains distributions are reinvested
in shares of the Fund at the net asset value without
sales charge;
(ii) Shareholders who have redeemed any or all of their
shares of the Fund within the past 120 days may purchase
shares at the net asset value without sales charge.
The amount which may be reinvested is limited to the amount
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THE YEAR 2000 ("Y2K") FUND
===============================================================================
up to but not exceeding the redemption proceeds
(or to the nearest full share if fractional
shares are not purchased) and is limited to shareholders
who have not previously exercised this right. The
Transfer Agent must be notified of the exercise of this
privilege when shares are being purchased;
(iii) Investor's shares purchased by advisory
accounts managed by S.E.C.-registered investment advisers
or bank trust departments;
(iv) Trustees, Officers, Employees (and those retired) of
the Fund, its services providers and their affiliates,
for their own accounts and for their spouse and children,
and employees of such broker-dealer firms that have
executed a Selling Agreement with the Funds may purchase
shares at net asset value without a sales charge.
6. On purchases of $500,000 or more, shares are acquired at
net asset value with no sales charge or dealer concession
charged to the investor. The Distributor, however, may pay
the broker-dealer up to 0.50% of the Offering Price, from
its own assets.
The Distributor may from time to time allow broker-dealers
selling shares of the Fund to retain 100% of the sales charge. In
such cases, the broker-dealer may be deemed an "underwriter"
under the Securities Act of 1933, as amended.
In addition to the commission paid to broker-dealers selling Fund
shares by way of a selling agreement, the Distributor may also
from time to time pay additional cash bonuses or other incentives
to selected broker-dealers in connection with their registered
representatives selling Fund shares. Such compensation will be
paid solely by the Distributor, and may be conditioned upon the
sale by the broker-dealer's representatives of a specified
minimum dollar amount of shares. Compensation may include
payment for travel expenses, including lodging, incurred in
connection with trips taken by registered representatives and
members of their families to locations within or outside the
United States for meetings of a business nature.
PURCHASING SHARES
Shares of the Fund may be purchased for your account directly by
your financial services firm representative, and may be purchased
by mail or wire.
INVESTING BY MAIL - To invest by mail, an investor must complete
and sign the Subscription Application Form which accompanies this
Prospectus and send it, with a check payable, to The Y2K Fund,
c/o Rodney Square Management Corporation, P.O. Box 8987,
Wilmington, DE 19899-9752. A purchase order sent by overnight
mail should be sent to The Y2K Fund, c/o Rodney Square Management
Corporation, 1105 N. Market Street, Wilmington, DE 19801.
INVESTING BY WIRE - Investors having an account with a commercial
bank that is a member of the Federal Reserve System may purchase
shares of the Fund by requesting their bank to transmit funds by
wire to:
c/o Wilmington Trust Company, Wilmington, DE
ABA #0311-0009-2
DDA# 2688-958-8
Attention: The Y2K Fund
(followed by the name in which the account is
registered, and the account number).
INITIAL PURCHASES - Before making an investment by wire, an
investor must first telephone the Transfer Agent at (800) 892-
1351 before the close of the New York Stock Exchange (generally,
4:00 p.m.) to be assigned an account number. The Subscription
Application Form which accompanies this Prospectus should be
promptly forwarded to Rodney Square Management Corporation at the
address above under "Investing by Mail."
SUBSEQUENT PURCHASES - Additional investments may also be made
through the wire procedures described above. An investor must
telephone the Transfer Agent at (800) 892-1351 before the close
of the New York Stock Exchange (generally, 4:00 p.m.).
The bank transmitting the wire may charge a fee for this service.
Federal funds wires received before the close of the New York
Stock Exchange ("NYSE") (generally, 4:00 p.m. Eastern time) will
be executed based on the Fund valuation that same day. Purchase
orders received after the close of the NYSE will be executed on
the next day the exchange is open.
<PAGE>
THE YEAR 2000 ("Y2K") FUND
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TAX-DEFERRED RETIREMENT PLANS
Shares may be purchased by certain types of retirement plans. The
Fund provides plan forms and custody agreements for the
following:
INDIVIDUAL RETIREMENT ACCOUNTS (IRA) - An IRA is a tax-deferred
retirement savings account that may be used by an individual who
has compensation or self- employment income and his or her
unemployed spouse, or an individual who has received a qualified
total or partial distribution from his or her employer's
retirement plan. The current annual maintenance fee for IRA
accounts is $10.00 per year.
In each of these plans, dividends and distributions will be
automatically reinvested. For further details, contact the
Adviser to obtain specific plan documents. Investors should
consult with their tax adviser before establishing any tax-
deferred retirement plans.
AUTOINVEST PLAN
The Fund also provides for an automatic investment plan whereby
shareholders may arrange to make regular monthly, quarterly, semi-
annual, or annual investments in the Fund. Investment amounts are
automatically debited from the shareholder's checking account.
The minimum initial and subsequent investment pursuant to this
plan is $50.
GENERAL PURCHASE INFORMATION
Purchase orders for shares of the Fund placed with a registered
broker-dealer must be received by the broker-dealer before the
close of the NYSE to receive the Funds' valuation calculated that
day. The broker-dealer is responsible for the timely transmission
of orders to the Distributor. Orders placed with the registered
broker-dealer after the close of the NYSE will be executed based
on the Fund's valuation calculated on the next business day.
The Fund may refuse any order for the purchase of shares which
the Board of Trustees deems as not in the best interests of the
Fund.
Stock certificates representing shares of the Fund are not issued
except upon written request. In order to facilitate redemptions
and transfers, most shareholders elect not to receive
certificates. If you lose your certificate, you may incur an
expense to replace it.
HOW TO REDEEM SHARES OF THE FUND
There is no charge for share redemptions. Shares will be redeemed
at the net asset value next determined after the redemption
request has been received in proper order by the Fund's Transfer
Agent. Shares may be redeemed by telephone call or mail delivery
to the Transfer Agent.
BY MAIL - A written request for redemption (along with any
endorsed stock certificates) must be received by the Fund's
Transfer Agent, Rodney Square Management Corporation, P.O. Box
8987, Wilmington, DE 19899-9752, to constitute a valid tender for
redemption. A signature guarantee is required for any written
redemption request which: (1) is in excess of $10,000.00; (2)
requests proceeds be sent to somewhere other than the account's
listed address; or (3) requests proceeds be sent to someone other
than the account's listed owner(s). These requirements may be
waived or modified upon notice to shareholders. Signatures must
be guaranteed by an "eligible guarantor institution" as defined
in Rule 17Ad-15 under the Securities Exchange Act of 1934.
Eligible guarantor institutions include banks, brokers, dealers,
credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings
associations. A broker-dealer guaranteeing signatures must be a
member of a clearing corporation or maintain net capital of at
least $100,000. Credit unions must be authorized to issue
signature guarantees. Signature guarantees will be accepted from
any eligible guarantor institution which participates in a
signature guarantee program. Payment of a written request for
redemption will be made within seven business days of receipt of
the request.
BY TELEPHONE - A shareholder redeeming at least $1,000 of shares
(for which certificates have not been issued) and who has
authorized expedited redemption on the Subscription Application
form filed with the Transfer Agent may, at the time of such
redemption, request that the funds be mailed or wired to the
commercial bank or registered broker-dealer designated on the
<PAGE>
THE YEAR 2000 ("Y2K") FUND
===============================================================================
application form by telephoning the Transfer Agent at (800) 892-
1351 before close of the New York Stock Exchange. Redemption
proceeds will be sent on the next business day following receipt
of the telephone redemption request. A wire fee of $7.00 will be
deducted from the shareholder account or proceeds before a wire
is sent. Please note that the Fund's Transfer Agent receives all
telephone calls for telephone instructions on a recorded phone
line. The Fund and/or its Transfer Agent will employ such
reasonable procedures to confirm that instructions communicated
by telephone are genuine. If they fail to employ reasonable
procedures, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. The Fund reserves the
right, at any time, to suspend or terminate the expedited
redemption procedure. During a period of unusual economic or
market changes, shareholders may experience difficulties or
delays in effecting telephone redemptions.
SYSTEMATIC WITHDRAWAL PLAN
Shareholders may elect to participate in a "Systematic Withdrawal
Plan" which provides for automatic fixed withdrawals of at least
$50 monthly, quarterly, semi-annually, or annually. The minimum
investment to establish a Systematic Withdrawal Plan is $10,000.
GENERAL REDEMPTION INFORMATION
If a shareholder seeks to redeem shares that were purchased
within fifteen days of the redemption request, the Fund may delay
payment until such time as the funds in question have been
properly cleared and collected by the Fund.
Due to the relatively high administration cost of smaller
shareholder accounts, the Fund reserves the right to redeem, at
net asset value, the shares of any shareholder whose account has
a value of less than $500, other than as a result of a decline in
the net asset value per share of the Funds or as an active
participant in the AutoInvest Plan. The Fund will provide a 30-
day written notice to such shareholder prior to initiating such a
redemption.
VALUING THE FUND'S SHARES
The net asset value and offering price of the shares of the Fund
are determined once on each Business Day as of the close of the
NYSE, which on a normal Business Day is usually 4:00 p.m. Eastern
Time. A "Business Day" is defined as a day in which the NYSE is
open for trading. Holidays currently observed by the NYSE are New
Year's Day, Martin Luther King, Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day. The Fund's value is determined by adding
the value of the portfolio securities and other assets,
subtracting its liabilities, and dividing the result by the
number of its shares outstanding. Net asset value includes
interest on fixed income securities, which is accrued daily. The
net asset value of the Fund will fluctuate with market conditions
as the value of the investment portfolio changes.
With approval of the Board of Trustees, the Fund may use a
pricing service, bank or broker-dealer experienced in such
matters to value the Fund's securities. The prices of bonds and
other fixed income securities provided by such service providers
may be determined without regard to bid or last sale prices but
take into account institutional size trading in similar groups of
securities and any developments related to specific securities.
Fund securities listed or traded on a national securities
exchange or market system for which representative market
quotations are available will be valued at the last quoted sales
price on the security's listed exchange on that day. Listed
securities not traded on an exchange that day, and other
securities traded in the over-the-counter market will be valued
at the mean between the closing asked price and the closing bid
price. Debt securities with maturities of 60 days or less are
valued at amortized cost, which approximates market value. Where
market quotations are not readily available, securities will be
valued using a method which the Board of Trustees believes in
good faith accurately reflects the fair value.
For more information concerning valuation of the Fund's shares,
see "Additional Information Concerning Valuing the Fund's Shares"
in the Statement of Additional Information.
<PAGE>
THE YEAR 2000 ("Y2K") FUND
===============================================================================
MANAGEMENT OF THE FUND
THE BOARD OF TRUSTEES
The operations and management of the Fund are the responsibility
of the Board of Trustees. Pursuant to that responsibility, the
Board of Trustees has approved contracts with the following
organizations to provide, among other things, day-to-day
investment advisory and administrative management services.
THE INVESTMENT ADVISER
Emerald Advisers, Inc. serves as investment adviser to the Fund.
The Adviser was organized as a Pennsylvania corporation on
November 14, 1991, and is registered with the Securities and
Exchange Commission under the Investment Advisers Act of 1940 and
with the Pennsylvania Securities Commission under the
Pennsylvania Securities Act of 1972. In August 1994, Emerald
Advisers, Inc. became a wholly-owned subsidiary of Emerald Asset
Management, Inc. Substantially all of the executives and
investment related personnel of Emerald Advisers continue in
their positions. Total assets managed by the Adviser exceeded
$325 million at September 30, 1997. The three principal officers
of the Adviser combine over 40 years of experience in the mutual
fund, investment advisory, pension funds management and
securities brokerage industries.
Pursuant to the investment advisory agreement (the "Advisory
Agreement"), the Adviser furnishes the Fund with investment
advisory and administrative services which are necessary to
conduct the Fund's business. Specifically, the Adviser manages
the Fund's investment operations and furnishes advice with
respect to the purchase and sale of securities on a daily basis.
The Y2K Fund agreement is dated September 12, 1997.
Kenneth G. Mertz II, CFA, President of Emerald Advisers, Inc.,
and Vice President and Chief Investment Officer of the Funds, is
primarily responsible for the day-to-day management of the Fund's
portfolio. Mr. Mertz has had this responsibility with the Adviser
since The HomeState Group commenced operations on October 1,
1992. Prior to this date, Mr. Mertz was the Chief Investment
Officer to the $12 billion Pennsylvania State Employes'
Retirement System. Mr. Mertz has had this responsibility with The
Y2K Fund since its inception.
Under the terms of the Advisory Agreement, the Fund pays the
Adviser an annual fee based on a percentage of the net assets
under management. The fees are computed daily and paid monthly as
follows:
For assets up to and including $100,000,000: 1.0%; for assets in
excess of $100,000,000: 0.90%. These fees are higher than most
other registered investment companies but comparable to fees paid
by equity funds of a similar investment objective and size.
The Fund pays all of its expenses other than those expressly
assumed by the Adviser. Specifically, the Fund pays the fees and
expenses of its transfer agent, custodian, independent auditors
and legal counsel. These fees are generally for the costs of
necessary professional services, regulatory compliance, and those
pertaining to maintaining the Fund's organizational standing. The
resulting fees may include, but are not limited to: brokerage
commissions, taxes and organizational fees, bonding and
insurance, custody, auditing and accounting services, shareholder
communications and shareholder servicing, and the cost of
financial reports and prospectuses sent to Shareholders.
The Adviser will reimburse its fee to the Fund to the extent such
fee exceeds the most restrictive expense limitation in effect by
a state regulatory agency where the Fund's shares are registered
for purchase. The Adviser reserves the right to voluntarily waive
any portion of its advisory fee at any time. The Adviser has
agreed to waive its advisory fee and/or reimburse other expenses
for The Y2K Fund for the period at least through and including
June 30, 1998 so that total Fund operating expenses are capped at
2.90% or less.
ADMINISTRATOR, ACCOUNTING AND TRANSFER AGENT
Pursuant to separate administration, accounting services and
transfer agency agreements each dated (September), 1997, Rodney
Square Management Corporation ("Rodney Square"), Rodney Square
North, 1100 N. Market Street, Wilmington, DE 19890-0001, has been
retained to serve as administrator, accounting and transfer
agent. As administrator, Rodney Square
<PAGE>
THE YEAR 2000 ("Y2K") FUND
===============================================================================
provides administrative and operational services and facilities.
As accounting agent, Rodney Square determines net asset value
and provides accounting services to the Funds. Also, Rodney
Square, as transfer agent, performs certain shareholder servicing
duties as listed in the Transfer Agency Agreement.
CUSTODIAN
Pursuant to a custodian agreement dated September 22, 1997 (the
"Custodian Agreement"), Wilmington Trust Company, 1100 N. Market
St., Wilmington DE (the "Custodian"), has been retained to serve
as custodian to the Fund's assets, and to perform certain related
administrative tasks.
THE DISTRIBUTOR
Rodney Square Distributors, Inc., Rodney Square North, 1100 N.
Market Street, Wilmington, DE 19890-0001, is the sole distributor
of shares of the Fund. The Distributor is a Delaware corporation,
a broker-dealer registered with the Securities and Exchange
Commission, a member of the National Association of Securities
Dealers (the "NASD"), and an affiliate of Rodney Square, which
also performs administrative, shareholder and accounting
servicing duties for the Fund.
Certain officers and/or employees of the Adviser may also serve
as registered representatives of the Distributor, but only in the
capacity of distributing shares of the Fund.
THE DISTRIBUTION PLAN
The Distributor will incur certain expenses while providing
selling and sales distribution services for the Fund, including
such costs as compensation to broker-dealers for (i) selling
shares of the Fund, and (ii) providing information and advice to
their shareholder clients regarding ongoing investment in the
Fund, as well as advertising, promotional and printing expenses.
To promote shares of the Fund to the general public, the Fund has
adopted a distribution services plan (the "Plan") under Rule 12b-
1 of the Investment Company Act of 1940 (the "Act"). The Plan
allows the Fund to reimburse the Distributor for costs
specifically described in this section. The Distributor receives
no other compensation from the Fund, except that (i) any sales
charge collected will be paid to the Distributor (See "How to
Purchase Shares of the Funds"), and (ii) the minimum total dollar
amount paid to the Distributor on an annual basis (net of the
amount paid to broker-dealers and/or service organizations) will
be $3,000. The Distributor may pay such sales charge to broker-
dealers who have entered into a Selling Agreement with the
Distributor as a commission paid for selling Fund shares.
The Fund pays the Distributor on a monthly basis at an annual
rate not to exceed 0.70% of the series' average net assets.
Expenses acceptable for reimbursement under the Plan include
compensation of broker-dealers or other persons for providing
assistance in distribution and for promotion of the sale of the
shares of the Fund. The Funds' Adviser is responsible to pay the
Distributor for any unreimbursed distribution expenses.
Pursuant to the Plan, a broker-dealer may receive a maintenance
commission in the amount of 0.50% (annualized) of the average net
assets maintained in the Fund by their clients.
The Fund may also compensate a bank under the Plan only to the
extent that a bank may serve as a "service organization,"
providing administrative and accounting services for Fund
shareholders. The Glass-Steagall Act and other applicable laws
and regulations prohibit a bank from acting as underwriter or
distributor of securities. If a bank were prohibited from
providing certain administrative services, shareholders would be
permitted to remain as Fund shareholders and alternate means for
continuing the servicing of such shareholders would be sought. It
is not expected that shareholders would suffer any financial
consequences as a result of any of those occurrences.
The Board of Trustees of the Trust adopted the Plan after
determining the Plan would likely benefit the Fund and its
shareholders to the extent that the Plan can aid the Distributor
in attracting additional shareholders, promoting the sale of
shares, reducing redemptions, and maintaining and improving
services provided to shareholders by the Distributor or dealers.
The resulting increase in assets should benefit the Fund by
providing a continuous cash flow, thereby affording the Adviser
the ability to purchase and redeem portfolio securities without
making unwanted redemptions of existing portfolio securities.
<PAGE>
THE YEAR 2000 ("Y2K") FUND
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The Trustees will annually review the success of the Plan in
meeting these objectives based on information provided by the
Adviser.
Future regulatory review and revision of Rule 12b-1 by the
Securities and Exchange Commission, of Article III Section 26 of
the Rules of Fair Practice by the National Association of
Securities Dealers, or any similar review and revision of other
applicable regulations by other regulatory agencies could affect
the Fund's Plan. The Trustees will promptly modify the Plan if
such action is warranted.
BROKERAGE ALLOCATION
The Adviser is responsible for selecting brokers and dealers to
effect portfolio securities transactions and for negotiating
brokerage commissions and dealers' charges. When selecting
brokers and dealers to handle the purchase and sale of portfolio
securities, the Adviser looks for prompt execution of the order
at the best overall terms available. Securities may be bought
from or sold to brokers who have furnished statistical, research
and other financial information or services to the Adviser. The
Adviser may give consideration to those firms which have sold or
are willing to sell shares of the Fund. See "Additional Brokerage
Allocation Information" in the Statement of Additional
Information for more information.
To the extent consistent with applicable provisions of the
Investment Company Act of 1940, Rule 17e-1, and other rules and
exemptions adopted by the Securities and Exchange Commission
("SEC") under that Act, the Board of Trustees has determined that
transactions for the Fund may be executed by affiliated brokers
if, in the judgment of the Adviser, the use of an affiliated
broker is likely to result in price and execution at least as
favorable as those qualified brokers. The Adviser will not
execute principal transactions by use of an affiliated broker.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends, if any, realized by the Fund will be declared and paid
semi-annually, in the months of December and July. Capital gains,
if any, realized by the Fund will be declared and paid annually
in the months of December and July. The Record and Declaration
dates for payments to shareholders will normally be the 15th of
the month, the Ex-Dividend dates will normally be the 16th of the
month, and the Payment dates will normally be the 20th of the
month (or the next business day if any of these dates fall on a
weekend). Shareholders of record as of the Record Date will be
paid, or have their payments reinvested in additional shares, as
of the Re-Invest and Payable Dates. The net asset value price of
the Fund will be reduced by the corresponding amount of the per-
share payment declared on the Ex-Dividend Date. Since dividend
income is not a primary objective of the Fund, the Fund does not
anticipate paying substantial income dividends to shareholders.
A shareholder will automatically receive all dividends and
capital gains distributions in additional full and fractional
shares of the Fund at net asset value as of the date of payment,
unless the shareholder elects to receive such distributions in
cash. To change the distribution option chosen, the shareholder
should write to the Fund's Transfer Agent, Rodney Square
Management Corporation, P.O. Box 8987, Wilmington, DE 19899-9752.
The request will become effective with respect to distributions
having record dates after its receipt by the Transfer Agent.
If a shareholder elects to receive distributions in cash, and the
check is returned by the United States Postal Service, the Fund
reserves the right to invest the amount of the returned check in
additional shares of the Fund at the then existing net asset
value and to convert the shareholder's election to automatic
reinvestment of all distributions.
TAXES
Reinvested dividends and capital gains distributions will receive
the same tax treatment as dividends and distributions paid in
cash. Because the Fund is a series of a Pennsylvania common law
trust, it will not be liable for corporate income or franchise
tax in the Commonwealth of Pennsylvania. Further, shares of the
Fund are exempt from Pennsylvania personal property taxes.
The Trust intends to qualify for treatment as a "regulated
investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). Qualification under the
Code requires that the Fund satisfy: (1) a gross income test that
ensures the Fund earns passive income; (2) two diversification
tests that limit the investment of the Fund's assets in any one
issuer; and (3) a series of distribution rules which require that
the Fund distributes to shareholders substantially all of its
<PAGE>
THE YEAR 2000 ("Y2K") FUND
===============================================================================
investment company taxable income and net tax-exempt interest
income. Each individual series of the Trust is expected to be
treated as a separate corporation for federal income tax
purposes. So long as the Fund qualifies for this tax treatment,
the Fund will be relieved of Federal income tax on amounts
distributed to shareholders. Amounts so distributed, however,
will be taxable to shareholders.
In general, all dividend distributions derived from ordinary
income and short-term capital gain are taxable to investors as
ordinary income (eligible in part for the dividends-received
deduction in the case of corporations, subject to certain
conditions). Pursuant to the Taxpayer Relief Act of 1997 (the
"1997 Act"), two different tax rates apply to net capital gains.
One rate (generally 28%) applies to net gains on capital assets
held for more than one year but not more than 18 months ("mid-
term gains"). A second, preferred rate (generally 20%) applies
to the balance of such net capital gains ("adjusted net capital
gains"). Distributions of net capital gains will be treated in
the hands of shareholders as mid-term gains to the extent
designated by the Fund as deriving from net gains from assets
held for more than one year but not more than 18 months, and the
balance will be treated as adjusted net capital gains.
Distributions of mid-term gains and adjusted net capital gains
will be taxable to shareholders as such, regardless of how long a
shareholder has held shares in the Fund. Distributions will be
taxable as described above whether received in cash or in shares
through the reinvestment of distributions. The dividends-
received deduction for corporations will generally apply to the
Fund's dividends from investment income to the extent derived by
dividends received by the Fund from domestic corporations,
provided the Fund and the shareholder each meet the relevant
holding period requirements.
A statement detailing the Federal income tax status of all
distributions made during a taxable year will be sent to
shareholders of record no later than January 31 of the following
year. Shareholders must furnish to the Fund a certified taxpayer
identification number ("TIN"). The Fund is required to withhold
31% from reportable payments including ordinary income dividends,
capital gains distributions, and redemptions occurring in
accounts where the shareholder has failed to furnish a certified
TIN and has not certified that such withholding does not apply.
Any shareholders who are non-resident alien individuals, or
foreign corporations, partnerships, trusts or estates, may be
subject to different Federal income tax treatment.
The tax information presented here is based on Federal and state
tax laws and regulations effective as of the date of this
Prospectus, and may subsequently change. Because the information
presented here is only a very brief summary of some of the
important tax considerations for shareholders, shareholders are
urged to consult their tax advisers for more specific
professional advice, especially as it relates to local and state
tax regulations. See "Additional Dividend, Distributions and
Taxes Information" in the Statement of Additional Information for
more information.
GENERAL INFORMATION
The Fund's adviser anticipates the revenue derived by companies
held in the Fund's portfolio from their Year 2000-related work
will have peaked by the end of calendar year 2000. Therefore,
before or during the last six months of calendar year 2000, the
Board of Directors of the Fund plan to consider (1)
implementation of an offer of exchange whereby investors would be
afforded the opportunity to exchange shares of the Fund for
shares of one or more other registered investment companies,
and/or (2) solicitation of Fund shareholders for proxies
regarding a vote upon one or more of the following options, as
the Board may then determine to be in the best interests of all
Fund shareholders, as a group: (a) a change in the Fund's
investment objective and/or fundamental investment policies; (b)
a merger into or consolidation with another registered investment
company; or (c) dissolution and liquidation of the Fund's assets.
Under current laws and regulations, proceeding pursuant to the
exchange offer or dissolution options (see (1) and (2.c) above)
would result in a taxable event, for federal income tax purposes,
to Fund investors. Changing the Fund's investment objective and
policies (see (2.a) above) would have no specific federal income
tax consequences at the Fund or investor level, while a merger or
consolidation transaction with another investment company (see
(2.b) above) might or might not constitute a federal income
taxable event for the Fund and Fund investors, depending upon how
the transaction was structured and pursued.
The HomeState Group was organized as a Pennsylvania common law
trust on August 26, 1992. Shares of the Trust do not have
preemptive or conversion rights, and are fully-paid and non-
assessable when issued.
Since The HomeState Group is organized as a Pennsylvania common
law trust, it is not required to hold annual meetings, and does
not intend to do so, except as required by the Act or other
applicable Federal or state law. The Trust will assist in
shareholder communications as required by Section 16(c) of the
Act. The Act does require initial shareholder approval of
<PAGE>
THE YEAR 2000 ("Y2K") FUND
===============================================================================
each investment advisory agreement and election of Trustees. Under
certain circumstances, the law provides shareholders with the
right to call for a special shareholders meeting for the purpose
of removing Trustees or for other proper purposes. Shares are
entitled to one vote per share, and do not have cumulative voting
rights.
The HomeState Group currently issues shares of beneficial
interest with no par value, in three series. Additional series
may be added in the future by the Board of Trustees. Each share
of each Fund has pro rata distribution rights, and shares equally
in dividends and distributions of the respective Fund series.
Shareholders will receive an annual report containing financial
statements which have been audited by the Fund's independent
accountants, and a semi-annual report containing unaudited
financial statements. Each report will include a list of
investment securities held by the Fund. Shareholders may contact
the Fund for additional information.
Duane, Morris & Heckscher, 305 North Front Street, Harrisburg, PA
17108, is legal counsel to the Trust.
Price Waterhouse LLP, 30 South Seventeenth Street, Philadelphia,
PA 19103, are the independent accountants for the Trust.
MANAGEMENT OF THE FUND
TRUSTEES - Bruce E. Bowen, Kenneth G. Mertz II, C.F.A., Scott
C. Penwell, Esq., Scott L. Rehr, Dr. H. J. Zoffer, Ph.D.
OFFICERS - Scott L. Rehr, President; Kenneth G. Mertz II,
C.F.A., Vice President and Chief Investment Officer; Daniel W.
Moyer IV, Vice President and Secretary; Diane D. Marky, Assistant
Secretary
<PAGE>
THE YEAR 2000 ("Y2K") FUND
===============================================================================
APPENDIX: YEAR 2000 TECHNOLOGY AND SUPPORT COMPANIES
The following is a listing of companies (1) the common stock of
which is (a) available for purchase and sale upon either the New
York Stock Exchange ("NYSE") or the American Stock Exchange
("AMEX"), (b) regularly quoted on either the National Market
("NNM") or Small-Cap ("NSC") level of the NASDAQ Automated
Quotation System ("NASDAQ") of the National Association of
Securities Dealers, Inc.("NASD"), or (c) otherwise traded in the
over-the-counter dealer market ("OTC") by NASD member firms; and
(2) which the Fund's adviser has identified as having stated, or
been reported as possessing, an intention of developing or
supporting marketable solutions to Year 2000 computer-related
problems.
The listing is based on information derived from publicly
available sources, is furnished only as a present illustrative
guide to Y2K problem-solving companies, and does not purport to
be a complete listing of these companies, as a whole, or of the
companies which are currently (or which may, at any time in the
future) be represented within the portfolio of The Y2K Fund. For
a complete description of the Fund's investment objective and
policies, see the Prospectus and accompanying Statement of
Additional Information.
COMPANY TRADING SYMBOL PRIMARY TRADING MARKET
Accelr8 Technology Corp. ACLY NNM
AccuStaff, Inc. ASI NYSE
AGISS Corporation AGCR OTC
ALLTEL Corp. AT NYSE
Alternative Resources Corp. ALRC NNM
Alydaar Software Corp. ALYD OTC
Amdahl Corp. AMH AMEX
American Management Systems AMSY NNM
American Software AMSWA NNM
SABRE Group Holdings `A' TSG NYSE
Analysts International Corp. ANLY NNM
Automatic Data Processing AUD NYSE
Baan Company BAANF NNM
BDM International Inc. BDMI NNM
BRC Holdings Inc. BRCP NNM
BTG Incorporated BTGI NNM
CACI International Inc. CACI NNM
Cambridge Technology Partners CATP NNM
Cayenne Software Inc. CAYN NNM
CIBER Inc. CBR NYSE
Claremont Technology Group CLMT NNM
Cognizant Corporation CZT NYSE
Cognos COGNF NNM
Comdisco Inc. CDO NYSE
Comforce Corporation CFS AMEX
Complete Business
Solutions Inc. CBSL NNM
Computer Associates
International CA NYSE
Computer Concepts Corp. CCEE NSC
Computer Horizons Corp. CHRZ NNM
Computer Management
Sciences Inc. CMSX NNM
Computer Sciences CSC NYSE
Computer Task Group Inc. TSK NYSE
Compuware Corp. CPWR NNM
ConSyGen, Inc. CSGI OTC
COREStaff Inc. CSTF NNM
<PAGE>
THE YEAR 2000 ("Y2K") FUND
===============================================================================
Crystal Systems Solutions CRYSF NNM
Data Dimensions DDIM NNM
Data Systems Network Corp. DSYS NSM
DelSoft Consulting Inc. DSFT OTC
Digital Equipment Corp. DEC NYSE
Egan Systems Inc. EGNS OTC
Electronic Data Systems Corp EDS NYSE
Forrester Research, Inc. FORR NNM
Gartner Group `A' GART NNM
GTE Corp. GTE NYSE
Hitachi, Ltd. ADR HIT NYSE
Intl. Business Machines IBM NYSE
Infinium Software INFM NNM
Information Analysis Inc. IAIC NNM
Information Management
Resources IMRS NNM
Informix Cor. IFMX NNM
International Veronex
Resources Ltd. IVXR OTC
Intersolv ISLI NSM
Keane Inc. KEA AMEX
Logicon Inc. LGN NYSE
MAPICS Inc. MAPX NNM
Mastech Corporation MAST NNM
Mercury Interactive MERQ NNM
MCI Communications MCIC NNM
Micro Focus Group ADS MIFGY NNM
NeoMedia Technologies Inc. NEOM NSM
Neoware Systems Inc. NWRE NNM
The NetPlex Group Inc. NTPL NSM
New Dimension Software DDDDF NNM
Norrell Corp. NRL NYSE
Olsten Corp. OLS NYSE
Oracle Corp. ORCL NNM
PeopleSoft Inc. PSFT NNM
Peritus Software Services PTUS NNM
Platinum technology Inc. PLAT NNM
Policy Management Systems PMS NYSE
Reliance Group Holdings REL NYSE
Robert Half International RHI NYSE
Romac International Inc. ROMC NNM
Safeguard Scientifics Inc. SFE NYSE
SAP AG - Sponsored ADR SAPHY OTC
Sapiens International
Corp.N.V. SPNSF NNM
SCB Computer Technology Inc. SCBI NNM
SEEC Inc. SEEC NNM
Sterling Software SSW NYSE
Strategia Corp. STGI OTC
SunGard Data Systems SDS NYSE
Sun Microsystems SUNW NNM
Sybase Inc. SYBS NNM
Systems & Computer Technology
Corp. SCTC NNM
Systems Software Associates
Inc. SSAX NNM
Tandem Computers TDM NYSE
<PAGE>
THE YEAR 2000 ("Y2K") FUND
===============================================================================
Tangram Enterprise Solutions,
Inc. TESI NSM
Techforce Corp. TFRC NNM
Thinking Tools Inc. TSIM NSM
Titan Corporation TTN NYSE
Topro Inc. TPRO NSM
Transformation Processing
Inc. TPII OTC
TSR Inc. TSRI NNM
Unicomp Inc. UCMP NNM
Unisys Corp. UIS NYSE
VIASOFT Inc. VIAS NNM
Walker Interactive Systems WALK NNM
Wang Laboratories Inc. WANG NNM
Whittman-Hart Inc. WHIT NNM
Zitel Corp. ZITL NNM
ZMAX Corp. ZMAX OTC
<PAGE>
THE YEAR 2000 ("Y2K") FUND
===============================================================================
I---------------------------------------------I
I FUND INFORMATION I
I I
I NEW ACCOUNTS -- 888-Y2K-FUND I
I I
I EXISTING ACCOUNTS/ORDER -- (800) 892-1351 I
I I
I-------------------------------------------- I
<PAGE>
THE YEAR 2000 ("Y2K") FUND
===============================================================================
THE HOMESTATE GROUP
1857 William Penn Way
P.O. Box 10666
Lancaster, PA 17605-0666
INVESTMENT ADVISER
GENERAL FUND INFORMATION
Emerald Advisers, Inc.
P.O. Box 10666
Lancaster, PA 17605-0666
DISTRIBUTOR
MARKETING INFORMATION
Rodney Square Distributors, Inc.
Rodney Square North
1100 N. Market Street
Wilmington, DE 19890-0001
ADMINISTRATOR
ACCOUNTING AGENT
TRANSFER AGENT
Rodney Square Management Corporation
Rodney Square North
1100 N. Market Street
Wilmington, DE 19890-0001
CUSTODIAN
Wilmington Trust Company
1100 North Market Street
Wilmington, Delaware 19890
LEGAL COUNSEL
Duane, Morris & Heckscher
305 North Front Street
Harrisburg, PA 17108
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
30 South Seventeenth Street
Philadelphia, PA 19103
<PAGE>
<PAGE>
SUBSCRIPTION APPLICATION FORM
THE YEAR 2000 ("Y2K") FUND
Mail to: Rodney Square Management Corporation
-------
P.O. Box 8987
Wilmington, DE 19899-9752
FOR ASSISTANCE, CALL (800) 892-1351
DO NOT USE FOR IRA PLAN ACCOUNTS: PLEASE CALL (800) 892-1351 TO RECEIVE AN IRA
ACCOUNT APPLICATION FORM.
- ------------------------------------------------------------------------------
1. AMOUNT INVESTED
DIVIDEND OPTION (DISTRIBUTIONS WILL BE REINVESTED
-------------------------------------------------
IF NO OPTION IS CHECKED)
------------------------
REINVEST ALL REINVEST CAP GAINS ONLY ALL CASH
------------ ----------------------- ---------
[ ] Year 2000 Fund $
------ [ ] [ ] [ ]
FORM OF PAYMENT -- INITIAL INVESTMENT (MAKE CHECK PAYABLE TO YEAR 2000 FUND)
[ ] Check Attached
[ ] NAV Purchase: Attach NAV Purchase Form
[ ] My Dealer purchased ---------------------- on -----------.
(SHARES) (DATE)
- ------------------------------------------------------------------------------
2. REGISTRATION (PLEASE PRINT OR TYPE)
INDIVIDUAL *(Joint ownership with rights of survivorship unless otherwise
noted)
------------------------------------------------- ---------------------
(First Name) (Initial) (Last Name) (Social Sec Number)
------------------------------------------------- ---------------------
(Joint Owner*) (Initial) (Last Name) (Social Sec Number)
GIFT TO MINORS
AS CUSTODIAN FOR
--------------------------------- -----------------------
(Name of Custodian--ONE ONLY) (Minor's Name)
Under the Uniform Gift to Minors Act. -- --
------------ -------------------------
(State) (Minor's Soc Sec No.)
CORPORATIONS, PARTNERSHIPS, TRUSTS and OTHERS (complete Corporate
Resolution)
---------------------------------------------------------------------------
(Name of Corporation, Partnership, Trust or Other)
/ / --
------ ------------ -------------------------------- ------------------
(Date of Trust) (Name of Trustee(s)) (Tax I.D. No.)
Citizen of: [ ] U.S. [ ] Other:
----------------------
- ------------------------------------------------------------------------------
3. SHAREHOLDER OPTIONS
I. LETTER OF INTENT/RIGHT OF ACCUMULATION/COMBINES PURCHASE PRIVILEGE
LETTER OF INTENT
[ ] $100,000 [ ] $250,000 [ ] $500,000
I agree to the letter of intent provisions of the Prospectus and
Statement of Additional Information, although I am not obligated to
purchase, and the Fund is not obligated to sell, I intend to invest,
over a 13-month period beginning on __________, 19_____, an
aggregate amount in the Fund at least equal to (check appropriate box
above).
RIGHT OF ACCUMULATION/COMBINED PURCHASE PRIVILEGE
I apply for Right of Accumulation or Combined Purchase Privilege reduced
sales charges subject to the Agent's confirmation of the following
holdings of eligible load accounts of the Fund.
-------------------------------- ----------------------- $-----------------
(Shareholder) (Account No.) (Approx. $ Value)
-------------------------------- ----------------------- $-----------------
(Shareholder) (Account No.) (Approx. $ Value)
- ------------------------------------------------------------------------------
SEE REVERSE FOR SIGNATURES AND ADDITIONAL SHAREHOLDER OPTIONS
-------------------------------------------------------------
<PAGE>
II. TELEPHONE TRANSFER OPTION
I (we) authorize Rodney Square Management Corporation to honor
telephone instructions for my (our) account. Neither the Fund nor Rodney
Square Management Corporation will be liable for properly acting upon
telephone instructions believed to be genuine. PLEASE ATTACH A VOIDED
CHECK ON THE TRANSFER ACCOUNT AND COMPLETE BELOW:
---------------------------------------------- ----------------- ----------
(NAME OF BANK) (CITY) (STATE)
-----------------
(Account Number)
[ ] Checking [ ] Savings
- ------------------------------------------------------------------------------
III. AUTOMATIC INVESTMENT PLAN
Please start an AutoInvest Plan for me in the following Fund and invest:
$_________ per period starting the 20th of _______, 19______ into the
Year 2000 Fund.
NOTE: Must be $50 or more - THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
PURSUANT TO THIS PLAN ARE $50.)
BANK DEBITS ARE TO BE MADE: [ ] Monthly [ ] Quarterly [ ] Semi-annually
[ ] Annually
(DEBITS ARE NORMALLY DRAWN ON THE 20th ON THE MONTH)
I understand that my ACH debit will be dated on the day of each month as
indicated above or as specified by written request. I agree that if such
debit is not honored upon presentation, Rodney Square Management Corp.
("Rodney Square"), transfer agent of the Fund, may discontinue this
service and any share purchase made upon deposit of such debit may be
cancelled. I further agree that if the net asset value of the shares
purchased with such debit is less when said purchase is cancelled than
when the purchase was made, Rodney Square shall be authorized to liquidate
other shares or fractions thereof held in my account to make up the
deficiency. This AutoInvest Plan may be discontinued by the Fund or Rodney
Square upon 30-days written notice or at any time by the shareholders by
written notice to Rodney Square which is received not later than 5 business
days prior to the designated investment date.
ATTACH A VOIDED CHECK TO THIS APPLICATION FORM: THIS OPTION WILL NOT BE
ESTABLISHED WITHOUT A VOIDED CHECK.
----------------------------------- ---------------------------------
(NAME OF YOUR BANK) (BANK CHECKING ACCOUNT NUMBER)
__________________________________________________________________________
(ADDRESS OF BANK OR BANK BRANCH WHERE ACCOUNT IS MAINTAINED)
- -------------------------------------------------------------------------------
IV. SYSTEMATIC WITHDRAWAL PLAN
Please establish a Systematic Withdrawal Plan for this account subject to
the terms in the Prospectus. I (we) authorize Rodney Square Management
Corporation ("Rodney Square") to redeem Fund shares as necessary to provide
the payments indicated below:
$_______________ per period starting on the 25th of _________, 19____ from
the Year 2000 Fund.
(NOTE: Must be $50 or more - your Year 2000 Fund account must have a
minimum value of $10,000 to initiate the Plan.)
WITHDRAWALS ARE TO BE MADE: [ ] Monthly [ ] Quarterly [ ] Semi-annually
[ ] Annually
If this account is registered to a party other than an individual, it may
require additional documentation identifying the authorized person(s).
Please consult with Rodney Square in such cases at the phone number listed
at the top of this form. You may cancel the Systematic Withdrawal Plan at
any time by writing to Rodney Square. This cancellation letter must be
signed by all shareholders as the account is registered, referencing the
Fund and account number. The Fund or Rodney Square reserve the right to
terminate this Plan upon 10 days written notice.
SPECIAL PAYEE INFORMATION:
If the proceeds are made payable to a party other than the registered
shareholder:
[ ] Mail check to Bank
[ ] ACH Electronic Funds Transfer to Bank
---------------------------- --------------------------------
(PAYEE NAME AND ADDRESS) (BANK NAME AND ADDRESS)
---------------------------- --------------------------------
(ADDRESS) (BANK ACCOUNT NUMBER)
---------------------------- ATTACH A VOIDED CHECK OR DEPOSIT SLIP
- -------------------------------------------------------------------------------
4. SIGNATURE AND CERTIFICATION
Required by Federal tax law to avoid 31% backup withholding:
"By signing, I certify under penalties of perjury that the social security
or taxpayer identification number entered above is correct and that I have
not been notified by the IRS that I am subject to backup withholding unless
I have checked the box below:"
[ ] I am subject to backup withholding.
Receipt of the current Prospectus is hereby acknowledged.
--------------------------------- --------------, 19 ----
(SIGNATURE) (DATE)
[ ] Owner [ ] Custodian [ ] TRUSTEE
--------------------------------- --------------, 19 ----
(JOINT OWNER SIGNATURE, IF APPLICABLE) (DATE)
- ------------------------------------------------------------------------------
5. INVESTMENT DEALER INFORMATION
---------------------------------------------------------------------------
(FIRM NAME)
----------------------------------------- ------------------------------
(REPRESENTATIVE NAME) (REP NUMBER/CODE)
----------------------------------------- ------------------------------
(MAIN OFFICE ADDRESS) (AUTHORIZED SIGNATURE)
---------------------------------------------------------------------------
(BRANCH OFFICE ADDRESS) (BRANCH OFFICE NUMBER/CODE)
- ------------------------------------------------------------------------------
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 30, 1997
THE YEAR 2000 ("Y2K") FUND
This Statement of Additional Information contains information
which may be useful to investors, but which is not included in
the Prospectus of The Year 2000 ("Y2K") Fund (the "Fund").
This Statement is not a Prospectus and should be read in
conjunction with the Fund's Prospectus. This Statement is only
authorized for distribution when accompanied or preceded by a copy
of the Fund's Prospectus dated October 30, 1997. You may obtain a
free copy of the Prospectus by writing The Y2K Fund, P.O. Box
10666, Lancaster, PA 17605, or by calling (888) Y2K-FUND.
TABLE OF CONTENTS
Additional Information Concerning Investment Objectives,
Policies and Risks.................................... 1
Fundamental Investment Restrictions......... 3
Additional Fund Valuation Information................. 5
Additional General Fund Information .................. 5
Additional Purchase and Redemption Information........ 7
Reduced Sales Charge Plans.................. 7
Additional Dividend, Distributions & Taxes Information 9
Dividend & Distributions.................... 9
Taxes....................................... 9
Management of the Fund................................ 11
Board of Trustees and Officers of the Fund.. 11
Person Controlling the Fund................. 13
Investment Adviser and Other Services
Providers.................................. 13
The Distribution Plan....................... 14
Additional Brokerage Allocation Information........... 15
Measuring Performance................................. 16
Appendix A - Description of Ratings................... 18
Appendix B - Options, Futures and
Short-Selling Strategies............................. 20
<PAGE>
ADDITIONAL INFORMATION CONCERNING INVESTMENT OBJECTIVES, POLICIES
AND RISKS
GENERAL
The HomeState Group (the "Trust") is registered as a
"series" fund, whereby each individual series of the Trust, in
effect, represents a separate mutual fund with its own objectives
and policies. There are currently three series in operation.
Information about the other two series can be obtained by
contacting The HomeState Group at the telephone numbers listed
herein. The discussion of investment objectives and policies that
follows relates only to The Year 2000 ("Y2K") Fund (the "Fund").
In the likely event that further series of the Trust are
introduced, these new series would have their own separate
objectives and policies and would be disclosed as such.
The Fund has been formed to invest primarily in equity
securities of companies involved in "The Year 2000 Industry" - a
grouping of companies which the Fund's adviser shall identify as
having stated an intention, or been reported as intending, to
develop or support marketable solutions to problems stemming from
the susceptibility of certain business and other computer
application programs or systems to fail, or to produce
inappropriate results with respect to, data, calculations and
other processing involving dates subsequent to December 31, 1999
(collectively, the "Year 2000 -- or Y2K -- Problem"). The Fund
can invest a larger percentage of its assets in a particular
company, and will focus on those companies identified by the
Fund's adviser as having what it believes are superior prospects
for price appreciation. The Fund's annual portfolio turnover rate
is expected to not exceed Two Hundred percent.
The Fund's objective may not be changed without a vote of
the holders of a majority of the outstanding shares of the Fund.
There can be no guarantee that the investment objective of the
Fund will be achieved. The principal risk factor associated with
an investment in the Fund is that the market value of the Fund's
portfolio securities may decrease and result in a decrease in the
value of a shareholder's investment. All investments, including
those in mutual funds, have risks, and no investment is suitable
for all investors.
CONVERTIBLE SECURITIES
The Fund may purchase convertible bonds and convertible
preferred stock which may be exchanged for a stated number of
shares of the issuer's common stock at a price known as the
conversion price. The conversion price is usually greater than
the price of the common stock at the time of purchase of the
convertible security. The interest rate of convertible bonds and
the yield of convertible preferred stock will generally be lower
than that of the non-convertible securities. While the value of
convertible securities will usually vary with the value of the
underlying common stock and will normally fluctuate inversely
with interest rates, it may show less volatility in value than
that of non-convertible securities. A principal risk associated
with the purchase of convertible bonds and convertible preferred
stock is that the conversion price of the common stock will not
be attained.
FIXED-INCOME SECURITIES
Investment grade corporate bonds are generally defined by
the four highest rating categories by Standard & Poor's
Corporation ("S & P") and Moody's Investors Services ("Moody's"):
AAA, AA, A or BBB by S & P and Aaa, Aa, A and Baa by Moody's.
Corporate bonds rated BBB by S & P or Baa by Moody's are regarded
as having an adequate capacity to pay principal and interest but
with greater vulnerability to adverse economic conditions and
speculative characteristics. For further information regarding
rating categories, see "Appendix A: Description of Ratings" of
this Statement.
The mortgage-related instruments in which the Fund may
invest include those issued by Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC")
(collectively, the "Mortgage-Related Instruments"). The
underlying mortgages which collateralize Mortgage-Related
Instruments issued by GNMA are fully guaranteed by the Federal
Housing Administration or Veteran's Administration, while those
collateralizing Mortgage-Related Instruments issued by FHLMC or
FNMA are typically conventional residential mortgages conforming
to strict underwriting size and maturity constraints. Mortgage-
Related Instruments provide for a periodic payment consisting of
both interest and principal. The interest portion of these
payments will be distributed by the Fund as income and the
capital portion will be reinvested.
Unlike conventional bonds,Mortgage-Related Instruments pay
back principal over the life of the Mortgage-Related Instrument
rather than at maturity. At the time that a holder of a Mortgage-
Related Instrument reinvests the payments and any unscheduled
prepayment of principal that it receives, the holder may receive
a rate of interest which is actually lower than the rate of
interest paid on the existing Mortgage-Related Instruments. As
a consequence, Mortgage-Related Instruments may be a less effective
means of "locking-in" long-term interest rates than other
types of U.S. government securities. While Mortgage-Related
Instruments generally entail less risk of a decline during periods
of rapidly rising interest rates, they may also have less potential
for capital appreciation than other investments with comparable
maturities because as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if Mortgage
- -Related Instruments are purchased at a premium, mortgage
foreclosures and unscheduled principal payments may result in
some loss of a holder's principal investment to the extent of
premium paid. Conversely, if Mortgage-Related Instruments are
purchased at a discount, both a scheduled payment of principal
and an unscheduled payment of principal would increase current
and total returns and would be taxed as ordinary income when
distributed to shareholders.
<PAGE>
REPURCHASE AGREEMENTS
A repurchase agreement is a contract under which the Fund
acquires a security for a relatively short time period (usually
not more than one week) subject to the obligation of the seller
to repurchase, and of the Fund to resell, such security at a
fixed time and price (which represents the Fund's cost, plus
interest). The Fund will enter into such agreements only with
commercial banks and registered broker-dealers. In these
transactions, the securities issued by the Fund will have a total
value in excess of the value of the repurchase agreement during
the term of the agreement. If the seller defaults, the Fund could
realize a loss on the sale of the underlying security to the
extent that the proceeds of the sale, including accrued interest,
are less than the resale price provided in the agreement
including interest, and it may incur expenses in selling the
security. In addition, if the other party to the agreement
becomes insolvent and subject to liquidation or reorganization
under the United States Bankruptcy Code of 1983 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 and
therefore 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
management acknowledges these risks, it is expected that they can
be controlled through careful monitoring procedures.
PORTFOLIO TURNOVER
As discussed in the Prospectus, the Fund will engage in
trading for short-term profits when such trading is believed by
the Fund's adviser to be desirable and consistent with the Fund's
investment objective of achieving capital appreciation. The Fund
may dispose of securities whenever the adviser deems advisable
without regard to the length of time such securities have been
held. The Fund is not expected to exceed a portfolio turnover
rate of 200% on an annual basis.
FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment policies and restrictions may not
be changed without the approval of a majority of the Fund's
outstanding shares. For these purposes, a majority of shares of
the Fund is defined as the vote, at a special meeting of the
shareholders of the Fund duly called, of more than fifty percent
(50%) of the Fund's outstanding voting securities.
The Fund may not:
1. Invest more than 25% of the value of its assets in the
equity or debt of one issuer (other than obligations issued or
guaranteed by the United States Government), nor, with respect to
at least 50% of its total assets, invest more than 5% of the
value of such assets in the equity or debt of one issuer (other
than obligations issued or guaranteed by the U.S. Government.
2. Invest more than 25% of total assets in one industry,
except that the Fund shall, under normal conditions, invest not
less than 25% of its total assets in the Year 2000/Technology
industries.
3. Issue or sell senior securities, except that the Fund
may engage in options, futures and/or short-selling strategies
provided the Fund either (i) sets aside liquid, unencumbered,
daily marked-to-market assets in a segregated account with its
custodian in amounts as prescribed by pertinent SEC guidelines,
or (ii) holds securities or other options or futures contracts
whose values are expected to offset ("cover") its obligations
thereunder. Securities or other options or futures contracts
used for cover will not be sold or closed out while such
strategies are outstanding, unless they are replaced with similar
assets.
4. Borrow money, except from a bank or for purposes of
purchasing securities on margin
(provided that such purchases may not exceed 120% of total assets
taken at current value). Such borrowing will be limited to no
more than 5% of total net assets.
<PAGE>
5. Underwrite securities issued by other persons except to
the extent that, in connection with the disposition of its
portfolio investments, it may be deemed to be an underwriter
under certain federal securities laws.
6. Purchase or sell real estate, although it may purchase
securities which are secured by or represent interests in real
estate that are issued or backed by the United States Government,
its agencies or instrumentalities.
7. Acquire more than 10% of the outstanding voting
securities of any issuer; or make investments for the purpose of
gaining control of a company's management.
8. Make loans, except by purchase of debt obligations in
which the Fund may invest in accordance with its investment
policies, or except by entering into qualified repurchase
agreements with respect to not more than 25% of the current value
of its total net assets.
The aforementioned investment limitations are considered as
applying at and as of the time when purchases, sales, short
sales or other transactions initially occur.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In addition to the fundamental investment restrictions
listed above, the Fund has also adopted the following non-
fundamental investment policies. These policies may be changed by
the Funds' Board of Trustees without shareholder approval.
The Fund:
1. Will not invest more than 15% of net assets in
illiquid securities (including illiquid equity securities, repurchase
agreements and time deposits with maturities or notice periods of
more than 7 days, and other securities which are not readily
marketable, including securities subject to legal or contractual
restrictions on resale);
2. May not invest in the securities of other investment
companies (excepting no-load, open-end money market mutual funds,
and excepting the case of acquiring such companies through
merger, consolidation or acquisition of assets).
3. May not write options (whether on securities or
securities indexes) or initiate further short-sale positions if
aggregate exercise prices of previously written outstanding
options, together with the value of assets used to cover
outstanding short-sale positions, would exceed 25% of the Fund's
total net assets.
4. Will not invest in foreign traded options or futures
contracts.
5. Will not purchase or sell non-hedging futures
contracts or related options if aggregate initial margin and
premiums required to establish such positions would exceed 5% of
the Fund's total assets. For purposes of this limitation,
unrealized profits and unrealized losses on any open contracts
are taken into account, while the in-the-money amount of an
option that is, or was, in-the-money at the time of purchase is
excluded.
6. May invest its cash for temporary purposes in
commercial paper, certificates of deposit, money market mutual
funds, repurchase agreements (as set forth in Item 1 above) or
other appropriate short-term investments.
(To be eligible for investment by the Fund, commercial paper must
be rated A-1 or A-2 by Standard & Poor's Corporation ("S & P") or
Prime-1 or Prime-2 by Moody's Investor Services ("Moody's"), or
issued by a company with an unsecured debt issue currently
outstanding rated AA by S & P or Aa by Moody's, or higher. For
more information on ratings, see "Appendix A: Description of
Ratings" in this Statement. Certificates of Deposit ("CD's") must
be issued by banks or thrifts which have total assets of at least
$1 billion. In the case of a bank or thrift with assets of less
than $1 billion, the Fund will only purchase CD's from such
institutions covered by FDIC insurance, and only to the dollar
amount insured by the FDIC.)
<PAGE>
7. May invest in securities convertible into common stock,
but only when the Fund's investment adviser believes the expected
total return of such a security exceeds the expected total return
of common stocks eligible for inclusion in the Fund's portfolio.
The Fund will only invest in investment-grade convertible
securities, i.e., those rated in the top four categories by
either Standard & Poor's Corporation ("S & P") or Moody's
Investor Services, Inc. ("Moody's"). See "Appendix A: Description
of Ratings" in this Statement.
ADDITIONAL FUND VALUATION INFORMATION
The Fund determines its net asset value per share daily by
subtracting its liabilities (including accrued expenses and
dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash or other assets, including
interest accrued but not yet received) and dividing the result by
the total number of shares outstanding. The Fund's net asset
value per share is calculated as of the close of trading on the
New York Stock Exchange (the "Exchange") every day the Exchange
is open for trading. The Exchange closes at 4:00 p.m. Eastern
Time on a normal business day. Presently, the Exchange is closed
on the following holidays: New Year's Day, Martin Luther King, Jr.
Day,President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
Temporary investments held by the Fund portfolios having a
remaining maturity of less than sixty days when purchased and
securities originally purchased with maturities in excess of
sixty days but which currently have maturities of sixty days or
less may be valued at cost, adjusted for amortization of premiums
or accrual of discounts, if in the judgment of the Board of
Trustees such methods of valuation are appropriate, or under such
other methods as the Board of Trustees may from time to time deem
to be appropriate. The cost of those temporary securities that
had original maturities in excess of sixty days shall be
determined by their fair market value as of the sixty-first day
prior to maturity. All other securities and assets in the
portfolios will be appraised in accordance with those procedures
established in good faith in computing the fair market value of
these assets by the Board of Trustees.
ADDITIONAL GENERAL FUND INFORMATION
DESCRIPTION OF SHARE AND VOTING RIGHTS
The Declaration of Trust permits the Board of Trustees to
issue an unlimited number of shares of beneficial interest
without par value from separate classes ("Series") of shares.
Currently the Trust is offering shares of three Series: The Y2K
Fund, the HomeState Pennsylvania Growth Fund and the HomeState
Select Opportunities Fund.
The shares of the Trust are fully paid and nonassessable
except as set forth under "Shareholder and Trustee Liability" and
have no preference as to conversion, exchange, dividends,
retirement or other features. The shares of the Trust have no pre-
emptive rights. The shares of the Trust have non-cumulative
voting rights which means that the holders of more than 50% of
the shares voting for the election of Trustees can elect 100% of
the Trustees if they choose to do so. A shareholder is entitled
to one vote for each full share held (and a fractional vote for
each fractional share held), then standing in his name on the
books of the Trust. On any matter submitted to a vote of
shareholders, all shares of the Trust then issued and outstanding
and entitled to vote, irrespective of the class, shall be voted
in the aggregate and not by class except that shares shall be
voted as a separate class with to respect matters affecting that
class or as otherwise required by applicable law.
The Trust will continue without limitation of time, provided
however that:
1) Subject to the majority vote of the holders of shares of
any Series of the Trust outstanding, the Trustees may sell or
convert the assets of such Series to another investment company
in exchange for shares of such investment company and distribute
such shares ratably among the shareholders of such Series;
2) Subject to the majority vote of shares of any Series of
the Trust outstanding, the Trustees may sell and convert into
money the assets of such Series and distribute such assets
ratably among the shareholders of such Series; and
3) Without the approval of the shareholders of any Series,
unless otherwise required by law, the Trustees may combine the
assets of any two or more Series into a single Series so long as
such combination will not have a material adverse effect upon the
shareholders of such Series.
<PAGE>
Upon completion of the distribution of the remaining
proceeds or the remaining assets of any Series as provided in
paragraphs 1), 2), and 3) above, the Trust shall terminate as to
that Series and the Trustees shall be discharged of any and all
further liabilities and duties hereunder and the right, title and
interest of all parties shall be canceled and discharged.
SHAREHOLDER AND TRUSTEE LIABILITY.- Under Pennsylvania law,
shareholders of such a Trust may, under certain circumstances, be
held personally liable as partners for the obligations of the
Trust. Therefore, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of
the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or
executed by the Trust or the Trustees. The Declaration of Trust
provides for indemnification out of the Trust property of any
shareholder held personally liable for the obligations of the
Trust. The Declaration of Trust also provides that the Trust
shall, upon request, assume the defense of any claim against any
shareholder for any act or obligation of the Trust and satisfy
any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet
its obligations.
The Declaration of Trust further provides that the Trustees
will not be liable for errors of judgment or mistakes of fact or
law, but nothing in the Declaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his
office.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund's shares are sold at net asset value with a sales
charge payable at the time of purchase. The Prospectus contains a
general description of how investors may buy shares of the Fund,
as well as a table of applicable sales charges for the Fund. This
Statement contains additional information which may be of
interest to investors.
The Fund is currently making a continuous offering of its
shares. The Fund receives the entire net asset value of shares
sold. The Fund will accept unconditional orders for shares to be
executed at the public offering price based on the net asset
value per share next determined after the order is placed. The
public offering price is the net asset value plus the applicable
sales charge, if any.
For orders placed through the Fund's established broker-
dealer network, the public offering price will be based on the
net asset value determined on the day the order is placed, but
only if (i) the dealer has received the order before the close of
the Exchange, and (ii) the dealer transmits it to the Fund's
Distributor prior to the close of the Exchange that same day
(normally 4:00 p.m. Eastern time). The dealer is responsible for
transmitting this order by 4:00 p.m. Eastern time, and if the
dealer fails to do so, the customer's entitlement to that day's
closing price must be settled between the customer and the
dealer. If the dealer receives the order after the close of the
Exchange, the price will be based on the net asset value
determined as of the close of the Exchange on the next day it is
open.
If funds are sent directly to Rodney Square, they will be
invested at the public offering price based on the net asset
value next determined after receipt. Payment for purchase of
shares of the Fund must be in United States dollars. If payment
is made by check, the check must be drawn on a United States
bank.
REDUCED SALES CHARGE PLANS
Shares of the Fund may be purchased at a reduced sales
charge to certain investors listed in the Fund's Prospectus and
below. The underwriter's commission (paid to the Distributor) is
the sales charge shown in the Prospectus, less any applicable
dealer concession. The dealer concession is paid to those firms
selling shares as a member of the Fund's broker-dealer network.
The dealer concession is the same for all dealers, except that
the Distributor retains the entire sales charge on any retail
sales made by it. Following are detailed discussions of some of
the reduced sales charge plans listed in the Fund's Prospectus:
COMBINED PURCHASE PRIVILEGE - Certain investors may qualify for a
reduced sales charge by combining purchases into a single
"purchase" if the resulting "purchase" totals at least $50,000.
The applicable sales charge for such a "purchase" is based on the
combined purchases of the following: (i) an individual, or a
"company," as defined in section 2(a)(8) of the Investment
Company Act of 1940 (which includes corporations which are
corporate affiliates of each other, but does not include those
companies in existence less than six months or which have no
purpose other than the purchase of shares of the Fund or other
registered investment companies at a discount); (ii) an
individual, their spouse and their children under age twenty-one,
purchasing for his, her or their own account; (iii) a single
purchase by a trustee or other fiduciary purchasing shares for a
single trust, estate or single fiduciary account although more
than one beneficiary is involved; or (iv) a single purchase for
the employee benefit plans of a single employer. Rodney Square,
the Fund's Transfer Agent, must be advised of the related
accounts at the time the purchase is made.
<PAGE>
RIGHT OF ACCUMULATION - An investor's purchase of additional
shares may qualify for a cumulative quantity discount by
combining a current purchase with certain other shares already
owned ("Right of Accumulation"). The applicable shares charge is
based on the total of: (i) the investor's current purchase; (ii)
the net asset value (valued at the close of business on the
previous day of (a.) all shares of the series held by the
investor, and (b.) all shares of any other series fund of the
HomeState Group which may be introduced and held by the investor;
and (iii) the net asset value of all shares described in section
(ii) above owned by another shareholder eligible to combine their
purchase with that of the investor into a single "purchase" (See
"Combined Purchase Privilege" above).
To qualify for the Combined Purchase Privilege or obtain the
Right of Accumulation on a purchase through a broker-dealer, when
each such purchase is made the investor or dealer must provide
the Distributor with sufficient information to verify that the
purchase qualifies for the privilege or discount.
LETTER OF INTENT - Investors may purchase shares at a reduced
sales charge by means of a written Letter of Intent (a "Letter"),
which expresses the investor's intention to invest a minimum of
$50,000 within a period of 13 months in shares of the Funds.
Each purchase of shares under a Letter will be made at the
public offering price applicable at the time of such purchase to
a single transaction of the dollar amount indicated in such
Letter. At the investor's option, a Letter may include purchases
of shares made not more than ninety days prior to the date the
investor signed the Letter; however, the 13-month period during
which the Letter is in effect will then begin on the date of the
earliest purchase to be included. Investors do not receive credit
for shares purchased by the reinvestment of distributions.
Investors qualifying for the Combined Purchase Privilege (see
above) may purchase shares under a single Letter. The Letter is
not a binding obligation upon the investor to purchase the full
amount indicated. The minimum initial investment under a Letter
is 20% of such stated amount. Shares purchased with the first
2.9% of such amount will be held in escrow (while remaining
registered in the name of the investor) to secure payment of the
higher sales charge applicable to the shares actually purchased
if the full amount indicated is not purchased, and such escrowed
accounts will be involuntarily redeemed to pay the additional
sales charge, if necessary.
To the extent that an investor purchases more than the
dollar amount indicated in the Letter and qualifies for a further
reduction in the sales charge, the sales charge will be adjusted
for the entire amount purchased at the end of the 13-month
period, upon recovery from the investor's dealer of its portion
of the sales charge adjustment. Once received from the dealer,
the sales charge adjustment will be used to purchase additional
shares of the Trust's series at the then-current offering price
applicable to the actual amount of the aggregate purchases. No
sales charge adjustment will be made until the investor's dealer
returns any excess commissions previously received. Dividends and
distributions on shares held in escrow, whether paid in cash or
reinvested in additional Fund shares, are not subject to escrow.
The escrow will be released when the full amount indicated has
been purchased. Investors making initial purchases who wish to
enter into a Letter may complete the appropriate section of the
Subscription Application Form. Current shareholders may call the
Fund at (800) 232-0224 to receive the appropriate form.
REINSTATEMENT OF PRIVILEGE - An investor who has sold shares of the
Fund may reinvest the proceeds of such sale in shares of the Fund
within 120 days of the sale, and any such reinvestment will be
made at the Fund's then-current net asset value, so that no sales
charge will be levied. Investors should call the Fund for
additional information.
By exercising this reinstatement privilege, the investor
does not alter the federal income tax treatment of any capital
gains realized on the previous sale of shares of the series, but
to the extent that any shares are sold at a loss and proceeds are
reinvested in shares of the series, some or all of the loss may
be disallowed as a deduction. Please contact your tax adviser for
more information concerning tax treatment of such transactions.
ADDITIONAL DIVIDEND, DISTRIBUTIONS & TAXES INFORMATION
DIVIDENDS AND DISTRIBUTIONS
Dividends, if any, will be declared and paid in July and
December. Capital gains, if any, will be declared and paid in
July and December. All such payments will be declared on the 15th
of the month and paid on the 20th of the month. If any of these
dates falls on a weekend, both the declaration and payment dates
will be moved accordingly to the next business day.
<PAGE>
If you elect to receive cash dividends and/or capital gains
distributions and a check is returned as undelivered by the
United States Postal Service, the Fund reserves the right to
invest the check in additional shares of the Fund at the then-
current net asset value and to convert your account's election to
automatic reinvestment of all distributions, until the Fund's
Transfer Agent receives a corrected address in writing from the
number of account owners authorized on your application to change
the registration. If the Transfer Agent receives no written
communication from the account owner(s) and there are no
purchases, sales or exchanges in your account for a period of
time mandated by state law, then that state may require the
Transfer Agent to turn over to state government the value of the
account as well as any dividends or distributions paid.
After a dividend or capital gains distribution is paid, the
Fund's share price will drop by the amount of the dividend or
distribution. If you have chosen to have your dividends or
distributions paid to your account in additional shares, the
total value of your account will not change after the dividend or
distribution is paid. In such cases, while the value of each
share will be lower, each reinvesting shareholder will own more
shares. Reinvested shares will be purchased at the price in
effect at the close of business on the day after the record date.
TAXES
Each series of the Trust is treated as a separate mutual fund for
federal income tax purposes. The Fund intends to qualify each
year as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). In order
to qualify, and, therefore to qualify for the special tax
treatment accorded regulated investment companies and their
shareholders, the Fund must, among other things:
(1) Derive at least 90% of its gross income from dividends,
interest, payments with respect to certain securities, loans, and
gains from the sale of stock and securities, or other income
derived with respect to its business of investing in such stock
or securities;
(2) Derive less than 30% of its gross income from gains from
the sale or other disposition of certain assets (including stock
or securities) held for less than three months;
(3) Distribute with respect to each taxable year at least
90% of its taxable and tax-exempt income for such year; and
(4) Diversify its holdings so that, at the end of each
fiscal quarter, (i) at least 50% of the market value of the
Fund's assets is represented by cash and cash items, United
States Government securities, securities of other investment
companies, and other securities limited in respect of any one
issuer to a value not greater than 5% of the value of the Fund's
total assets and 10% of the voting securities of such issuer, and
(ii) not more than 25% of the value of its assets is invested in
the securities (other than those of the United States Government
or other regulated investment companies) of any one issuer or of
two or more issuers which the Fund controls and which are engaged
in the same, similar, or related types of businesses.
If the Fund qualifies to be taxed as a regulated investment
company it is accorded special tax treatment and will not be
subject to federal income tax on income distributed to its
shareholders in the form of dividends (including both capital
gain and ordinary income dividends). If, however, the Fund does
not qualify for such special tax treatment, the Fund will be
subject to tax on its taxable income at corporate rates, and
could be required to recognize unrealized gains, pay substantial
taxes and interest and make substantial distributions before
requalifying as a regulated investment company that is accorded
special tax treatment. In addition, if the Fund fails to
distribute in a calendar year substantially all of its ordinary
income for such year and substantially all of its net capital
gain for the year ending October 31 (or later if the Fund is
permitted so to elect and so elects), plus any retained amount
from the prior year, the Fund will be subject to a 4% excise tax
on the undistributed amounts. The Fund intends generally to make
distributions sufficient to avoid imposition of the 4% excise
tax. In calculating its income, the Fund must include dividends
in income not when received, but on the date when the stock in
question is acquired or becomes ex-dividend, whichever is later.
OTHER TAX INFORMATION
RETURN OF CAPITAL DISTRIBUTIONS - If the Fund makes a
distribution to you in excess of its accumulated earnings and
profits in any taxable year, the excess distribution will be
treated as a return of capital to the extent of your tax basis in
your shares, and thereafter as capital gain. A return of capital
is not taxable, but it reduces your tax basis in your shares.
<PAGE>
CAPITAL GAINS - When you purchase shares of the Fund, the Fund's
then-current net asset value may reflect undistributed capital
gains or net unrealized appreciation of securities held by the
Fund. If the Fund subsequently distributed such amounts to you,
the distribution would be taxable, although it constituted a
return of your investment. For federal income tax purposes, the
Fund is permitted to carry forward net realized capital losses,
if any, and realize net capital gains up to the amount of such
losses without being required to pay taxes on or distribute such
gains which, if distributed, might be taxable to you.
DIVIDENDS - The Code provides a 70% deduction for dividends
received by corporate shareholders, with certain exceptions. It
is expected that only part of the Fund's investment income will
be derived from dividends qualifying as such and, therefore, not
all dividends received will be subject to the deduction.
SHARES PURCHASED THROUGH RETIREMENT PLANS - Special tax rules and
fiduciary responsibility requirements apply to investments made
through retirement plans which satisfy the requirements of
Section 401(a) of the Code. Shareholders of the Fund should
consult with their tax adviser to determine the suitability of
shares of the Funds as an investment through such plans, and the
precise effect of such an investment on their particular tax
situation.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES AND OFFICERS OF THE TRUST
The following individuals hold positions as Trustees and/or
Officers of the Trust. Their position with the Trust is listed
along with their business occupations for the previous five
years:
Name, Position and Occupation for previous Five Years
SCOTT L. REHR*, 1857 William Penn Way, Lancaster, PA 17601,
President and Trustee, age 33, has been Senior Vice President and
Treasurer of Emerald Advisers, Inc. since 1991. He was Vice
President of Weik Investment Services, Inc. from 1990 to 1991.
He was Vice President of Penn Square Mutual Fund and the William
Penn Interest Income Fund from 1989 to 1990 and Director of
Investor Services , Penn Square Management Corp. from 1986 to
1989.
BRUCE E. BOWEN, 1536 Buttonbush Circle, Palm City, Fl 34990,
Trustee, age 59, is currently a private investor. He retired as
Vice Chairman and Secretary of Penn Square Mutual Fund, positions
he held from 1968 to 1988 and Vice Chairman and Secretary of
William Penn Interest Income Fund positions he held from 1987 to
1988. He also served as Vice President and Secretary of Penn
Square Management Corp. from 1964 to 1988. He also was a Director
of Berk-Tek, Inc. from 1987 to 1991 and Director of Morgan
Corporation, from 1989 to 1991.
KENNETH G. MERTZ II, C.F.A.*, 1857 William Penn Way, Lancaster,
PA 17601, Trustee, Vice President and Chief Financial Officer,
age 44, has been President and Chief Investment Officer of
Emerald Advisers, Inc. since 1992. He was Chief Investment
Officer for the Pennsylvania State Employes Retirement System
from 1985 to 1992. He was a Member of the National Advisory
Board, Northwest Center for Professional Education/Real Estate
Investment for Pension Funds from 1991 to 1992 and a Member of
the Advisory Board, APA/Fostin Pennsylvania Venture Capital Fund
from 1987 to 1992.
DANIEL W. MOYER IV*, 1857 William Penn Way, Lancaster, PA 17601,
Vice President and Secretary, age 41, has been Vice President of
Emerald Advisers, Inc. since 1992 as well as a Registered
Representative for First Montauk Securities Corp. since 1992. He
was the Branch Office Manager for Keogler Morgan & Co. and a
Registered Representative and Director for Financial Management
Group from 1988 to 1992.
SCOTT C. PENWELL, ESQ. **, 305 North Front Street, Harrisburg, PA
17108, Trustee, age 43, has been a partner at Duane, Morris &
Heckscher since 1981. He has also been Chairman of the Securities
Regulation Committee of the Corporation, Banking and Business Law
Section of the Pennsylvania Bar Association since 1994.
DR. H. J. ZOFFER, Joseph M. Katz School of Business, 366 Mervis
Hall, Pittsburgh, PA 15260, Trustee, age 66, has been Professor
of Business Administration at Joseph M. Katz School of Business
since 1966. He was Dean of Joseph M. Katz School of Business,
University of Pittsburgh from 1966 to 1996. He is also a Director
of Penwood Savings Association.
<PAGE>
DIANE D. MARKY, Rodney Square North, 1100 N. Market St.,
Wilmington, DE 19890-0001, Assistant Secretary, age 33, has been
a Senior Fund Administrator of RSMC since 1994 and a Fund
Administration Officer of RSMC since July 1991. She was a Mutual
Fund Accountant for RSMC from 1989 to 1991.
* EMPLOYEE OF EMERALD ADVISERS, INC. AND "INTERESTED PERSON"
WITHIN THE MEANING OF THE INVESTMENT COMPANY ACT OF 1940.
** EMPLOYEE OF THE TRUST'S LEGAL COUNSEL AND THEREFORE AN
"INTERESTED PERSON" WITHIN THE MEANING OF THE INVESTMENT COMPANY
ACT OF 1940.
The Trustees of the Funds who are not employed by the
Adviser, the Distributor, or their affiliates (the "Disinterested
Trustees") receive an annual retainer of $ 1,000 for The Y2K
Fund, $350 for each Trustees meeting attended, and $100 for each
Audit Committee meeting attended. The Funds will also reimburse
the Independent Trustees' travel expenses incurred attending
Board meetings.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Name and Title Aggregate Pay Aggregate Pay Aggregate Pay Total Pay
From PA From Select From The From
Growth Fund Opportunities Fund Year 2000 Fund Fund Complex (1)
<S> <C> <C> <C> <C>
Scott L. Rehr
Trustee and President $0 $0 $0 $0
Bruce E. Bowen
Trustee 4,000 2,050 2,500 8,550
Daniel W. Moyer, IV
Vice-President and
Secretary 0 0 0 0
Kenneth G. Mertz, II
Trustee, Vice-President
and Chief Investment
Officer 0 0 0 0
Scott C. Penwell
Trustee 4,000 2,050 2,500 8,550
Dr. H. J. Zoffer
Trustee 4,000 2,050 2,500 8,550
(1) No pension or retirement benefits are provided for trustees or officers
of the funds
</TABLE>
The Officers of the Funds receive no compensation for their
services as such.
As of October 1, 1997, the Trustees and Officers of the
Funds owned, as a group, less than one percent of the outstanding
shares of the Fund.
The Declaration of Trust provides that the Trust will
indemnify the Trustees and may indemnify its officers and
employees against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their
offices with the Trust, except if it is determined in the manner
specified in the Trust that they have acted in bad faith, with
reckless disregard of his/her duties, willful misconduct or gross
negligence. The Trust, at its expense, may provide liability
insurance for the benefit of its Trustees, officers and
employees.
PERSON CONTROLLING THE FUND
As of October 1, 1997, the Fund's adviser owned all of the
outstanding shares of the Fund.
INVESTMENT ADVISER AND OTHER SERVICE PROVIDERS
INVESTMENT ADVISER AND PRINCIPAL UNDERWRITER
Emerald Advisers, Inc., 1857 William Penn Way, Lancaster, PA
17601, and Rodney Square Distributors, Inc., Rodney Square North,
1100 N. Market Street, Wilmington, DE 19890-0001, are the Fund's
investment adviser and distributor, respectively. The Distributor
is not obligated to sell any specific amount of shares of the
Fund and will purchase shares for resale only against orders for
shares. The Distributor is a Delaware corporation, a broker-
dealer registered with the Securities and Exchange Commission,
and a member of the National Association of Securities Dealers,
Inc., (the "NASD"). The Distributor is an affiliate of Rodney
Square, which also provides administrative, shareholder and
accounting services to the Funds. Some officers of the Fund are
employed by the Adviser and may also distribute shares of the
Funds as registered representatives of the Distributor.
Effective August 19, 1994, Emerald Advisers, Inc.("EAI") the
investment adviser of the Fund, became a wholly-owned subsidiary
of Emerald Asset Management, Inc. ("EAM"), 1857 William Penn Way,
Lancaster, PA 17601. The shareholders of EAM are: Joseph E.
Besecker, James Brubaker, J. Jeffrey Fox, Kenneth G. Mertz II,
Daniel W. Moyer IV, Scott L. Rehr, Paul W. Ware and Judy S. Ware.
The following individuals have the following positions and
offices with the Trust and EAI:
<PAGE>
POSITION(S) WITH POSITION(S) WITH
NAME: ADVISER TRUST
Scott L. Rehr Senior Vice President, Trustee, President
Treasurer, Director
Kenneth G. President, Director Trustee, Vice
Mertz II, C.F.A. President, Chief
Investment Officer
Daniel W. Vice President, Director Vice President and
Moyer IV Secretary
In carrying out its responsibilities under the investment
advisory contract with the Fund, EAI furnishes or pays for all
facilities and services furnished or performed for, or on behalf
of, the Fund. Such items may include, but are not limited to:
office facilities, office support materials and equipment,
records and personnel necessary to manage the Fund's daily
affairs. In return for these services, the Fund has agreed to pay
EAI an annualized fee, based on the average market value of the
net assets of the Fund, computed each business day and paid to
EAI monthly. The fee is paid as follows:
Assets $0 to $100 Million......................... 1.00%
Over $100 Million................................. .90%
These fees are higher than most other registered mutual
funds but comparable to fees paid by equity funds of a similar
investment objective and size.
The Fund pays all of its expenses other than those expressly
assumed by the Adviser. Specifically, the Fund pays the fees and
expenses of its transfer agent, custodian, independent auditors
and legal counsel. These fees are generally for the costs of
necessary professional services, regulatory compliance, and those
pertaining to maintaining the Fund's organizational standing. The
resulting fees may include, but are not limited to: brokerage
commissions, taxes and organizational fees, bonding and
insurance, custody, auditing and accounting services, shareholder
communications and shareholder servicing, and the cost of
financial reports and prospectuses sent to Shareholders. The
Adviser will reimburse its fee to the Fund to the extent such fee
exceeds the most restrictive expense limitation in effect by a
state regulatory agency where the Fund's shares are registered
for purchase. The Adviser reserves the right to voluntarily waive
any portion of its advisory fee at any time.
ADMINISTRATOR, ACCOUNTING AGENT AND TRANSFER AGENT
Rodney Square Management Corporation, Rodney Square North,
1100 N. Market Street, Wilmington, DE 19890-0001, is the
administrator, accounting agent and transfer agent for the Fund.
As administrator, Rodney Square provides administrative and
operational services and facilities. As transfer, dividend
disbursing, and shareholder servicing agent for the Fund, Rodney
Square is responsible for all such corresponding duties,
including: maintenance of the Fund's shareholders' records,
transactions involving the Fund's shares, and the compilation,
distribution, or reinvestment of income dividends or capital
gains distributions, and shareholder communication regarding
these items. Rodney Square also performs certain bookkeeping and
accounting duties for the Fund.
CUSTODIAN AND INDEPENDENT ACCOUNTANTS
Wilmington Trust Company, One Rodney Square, Wilmington, DE 19801
"WTC"), is the custodian of the securities and cash of the Fund.
Price Waterhouse LLP, 30 South Seventeenth Street, Philadelphia,
PA 19103, are the independent accountants which audit the annual
financial statements of the Fund.
THE DISTRIBUTION PLANS
GENERAL INFORMATION. In order to compensate investment dealers
(including for this purpose certain financial institutions) for
services provided in connection with sales of shares of the Fund
and maintenance of shareholder accounts within the Fund, the
Distributor makes quarterly payments to qualifying dealers based
on the average net asset value of shares of the Fund which are
attributable to shareholders for whom the dealers are designated
as the dealer of record. The Distributor makes such payments at
the annual rate of 0.50% of the average net asset value of the
Fund, with "average net asset value" attributable to a
shareholder account meaning the product of (i) the average daily
share balance of the account multiplied by (ii) the Fund's
average daily net asset value per share.
<PAGE>
For administrative reasons, the Distributor may enter into
agreements with certain dealers providing for the calculation of
"average net asset value" on the basis of assets of the accounts
of the dealer's customers on an established day in each quarter.
The Distributor may suspend or modify these payments at any time.
Payments are subject to the continuation of the Fund's Plan
described below and the terms of service agreements between
dealers and the Distributor.
The Y2K Fund is currently operating with Distribution Plan (the
"Plan"). The Fund has adopted a Plan pursuant to Rule 12b-1 under
the Investment Company Act of 1940. The purpose of the Plan is to
permit the Fund to compensate the Distributor for services
provided and expenses incurred by it in promoting the sale of
shares of the Fund, reducing redemptions, or maintaining or
improving services provided to shareholders by the Distributor or
dealers. By promoting the sale of shares and/or reducing
redemptions, the Plan should help provide a continuous cash flow,
affording the Adviser the ability to purchase and redeem
securities without forcing the Adviser to make unwanted
redemptions of existing portfolio securities.
The Plan provides for quarterly payments by the Fund to the
Distributor at the annual rate of up to 0.70% of the Fund's
average net assets, subject to the authority of the Trust's Board
of Trustees to reduce the amount of payments or to suspend the
Plan for such periods as they may determine. Subject to these
limitations, the amount of such payments and the specific
purposes for which they are made shall be determined by the Board
of Trustees. At present, the Trustees have approved payments
under the Plan for the purpose of reimbursing the Distributor for
payments made by it to dealers under the service agreements
referred to above as well as for certain additional expenses
related to shareholder services and the distribution of shares,
subject to the maximum annual rate of 0.70% of the Fund's average
net assets. Continuance of the Plan is subject to annual approval
by a vote of the Board of Trustees, including a majority of the
Trustees who are not interested persons of the Fund and who have
no direct or indirect interest in the Plan or related
arrangements (these Trustees are known as "Disinterested
Trustees"), cast in person at a meeting called for that purpose.
All material amendments to the Plan must be likewise approved by
separate votes of the Trustees and the Disinterested Trustees of
the Trust. The Plan may not be amended in order to increase
materially the costs which the Fund bear for distribution
pursuant to the Plan without also being approved by a majority of
the outstanding voting securities of the Fund. The Plan
terminates automatically in the event of their assignment and may
be terminated without penalty, at any time, by a vote of the
majority of (i) the outstanding voting securities of a Fund, or
(ii) the Disinterested Trustees.
ADDITIONAL BROKERAGE ALLOCATION INFORMATION
EAI places orders for the purchase or sale of portfolio
securities of the Fund. In choosing a particular broker to
execute a given transaction, EAI uses the following criteria: (1)
the past capabilities of that broker in executing such types of
trades; (2) the quality and speed of executing trades; (3)
competitive commission rates; and (4) all other factors being
equal, useful research services provided by the brokerage firm.
The research services provided to EAI are used to advise all of
its clients, including the Fund, but not all such services
furnished are used to advise the Fund. Research services can
include written reports and interviews by analysts on a
particular industry or company or on economic factors, and other
such services which can enhance EAI's ability to gauge the
potential investment worthiness of companies and/or industries,
such as evaluation of investments, recommendations as to the
purchase or sale of investments, newspapers, magazines, quotation
services and news services. If these services are not used
exclusively by EAI for Fund research purposes, then EAI, based
upon allocations of expected use, bears that portion of the
service's cost that directly relates to non-Fund research use.
The management fee paid by the Fund to EAI is not reduced because
EAI receives these services even though EAI might otherwise be
required to purchase some of these services for cash. EAI does
not pay excess commissions to any broker for research services
provided or for any other reason. Consistent with the Rules of
Fair Practice of the National Association of Securities Dealers,
Inc. (the "NASD") and subject to seeking the most favorable price
and execution available and such other policies as the Board of
Trustees may determine, EAI may consider sales of shares of front-
end load series of the Fund as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund.
PORTFOLIO TURNOVER RATE. The portfolio turnover rate is
calculated by dividing the lesser of each Fund's annual purchases
and sales of portfolio securities for the particular fiscal year
by the monthly average value of the portfolio securities owned by
each Fund during the year. All securities, including options,
whose maturity or expiration date at the time of acquisition was
one year or less are to be excluded from both the numerator and
the denominator.
<PAGE>
MEASURING PERFORMANCE
Average annual total return data ("Standardized Return") for
the Fund may from time to time be presented in the Prospectus,
this Statement and in advertisements. Each Fund's "average annual
total return" is an average annual compounded rate of return. It
is the rate of return based on factors that include a
hypothetical investment of $1,000 held for a number of years with
an Ending Redeemable Value of that investment, according to the
following formula:
(ERV/P) 1/n - 1 = T
where: P = hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at end of the
period of a hypothetical $1,000 payment
made at the beginning of that period.
Total return data ("Non-Standardized Return") may also be
presented from time to time. The calculation of the Fund's "total
return" uses some of the same factors as the calculation of the
average annual total return, but does not average the rate of
return on an annual basis. Total return measures the cumulative
(rather than average) change in value of a hypothetical
investment in the Fund over a stated period. Total return is
stated as follows:
P(1 + T)(n) = ERV
Both methods of total return calculation assume: (i)
deduction of the Fund's maximum sales charge, if applicable, and
(ii) reinvestment of all Fund distributions at net asset value on
the respective date. Average annual total return and total return
calculation is a measurement of past performance, and is not
indicative of future results. Share prices will fluctuate so that
an investor's shares in the Fund may be worth more or less than
their original purchase cost when redeemed.
The Fund may periodically compare its performance to that of
other mutual funds tracked by mutual fund ratings services (such
as Lipper Analytical Services, Inc.), financial and business
publications and periodicals, of broad groups of comparable
mutual funds or of unmanaged indices (such as the Standard &
Poor's 500, Dow Jones Industrial Average, NASDAQ Composite,
Wilshire 5000 or Wilshire 4500 indices), which may assume
investment of dividends but generally do not reflect deductions
for administrative and management costs. A Fund may quote
Morningstar, Inc., a service that ranks mutual funds on the basis
of risk-adjusted performance. A Fund may also quote financial and
business publications and periodicals as they relate to fund
management, investment philosophy, and investment techniques.
<PAGE>
APPENDIX A:
DESCRIPTION OF RATINGS
Following are descriptions of investment securities ratings from
Moody's Investor Services ("Moody's") and Standard & Poor's
Corporation ("S & P"). See pages 4 and 5 of this Statement for
how these ratings relate to investments in the Fund's portfolio.
I. COMMERCIAL PAPER RATINGS:
A. Moody's: Issuers rated Prime-1 have a superior capacity,
issuers rated Prime-2 have a strong capacity, and issuers rated
Prime-3 have an acceptable capacity for the repayment of short-
term promissory obligations.
B. S & P: Issues rated A are the highest quality
obligations. Issues in this category are regarded as having the
greatest capacity for timely payment. For issues designated A-1
the degree of safety regarding timely payment is very strong. For
issues designated A-2 the capacity for timely payment is also
strong, but not as high as for A-1 issues. Issues designated A-3
have a satisfactory capacity for timely payment.
II. CORPORATE BOND RATINGS:
A. Moody's:
Aaa - Bonds which are rated Aaa are judged to be of the best
quality and carry the smallest degree of investment risk.
Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there maybe other
elements present which make the long term risks appear somewhat
larger than in Aaa securities.
A - Bonds which are rated A 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
which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
period of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
These categories are considered to be of "Investment Grade" by
Moody's. Moody's applies numerical modifiers "1," "2," and "3" in
each generic rating classification from Aa through B in its
corporate bond rating system. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category;
the modifier 2 indicates a mid-range ranking, and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
B. S & P:
AAA - This is the highest rating assigned by Standard &
Poor's to a debt obligation and indicates an extremely strong
capacity to pay principal & interest.
AA - Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very
strong, and in the majority of instances they differ from AAA
issues only in small degree.
A - Bonds rated A 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.
BBB - Bonds rated BBB are regarded as having an adequate
capacity to pay principal and conditions or changing
circumstances are more likely to lead to a weakened capacity to
pay principal and interest for bonds in this category than for
bonds in the A category.
<PAGE>
S & P classifies corporate bonds of these ratings to be of
"Investment Grade." Plus (+) or Minus (-): The ratings from AA to
B may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
III. PREFERRED STOCK RATINGS:
Both Moody's and S & P use the same designations for
corporate bonds as they do for preferred stock except in the case
of Moody's preferred stock ratings, the initial letter rating is
not capitalized. While the descriptions are tailored for
preferred stocks, the relative quality descriptions are
comparable to those described above for corporate bonds.
Ratings by Moody's and S & P represent their respective opinions
as to the investment quality of the rated obligations. These
ratings do not constitute a guarantee that the principal and
interest payable under these obligations will be paid when due,
but rather serve as a general guide in comparing prospective
investments.
<PAGE>
APPENDIX B
OPTIONS, FUTURES AND SHORT-SELLING STRATEGIES
REGULATION OF THE USE OF OPTIONS, FUTURES AND SHORT-SELLING
STRATEGIES. As discussed in the Prospectus, in managing the
Fund, the adviser may engage in certain options, futures and
short-selling strategies to hedge various market risks or to
enhance potential gain. Certain special characteristics of and
risks associated with using these strategies are discussed below.
Use of options, futures and short-selling is subject to
applicable regulations and/or interpretations of the SEC and the
several options and futures exchanges upon which these
instruments may be traded. The Board of Trustees has adopted
investment guidelines (described below) reflecting these trading
regulations.
COVER REQUIREMENTS. The Fund will not use leverage in its
options, futures and short-selling strategies. Accordingly, the
Fund will comply with guidelines established by the SEC with
respect to coverage of these strategies by either (1) setting
aside liquid, unencumbered, daily marked-to-market assets in the
prescribed amount(s) in one or more segregated accounts with the
Fund's custodian; or (2) holding securities or other options or
futures contracts whose values are expected to offset ("cover")
its obligations thereunder. Securities or other options or
futures contracts used for cover cannot be sold or closed out
while these strategies are outstanding, unless they are replaced
with similar assets. As a result, there is a possibility that
the use of cover involving a large percentage of the Fund's
assets could impede portfolio management, or the Fund's ability
to meet redemption requests or other current obligations.
OPTIONS STRATEGIES. The Fund may purchase and write (sell)
options on securities and securities indices that are traded on
U.S. exchanges and in the over-the-counter ("OTC") market.
Currently, options on debt securities are primarily traded on the
OTC market. Exchange-traded options in the U.S. are issued by a
clearing organization affiliated with the exchange on which the
option is listed, which, in effect, guarantees completion of
every exchange-traded option transaction. In contrast, OTC
options are contracts between the Fund and its contra-party with
no clearing organization guarantee unless the parties provide for
it. Thus, when the Fund purchases an OTC option, it relies on
the dealer from which it has purchased the OTC option to make or
take delivery of the securities underlying the option. Failure
by the dealer to do so would result in the loss of any premium
paid by the Fund as well as the loss of the expected benefit of
the transaction. Accordingly, before the Fund purchases or sells
an OTC option, the adviser assesses the creditworthiness of each
counterparty and any guarantor or credit enhancement of the
counterparty's credit to determine whether the terms of the
option are likely to be satisfied.
The Fund may purchase call options on securities in which it
is authorized to invest in order to fix the cost of a future
purchase. Call options also may be used as a means of enhancing
returns by, for example, participating in an anticipated price
increase of a security. In the event of a decline in the price
of the underlying security, use of this strategy would serve to
limit the potential loss to the Fund to the option premium paid;
conversely, if the market price of the underlying security
increases above the exercise price and the Fund either sells or
exercises the option, any profit eventually realized would be
reduced by the premium paid.
The Fund may purchase put options on securities that it
holds in order to hedge against a decline in the market value of
the securities held or to enhance return. The put option enables
the Fund to sell the underlying security at the predetermined
exercise price; thus, the potential for loss to the Fund below
the exercise price is limited to the option premium paid. If the
market price of the underlying security is higher than the
exercise price of the put option, any profit the Fund realizes on
the sale of the security is reduced by the premium paid for the
put option less any amount for which the put option may be sold.
The Fund may on certain occasions wish to hedge against a
decline in the market value of securities that it holds at a time
when put options on those particular securities are not available
for purchase. At those times, the Fund may purchase a put option
on other carefully selected securities in which it is authorized
to invest, the values of which historically have a high degree of
positive correlation to the value of the securities actually
held. If the adviser's judgment is correct, changes in the value
of the put options should generally offset changes in the value
of the securities being hedged. However, the correlation between
the two values may not be as close in these transactions as in
transactions in which the Fund purchases a put option on a
security that it holds. If the value of the securities
underlying the put option falls below the value of the portfolio
securities, the put option may not provide complete protection
against a decline in the value of the portfolio securities.
<PAGE>
The Fund may write covered call options on securities in
which it is authorized to invest for hedging purposes or to
increase return in the form of premiums received from the
purchasers of the options. A call option gives the purchaser of
the option the right to buy, and the writer (seller) the
obligation to sell, the underlying security at the exercise price
during the option period. The strategy may be used to provide
limited protection against a decrease in the market price of the
security, in an amount equal to the premium received for writing
the call option less any transaction costs. Thus, if the market
price of the underlying security held by the Fund declines, the
amount of the decline will be offset wholly or in part by the
amount of the premium received by the Fund. If, however, there
is an increase in the market price of the underlying security and
the option is exercised, the Fund will be obligated to sell the
security at less than its market value.
Securities used to cover OTC call options written by the
Fund are considered illiquid and therefore subject to the Fund's
limitations on investing in illiquid securities, unless the OTC
options are sold to qualified dealers who agree that the Fund may
repurchase any OTC options it writes for a maximum price to be
calculated by a formula set forth in the option agreement. The
cover for an OTC call option written subject to this procedure is
considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of
the option. The Fund could lose the ability to participate in an
increase in the value of the underlying securities above the
exercise price because the increase would likely be offset by an
increase in the cost of closing out the call option (or could be
negated if the buyer chose to exercise the call option at an
exercise price below the current market value).
The Fund may also write covered put options on securities in
which it is authorized to invest. A put option gives the
purchaser of the option the right to sell, and the writer
(seller) the obligation to buy, the underlying security at the
exercise price during the option period. So long as the
obligation of the writer continues, the writer may be assigned an
exercise notice by the broker-dealer through whom such option was
sold, requiring it to make payment of the exercise price against
delivery of the underlying security. The operation of put
options in other respects, including their related risks and
rewards, is substantially identical to that of call options. If
the put option is not exercised, the Fund will realize income in
the amount of the premium received. This technique could be used
to enhance current return during periods of market uncertainty.
The risk in such a transaction would be that the market price of
the underlying securities would decline below the exercise price
less the premiums received, in which case the Fund would expect
to suffer a loss.
The Fund may purchase put and call options and write covered
put and call options on indexes in much the same manner as the
more traditional options discussed above, except that index
options may serve as a hedge against overall fluctuations in the
securities markets (or a market sector) rather than anticipated
increases or decreases in the value of a particular security. An
index assigns values to the securities included in the index and
fluctuates with changes in such values. Settlements of index
options are effected with cash payments and do not involve
delivery of securities. Thus, upon settlement of a index option,
the purchaser will realize, and the writer will pay, an amount
based on the difference between the exercise price and the
closing price of the index. The effectiveness of hedging
techniques using index options will depend on the extent to which
price movements in the index selected correlate with price
movements of the securities in which a Fund invests. Perfect
correlation is not possible because the securities held or to be
acquired by the Fund will not exactly match the composition of
indexes on which options are purchased or written.
The Fund may purchase and write covered straddles on
securities or indexes. A long straddle is a combination of a
call and a put purchased on the same security where the exercise
price of the put is less than or equal to the exercise price on
the call. The Fund would enter into a long straddle when the
adviser believes that it is likely that prices will be more
volatile during the term of the options than is implied by the
option pricing. A short straddle is a combination of a call and
a put written on the same security where the exercise price on
the put is less than or equal to the exercise price of the call
where the same issue of the security is considered "cover" for
both the put and the call. The Fund would enter into a short
straddle when the adviser believes that it is unlikely that
prices will be as volatile during the term of the options as is
implied by the option pricing. In such case, the Fund will set
aside cash and/or liquid, unencumbered securities in a segregated
account with its custodian equivalent in value to the amount, if
any, by which the put is "in-the-money," that is, that amount by
which the exercise price of the put exceeds the current market
value of the underlying security. Because straddles involve
multiple trades, they result in higher transaction costs and may
be more difficult to open and close out.
The Fund may purchase put and call warrants with values that
vary depending on the change in the value of one or more
specified indexes ("index warrants"). An index warrant is
usually issued by a bank or other financial institution and gives
the Fund the right, at any time during the term of the warrant,
to receive upon exercise of the warrant a cash payment from the
issuer of the warrant based on the value of the underlying index
at the time of exercise. In general, if the Fund holds a call
warrant and the value of the underlying index rises above the
exercise price of the warrant, the Fund will be entitled to
receive a cash payment from the issuer upon exercise based on the
difference between the value of the index and the exercise price
of the warrant; if the Fund holds a put warrant and the value of
the underlying index falls, the Fund will be entitled to receive
a cash payment from the issuer upon exercise based on the
difference between the exercise price of the warrant and the
value of the index. The Fund holding a call warrant would not be
entitled to any payments from the issuer at any time when the
exercise price is greater than the value of the underlying index;
the Fund holding a put warrant would not be entitled to any
payments when the exercise price is less than the value of the
underlying index. If the Fund does not exercise an index warrant
prior to its expiration, then the Fund loses the amount of the
purchase price that it paid for the warrant.
<PAGE>
The Fund will normally use index warrants as it may use
index options. The risks of the Fund's use of index warrants are
generally similar to those relating to its use of index options.
Unlike most index options, however, index warrants are issued in
limited amounts and are not obligations of a regulated clearing
agency, but are backed only by the credit of the bank or other
institution which issues the warrant. Also, index warrants
generally have longer terms than index options. Index warrants
are not likely to be as liquid as index options backed by a
recognized clearing agency. In addition, the terms of index
warrants may limit the Fund's ability to exercise the warrants at
any time or in any quantity.
OPTIONS GUIDELINES. In view of the risks involved in using
the options strategies described above, the Fund has adopted the
following investment guidelines to govern its use of such
strategies. These guidelines may be modified by the Board of
Trustees without shareholder approval:
(1) The Fund will write only covered options, and
each such option will remain covered so long as
the Fund is obligated thereby.
(2) The Fund will not write options (whether on
securities or securities indexes) if
aggregate exercise prices of previous written
outstanding options, together with the value of
assets used to cover all outstanding short-sale
positions, would exceed 25% of its total net
assets.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING. The
Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. If the Fund
wishes to terminate its obligation to purchase or sell securities
under a put or a call option it has written, the Fund may
purchase a put or a call option of the same series (that is, an
option identical in its terms to the option previously written).
This is known as a closing purchase transaction. Conversely, in
order to terminate its right to purchase or sell specified
securities under a call or put option it has purchased, the Fund
may sell an option of the same series as the option held. This
is known as a closing sale transaction. Closing transactions
essentially permit the Fund to realize profits or limit losses on
its options positions prior to the exercise or expiration of the
option. If the Fund is unable to effect a closing purchase
transaction with respect to options it has acquired, the Fund
will have to allow the options to expire without recovering all
or a portion of the option premiums paid. If the Fund is unable
to effect a closing purchase transaction with respect to covered
options it has written, the Fund will not be able to sell the
underlying securities or dispose of assets used as cover until
the options expire or are exercised, and the Fund may experience
material losses due to losses on the option transaction itself
and in the covering securities.
In considering the use of options to enhance returns or for
hedging purposes, particular note should be taken of the
following:
(1) The value of an option position will
reflect, among other things, the current market price
of the underlying security or index, the time remaining
until expiration, the relationship of the exercise
price to the market price, the historical price
volatility of the underlying security or index, and
general market conditions. For this reason, the
successful use of options depends upon the adviser's
ability to forecast the direction of price fluctuations
in the underlying securities markets or, in the case of
index options, fluctuations in the market sector
represented by the selected index.
(2) Options normally have expiration dates of
up to three years. An American style put or call
option may be exercised at any time during the option
period while a European style put or call option may be
exercised only upon expiration or during a fixed period
prior to expiration. The exercise price of the options
may be below, equal to or above the current market
value of the underlying security or index. Purchased
options that expire unexercised have no value. Unless
an option purchased by the Fund is exercised or unless
a closing transaction is effected with respect to that
position, the Fund will realize a loss in the amount of
the premium paid and any transaction costs.
<PAGE>
(3) A position in an exchange-listed option may
be closed out only on an exchange that provides a
secondary market for identical options. Although the
Fund intends to purchase or write only those exchange-
traded options for which there appears to be a liquid
secondary market, there is no assurance that a liquid
secondary market will exist for any particular option
at any particular time. A liquid market may be absent
if: (i) there is insufficient trading interest in the
option; (ii) the exchange has imposed restrictions on
trading, such as trading halts, trading suspensions or
daily price limits; (iii) normal exchange operations
have been disrupted; or (iv) the exchange has
inadequate facilities to handle current trading volume.
Closing transactions may be effected with respect
to options traded in the OTC markets only by
negotiating directly with the other party to the option
contract or in a secondary market for the option if
such market exists. Although the Fund will enter into
OTC options with dealers that agree to enter into, and
that are expected to be capable of entering into,
closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate an
OTC option at a favorable price at any time prior to
expiration. In the event of insolvency of the contra-
party, the Fund may be unable to liquidate an OTC
option. Accordingly, it may not be possible to effect
closing transactions with respect to certain options,
which would result in the Fund having to exercise those
options that it has purchased in order to realize any
profit. With respect to options written by the Fund,
the inability to enter into a closing transaction may
result in material losses to the Fund.
(4) With certain exceptions, exchange listed
options generally settle by physical delivery of the
underlying security. Index options are settled
exclusively in cash for the net amount, if any, by
which the option is "in-the-money" (where the value of
the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put
option, the exercise price of the option) at the time
the option is exercised. If the Fund writes a call
option on an index, the Fund will not know in advance
the difference, if any, between the closing value of
the index on the exercise date and the exercise price
of the call option itself and thus will not know the
amount of cash payable upon settlement. If the Fund
holds an index option and exercises it before the
closing index value for that day is available, the Fund
runs the risk that the level of the underlying index
may subsequently change.
(5) The Fund's activities in the options markets
may result in a higher portfolio turnover rate and
additional brokerage costs; however, the Fund also may
save on commissions by using options as a hedge rather
than buying or selling individual securities in
anticipation of, or as a result of, market movements.
FUTURES AND RELATED OPTIONS STRATEGIES. The Fund may engage
in futures strategies for hedging purposes to attempt to reduce
the overall investment risk that would normally be expected to be
associated with ownership of the securities in which it invests.
The Fund may also engage in futures strategies to enhance
potential gain, subject to certain voluntary, as well as
regulatory, percentage limitations as discussed below.
The Fund may sell securities index futures contracts in
anticipation of a general market or market sector decline that
could adversely affect the market value of the Fund's securities
holdings. To the extent that a portion of the Fund's holdings
correlate with a given index, the sale of futures contracts on
that index could reduce the risks associated with a market
decline and thus provide an alternative to the liquidation of
securities positions. For example, if the Fund correctly
anticipates a general market decline and sells index futures to
hedge against this risk, the gain in the futures position should
offset some or all of the decline in the value of the Fund's
holdings. The Fund may purchase index futures contracts if a
significant market or market sector advance is anticipated. Such
a purchase of a futures contract would serve as a temporary
substitute for the purchase of the underlying securities which
may then be purchased in an orderly fashion. This strategy may
minimize the effect of all or part of an increase in the market
price of securities that the Fund intends to purchase. A rise in
the price of the securities should be in part or wholly offset by
gains in the futures position.
<PAGE>
As in the case of a purchase of an index futures contract,
the Fund may purchase a call option on an index futures contract
to hedge against a market advance in securities that the Fund
plans to acquire at a future date. The Fund may write covered
put options on index futures as a partial anticipatory hedge, and
may write covered call options on index futures as a partial
hedge against a decline in the prices of securities held by the
Fund. This is analogous to writing covered call options on
securities. The Fund also may purchase put options on index
futures contracts. The purchase of put options on index futures
contracts is analogous to the purchase of protective put options
on individual securities where a level of protection is sought
below which no additional economic loss would be incurred by the
Portfolio.
FUTURES AND RELATED OPTIONS GUIDELINES. In view of the
risks involved in using the futures strategies that are described
above, the Fund has adopted the following investment guidelines
to govern its use of such strategies. These guidelines may be
modified by the Board of Trustees without shareholder vote.
(1) The Fund will engage only in covered futures
transactions, and each such transaction will remain covered
so long as the Fund is obligated thereby.
(2) The Fund will not purchase or sell non-hedging
futures contracts or related options if aggregate initial
margin and premiums required to establish such positions
would exceed 5% of the Fund's total assets. For purposes of
this limitation, unrealized profits and unrealized losses on
any open contracts are taken into account, while the in-the-
money amount of an option that is, or was, in-the-money at
the time of purchase is excluded.
(3) The Fund will not write options (whether hedging
or non-hedging) on futures contracts if aggregate exercise
prices of previously written outstanding options (whether on
securities or securities indexes), together with the value
of assets used to cover all outstanding short-sale
positions, would exceed 25% of its net assets.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED
OPTIONS TRADING. No price is paid upon entering into a futures
contract. Instead, upon entering into a futures contract, the
Fund is required to deposit with the Fund's custodian, in a
segregated account in the name of the futures broker through whom
the transaction is effected, an amount of cash, U.S. Government
securities or other liquid instruments generally equal to 10% or
less of the contract value. This amount is known as "initial
margin." When writing a call or a put option on a futures
contract, margin also must be deposited in accordance with
applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not
involve borrowing to finance the futures transactions. Rather,
initial margin on a futures contract is in the nature of a
performance bond or good-faith deposit on the contract that is
returned to the Fund upon termination of the transaction,
assuming all obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, the Fund may
be required by a futures exchange to increase the level of its
initial margin payment. Additionally, initial margin
requirements may be increased generally in the future by
regulatory action. Subsequent payments, called "variation
margin," to and from the broker, are made on a daily basis as the
value of the futures or options position varies, a process known
as "marking to the market." For example, when the Fund purchases
a contract and the value of the contract rises, the Fund receives
from the broker a variation margin payment equal to that increase
in value. Conversely, if the value of the futures position
declines, the Fund is required to make a variation margin payment
to the broker equal to the decline in value. Variation margin
does not involve borrowing to finance the futures transaction,
but rather represents a daily settlement of the Fund's
obligations to or from a clearing organization.
Buyers and sellers of futures positions and options thereon
can enter into offsetting closing transactions, similar to
closing transactions on options on securities, by selling or
purchasing an offsetting contract or option. Futures contracts
or options thereon may be closed only on an exchange or board of
trade providing a secondary market for such futures contracts or
options.
Under certain circumstances, futures exchanges may establish
daily limits on the amount that the price of a futures contract
or related option may vary either up or down from the previous
day's settlement price. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price
beyond that limit. The daily limit governs only price movements
during a particular trading day and therefore does not limit
potential losses, because prices could move to the daily limit
for several consecutive trading days with little or no trading
and thereby prevent prompt liquidation of unfavorable positions.
In such event, it may not be possible for the Fund to close a
position and, in the event of adverse price movements, the Fund
would have to make daily cash payments of variation margin
(except in the case of purchased options). However, if futures
contracts have been used to hedge portfolio securities, such
securities will not be sold until the contracts can be
terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses
on the futures contract. However, there is no guarantee that the
price of the securities will, in fact, correlate with the price
movements in the contracts and thus provide an offset to losses
on the contracts.
<PAGE>
In considering the Fund's use of futures contracts and
related options, particular note should be taken of the
following:
(1) Successful use by the Fund of futures contracts
and related options will depend upon the adviser's ability
to predict movements in the direction of the securities
markets, which requires different skills and techniques than
predicting changes in the prices of individual securities.
Moreover, futures contracts relate not only to the current
price level of the underlying securities, but also to
anticipated price levels at some point in the future. There
is, in addition, the risk that the movements in the price of
the futures contract will not correlate with the movements
in the prices of the securities being hedged. For example,
if the price of an index futures contract moves less than
the price of the securities that are the subject of the
hedge, the hedge will not be fully effective, but if the
price of the securities being hedged has moved in an
unfavorable direction, the Portfolio would be in a better
position than if it had not hedged at all. If the price of
the securities being hedged has moved in a favorable
direction, the advantage may be partially offset by losses
in the futures position. In addition, if the Fund has
insufficient cash, it may have to sell assets to meet daily
variation margin requirements. Any such sale of assets may
or may not be made at prices that reflect a rising market.
Consequently, the Fund may need to sell assets at a time
when such sales are disadvantageous to the Fund. If the
price of the futures contract moves more than the price of
the underlying securities, the Fund will experience either a
loss or a gain on the futures contract that may or may not
be completely offset by movements in the price of the
securities that are the subject of the hedge.
(2) In addition to the possibility that there may be
an imperfect correlation, or no correlation at all, between
price movements in the futures position and the securities
being hedged, movements in the prices of futures contracts
may not correlate perfectly with movements in the prices of
the hedged securities due to price distortions in the
futures market. There may be several reasons unrelated to
the value of the underlying securities that cause this
situation to occur. First, as noted above, all participants
in the futures market are subject to initial and variation
margin requirements. If, to avoid meeting additional margin
deposit requirements or for other reasons, investors choose
to close a significant number of futures contracts through
offsetting transactions, distortions in the normal price
relationship between the securities and the futures markets
may occur. Second, because the margin deposit requirements
in the futures market are less onerous than margin
requirements in the securities market, there may be
increased participation by speculators in the futures
market. Such speculative activity in the futures market
also may cause temporary price distortions. As a result, a
correct forecast of general market trends may not result in
successful hedging through the use of futures contracts over
the short term. In addition, activities of large traders in
both the futures and securities markets involving arbitrage
and other investment strategies may result in temporary
price distortions.
(3) Positions in futures contracts may be closed out
only on an exchange or board of trade that provides a
secondary market for such futures contracts. Although the
Fund intends to purchase and sell futures only on exchanges
or boards of trade where there appears to be an active
secondary market, there is no assurance that a liquid
secondary market on an exchange or board of trade will exist
for any particular contract at any particular time. In such
event, it may not be possible to close a futures position,
and in the event of adverse price movements, the Fund would
continue to be required to make variation margin payments.
(4) Like options on securities, options on futures
contracts have limited life. The ability to establish and
close out options on futures will be subject to the
development and maintenance of liquid secondary markets on
the relevant exchanges or boards of trade. There can be no
certainty that such markets for all options on futures
contracts will develop.
(5) Purchasers of options on futures contracts pay a
premium in cash at the time of purchase. This amount and
the transaction costs are all that is at risk. Sellers of
options on futures contracts, however, must post initial
margin and are subject to additional margin calls that could
be substantial in the event of adverse price movements. In
addition, although the maximum amount at risk when the Fund
purchases an option is the premium paid for the option and
the transaction costs, there may be circumstances when the
purchase of an option on a futures contract would result in
a loss to the Fund when the use of a futures contract would
not, such as when there is no movement in the level of the
underlying index value or the securities or currencies being
hedged.
<PAGE>
(6) As is the case with options, the Fund's activities
in the futures markets may result in a higher portfolio
turnover rate and additional transaction costs in the form
of added brokerage commissions. However, the Fund also may
save on commissions by using futures contracts or options
thereon as a hedge rather than buying or selling individual
securities in anticipation of, or as a result of, market
movements.
SHORT-SELLING
Whenever the Fund effects a short sale, it will set aside,
in segregated accounts with the Fund's custodian, cash, U.S.
Government Securities or other liquid assets equal to the
difference between (i) the market value of the securities sold
short; and (ii) any cash or U.S. Government Securities required
to be deposited as collateral with the broker in connection with
the short sale (but not including the proceeds of the short
sale). Until the Fund replaces the security it borrowed to make
the short sale, it must maintain daily the segregated accounts at
such a level that (i) the amount deposited therein, plus the
amount deposited with the broker as collateral, will equal the
current market value of the securities sold short, and (ii) the
amount deposited therein, plus the amount deposited with the
broker, will not be less than the market value of the securities
at the time they were sold short. No more than 25% of the value
of the Fund's total net assets will be, when added together, (i)
deposited as collateral for the obligation to replace securities
borrowed to effect short sales; (ii) allocated to segregated
accounts in connection with short sales; and/or (iii) equal to
the aggregate exercise prices of outstanding options written by
the Fund.
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS, FUTURES AND SHORT-SELLING
STRATEGIES
To the extent such investments are permissible for the Fund, the
Fund's activities in options, futures contracts, hedging transactions,
short sales and straddles will be subject to certain tax rules including
mark-to-market, constructive sale, straddle, wash sale and short sale
rules. The effect of these rules may include acceleration of income to
the Fund, deferral of losses to the Fund, adjustments in the holding
periods of the Fund's securities, and they may cause the conversion of
short-term capital losses into long-term capital losses. Therefore, these
tax rules could affect the amount, timing and character of distributions
to the Fund's shareholders.
Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act"), new
"constructive sale" provisions apply to Fund activities which lock in
gain on an "appreciated financial position." Generally, an "appreciated
finanical position" is defined as any "position" with respect to stock,
a debt instrument, or partnership interest, or an interest in any of the
foregoing, including through a short sale, or a futures contract. Under
these provisions, the entry ino a short sale, or a futures contract
relating to an appreciated direct position in any stock or a debt
instrument, or the acquisition of stock or debt instrument at a time when
the Fund holds an offsetting (Short) appreciated position in the stock or
debt instrument, is treated as a "constructive sale" that gives rise to the
immediate recognition of gain (but not loss). The application of these new
provisions of the 1997 Act may cause a Fund to recognize taxable addition,
to the extent provided under the 1997 Act, a constructive sale occurs if the
Fund enters into one or more transactions (or acquires one or more positions)
that have "substantially the same effect" as the transactions described.
