PAGE
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RULE 497(c)
FILE NO. 33-59692
RYDEX SERIES TRUST PROSPECTUS
THE RYDEX HIGH YIELD FUND
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852
(800) 820-0888 (301) 468-8520
INVESTMENT OBJECTIVE AND POLICIES
The Rydex High Yield Fund (the "Fund") is a diversified series
of the Rydex Series Trust, an open-end management investment
company (the "Trust"). The investment objective of the Fund
is to seek to provide investment returns that correspond to
the performance of a benchmark for high yield fixed income
securities. The Fund s current benchmark is the Merrill Lynch
High Yield Master Index (the MLHY Index ). To achieve its
objective, the Fund will invest in securities included in the
MLHY Index. In addition, the Fund may invest in debt
obligations and other securities that are expected to perform
in a manner that will assist the Fund s performance to track
closely the investment performance of the MLHY Index. See
Other Investment Policies. The Fund will invest primarily
in below investment grade corporate bonds, commonly known as
junk bonds. Investments of this type are subject to greater
risks, including default risks, than those found in higher
rated securities. Purchasers should carefully assess the
risks associated with an investment in the Fund. See Special
Risk Factors.
ADDITIONAL INFORMATION
The Fund is part of the Rydex Group of Funds, which is
designed for professional money managers and knowledgeable
investors who intend to invest in the Rydex Group of Funds as
part of an asset-allocation or market-timing investment
strategy. The Fund alone does not constitute a balanced
investment plan. The nature of the Fund generally will result
in significant portfolio turnover which would likely cause
higher expenses and additional costs and increase the risk
that the Fund will not qualify as a regulated investment
company under the Federal tax laws. Sales of the Fund shares
are made, without sales charges, at the Fund s per share net
asset value.
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Investors should read this Prospectus and retain it for future
reference. This Prospectus is designed to set forth concisely
the information an investor should know before investing in
the Fund. A Statement of Additional Information, dated
December 1, 1996, containing additional information about the
Fund and the Trust has been filed with the Securities and
Exchange Commission and is incorporated herein by reference.
A copy of that Statement of Additional Information is
available, without charge, upon request to the Trust at the
address above or by telephoning the Trust at the telephone
numbers above.
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.
The date of this Prospectus is December 1, 1996.
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TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY 3
FEES AND EXPENSES OF THE FUND 4
THE RYDEX FUNDS 5
INVESTMENT OBJECTIVE AND POLICIES 5
SPECIAL RISK FACTORS 7
PORTFOLIO TRANSACTIONS AND BROKERAGE 10
HOW TO INVEST IN THE FUND 10
REDEEMING AN INVESTMENT (WITHDRAWALS) 11
EXCHANGES 11
PROCEDURES FOR REDEMPTIONS AND EXCHANGES 12
DETERMINATION OF NET ASSET VALUE 12
TAX-SHELTERED RETIREMENT PLANS 13
TRANSACTION CHARGES 13
DIVIDENDS AND DISTRIBUTIONS 13
TAXES 13
MANAGEMENT OF THE TRUST 15
DISTRIBUTION PLAN 17
PERFORMANCE INFORMATION 17
GENERAL INFORMATION ABOUT THE TRUST 18
APPENDIX A 19
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PROSPECTUS SUMMARY
The Fund
The Rydex High Yield Fund (the "Fund") is a diversified series
of the Rydex Series Trust, an open-end management investment
company (the "Trust") that currently is comprised of nine
separate series, including the Fund (collectively, the Rydex
Funds ). The investment objective of the Fund is to seek to
provide investment returns that correspond to the performance
of a benchmark for high yield fixed income securities. The
Fund s current benchmark is the Merrill Lynch High Yield
Master Index (the MLHY Index ). To achieve its objective,
the Fund will invest in securities included in the MLHY Index.
In addition, the Fund may invest in debt obligations and other
securities that are expected to perform in a manner that will
assist the Fund s performance to correspond to the investment
performance of the MLHY Index. (See The Rydex Funds,
Investment Objective and Policies, and Other Investment
Policies. ) While the Fund does not expect that the returns
over a year will deviate adversely from the performance of the
Fund s current benchmark by more than ten percent, certain
factors may affect the Fund s ability to achieve this
correlation, and there is no assurance that the Fund will
achieve its investment objective. See Tracking Error under
Special Risk Factors for a discussion of these factors.
Special Risk Considerations
The Fund will invest primarily in below investment grade
corporate bonds, commonly known as junk bonds. Investments
of this type are subject to greater risks, including default
risks and market risks, than those found in higher rated
securities. Below investment grade securities are of poorer
quality, may have speculative characteristics, and may present
elements of danger with respect to principal or interest.
Purchasers should carefully assess the risks associated with
an investment in the Fund. (See Special Risk Factors. )
The Fund is part of the Rydex Group of Funds, which is
designed for professional money managers and knowledgeable
investors who intend to invest in the Rydex Group of Funds as
part of an asset-allocation or market-timing investment
strategy. The Fund alone does not constitute a balanced
investment plan. The nature of the Fund generally will result
in significant portfolio turnover which would likely cause
higher expenses and additional costs and increase the risk
that the Fund will not qualify as a regulated investment
company under the Federal tax laws. (See Special Risk
Factors. )
Investment Advisor, Sub-Advisor, and Servicer
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The Fund s investment adviser is PADCO Advisors, Inc., a
Maryland corporation with offices at 6116 Executive Boulevard,
Suite 400, Rockville, Maryland 20852 (the "Advisor"). The
Fund pays the Advisor an investment management fee of 0.75% of
the average daily net assets of the Fund. Pursuant to a sub-
advisory agreement between the Advisor and Loomis, Sayles &
Company, L.P. (the Sub-Advisor ), the Advisor pays the Sub-
Advisor 0.375% of the average daily net assets of the Fund for
providing portfolio management services to the Fund. PADCO
Service Company, Inc. (the "Servicer"), provides the Fund with
general administrative, transfer agent, shareholder, and
registrar services for a fee of 0.20% of the average daily net
assets of the Fund. (See Management of the Trust. )
Purchases, Redemptions, and Exchanges
Shares of the Fund may be purchased and redeemed, without any
respective sales or redemption charge, at the net asset value
per share of the Fund next determined. Shares of the Fund may
be exchanged at any time for shares of any other available
Rydex Fund, without any charge, on the basis of the relative
net asset values next computed (subject to compliance with
applicable minimum investment requirements). Because of the
administrative expense of handling small accounts, any request
for a redemption by an investor whose account balance is (a)
below the currently-applicable minimum investment, or (b)
would be below that minimum as a result of the redemption,
will be treated as a request by the investor for a complete
redemption of that account. For shareholders who have engaged
a registered investment adviser with discretionary authority
over the shareholder s account, the minimum initial investment
in the Fund currently is $15,000; for all other shareholder
accounts, the minimum initial investment in the Fund currently
is $25,000. These minimums also apply to retirement plan
accounts. The Trust reserves the right to modify its minimum
investment requirements. (See "How To Invest In the Fund,"
"Redeeming An Investment (Withdrawals)," and "Exchanges.")
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FEES AND EXPENSES OF THE FUND
The following table illustrates all expenses and fees that a
shareholder of the Fund will incur:
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
<S> <C>
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested
Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.75%
12b-1 Fees 0.25%
Other Expenses:
Administrative Fees 0.20%
Additional Expenses 0.15%*
Total Fund Operating Expenses 1.35%**
</TABLE>
_____________________
* Additional expenses are based on estimated amounts for
the current fiscal year.
** Retirement plans are charged an annual $15.00 maintenance
fee. See Tax-Sheltered Retirement Plans.
Example
Assuming a hypothetical investment of $1,000, a five-percent
annual return, and redemption at the end of each time period,
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an investor in the Fund would pay transaction and operating
expenses at the end of each year as follows:
1 YEAR 3 YEARS
$13.75 $42.76
The same level of expenses would be incurred if the investment
were held throughout the period indicated.
The preceding table is provided to assist the investor in
understanding the various costs and expenses which may be
borne directly or indirectly by an investor in the Fund. The
percentages shown above are based on the estimate by the
Fund's investment adviser of the expenses to be incurred by
the Fund during the Fund's current fiscal year. The five-
percent assumed annual return is for comparison purposes only.
The actual return for the Fund in future periods may be more
or less depending on market conditions, and the actual
expenses an investor incurs in future periods may be more or
less than those shown above and will depend on the amount
invested and on the actual growth rate of the Fund. For a
more complete discussion of the fees connected with an
investment in the Fund, including any fees that may be charged
by securities dealers, banks, and other financial institutions
in connection with wire transfers, and the services to be
provided to the Fund, see How To Investment In the Fund,
Management of the Trust, and Distribution Plan in this
Prospectus.
THE RYDEX FUNDS
The Trust is an open-end management investment company, and
currently is composed of nine separate series, including the
Fund, The Nova Fund, The Ursa Fund, The Rydex OTC Fund, The
Rydex Precious Metals Fund, The Rydex U.S. Government Bond
Fund, The Juno Fund, The Rydex U.S. Government Money Market
Fund, and the Institutional Money Market Fund (collectively,
the "Rydex Funds"); other separate Rydex Funds may be added in
the future. The Rydex Funds are principally designed for
professional money managers and investors who intend to follow
an asset-allocation or market-timing investment strategy.
Except for the Institutional Money Market Fund and the Rydex
U.S. Government Money Market Fund, each Rydex Fund is intended
to provide investment exposure with respect to a particular
segment of the securities markets. These Rydex Funds seek
investment results that correspond over time to a specified
benchmark. The Rydex Funds may be used independently or in
combination with each other as part of an overall investment
strategy.
<PAGE> - 8 -<PAGE>
Shares of any Rydex Fund may be exchanged, without any charge,
for shares of any other Rydex Fund on the basis of the
respective net asset values of the shares involved; provided,
t h at, in connection with exchanges for shares of the
Institutional Money Market Fund, certain minimum investment
levels are maintained. The Trust reserves the right to modify
its minimum investment requirements (see "Exchanges"). Copies
of the separate Prospectuses and Statements of Additional
Information for the Rydex Funds other than the Fund are
available, without charge, upon request to the Trust at 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852, or
by telephoning the Trust at (800) 820-0888 or (301) 468-8520.
The Trust reserves the right to restrict exchanges out of the
Fund if necessary to preserve the Fund s tax status.
INVESTMENT OBJECTIVE AND POLICIES
General
The investment objective of the Fund is to seek to provide
investment returns that correspond to the performance of a
benchmark for high yield fixed income securities. The Fund s
current benchmark is the MLHY Index. Although there is no
assurance that the Fund's objective will be achieved, the Fund
will seek to achieve its objective by investing primarily in a
variety of long-term, intermediate-term, and short-term below
i n vestment grade corporate bonds (including convertible
issues) commonly known as junk bonds and low-rated preferred
securities. The Fund will invest in securities included in
the MLHY Index, and may also invest in United States dollar-
denominated bonds issued by foreign-based companies which may
be issued in the United States or on a global basis.
The investment objective of the Fund is fundamental and may
not be changed without the approval of a majority of the
shareholders, as defined in the Investment Company Act of
1940, as amended (the "1940 Act"). All other investment
policies of the Fund not specified as fundamental, including
the benchmark index for high yield fixed income securities,
may be changed without the approval of shareholders. The
trustees of the Trust (the Trustees ) may consider changing
the Fund s benchmark (to the extent permitted) if, for
example, the current benchmark becomes unavailable; the
Trustees believe the current benchmark no longer serves the
investment needs of a majority of shareholders or another
benchmark better serves their needs; or the financial or
economic environment makes it difficult for the Fund s
investment results to correspond sufficiently to its current
benchmark. If believed appropriate, the Trustees may specify
a benchmark for the Fund that is "leveraged" or proprietary.
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Of course, there can be no assurance that the Fund will
achieve its objective.
High Yield Corporate Bonds
The corporate bonds primarily purchased by the Fund will be
rated in below investment grade categories by Moody s
Investors Service, Inc. ( Moody s ) or Standard & Poor s
Ratings Group ( Standard & Poor s ) ( Ba or lower by Moody s,
BB or lower by Standard and Poor s). The Fund does not
invest in securities rated lower than Caa by Moody s or
CCC by Standard & Poor s; these ratings are applied to
issues which are predominantly speculative and may be in
default or as to which there may be present elements of danger
with respect to principal or interest. The Fund does not
invest in issues which are in default. The Fund may invest in
unrated securities when the Sub-Advisor believes that the
financial condition of the issuer or the protection afforded
by the terms of the securities limits risk to a level similar
to that of securities eligible for purchase by the Fund rated
in below investment grade categories by Moody s or Standard &
Poor s (between Ba and Caa ratings by Moody s and between
BB and CCC ratings by Standard & Poor s). If the
investment rating of a high yield corporate security in which
the Fund is invested is downgraded to below Caa by Moody s
or CCC by Standard & Poor s, the Fund will sell the
downgraded security as soon as practicable and when the Sub-
Advisor considers it desirable to do so. See Appendix A to
this Prospectus for a specific description of each corporate
bond rating category.
The securities in which the Fund invests offer a wide range of
maturities (from less than one year to thirty years) and
yields. These securities include short-term bonds or notes
(maturing in less than three years), intermediate-term bonds
or notes (maturing in three to ten years), and long-term bonds
(maturing in more than ten years). While there are no
limitations on the average maturity of the securities held by
t h e Fund, the Fund s average portfolio maturity will
ordinarily be comparable to that of its benchmark. As of July
30, 1996, the average years-to-maturity of the MLHY Index was
approximately nine years.
Repurchase Agreements
The Fund may also invest in repurchase agreements secured by
U.S. Government Securities. Under a repurchase agreement, the
Fund purchases a debt security and simultaneously agrees to
sell the security back to the seller at a mutually agreed-upon
future price (thereby determining the yield during the
purchaser's holding period) and date, normally one day or a
few days later. The resale price is greater than the purchase
<PAGE> - 10 -<PAGE>
price, reflecting an agreed-upon market interest rate during
the purchaser s holding period. While the maturities of the
underlying securities in repurchase transactions may be more
than one year, the term of each repurchase agreement will
always be less than one year. The Fund will enter into
repurchase agreements only with member banks of the Federal
R e s erve System or primary dealers of U.S. Government
Securities.
The Advisor will monitor the creditworthiness of each firm
which is a party to a repurchase agreement with the Fund. In
the event of a default or bankruptcy by the seller, the Fund
will liquidate those securities (whose market value, including
accrued interest, must be at least equal to 100% of the dollar
amount invested by the Fund in each repurchase agreement) held
under the applicable repurchase agreement, which securities
constitute collateral for the seller s obligation to pay.
However, liquidation could involve costs or delays and, to the
extent proceeds from the sales of these securities were less
than the agreed-upon repurchase price, the Fund would suffer a
loss. The Fund also may experience difficulties and incur
certain costs in exercising its rights to the collateral and
may lose the interest the Fund expected to receive under the
repurchase agreement. Repurchase agreements usually are for
short periods, such as one week or less, but may be longer.
It is the current policy of the Fund to treat repurchase
agreements that do not mature within seven days as illiquid
for the purposes of the Fund's investment policies.
The Fund will not enter into repurchase agreements of more
than seven days duration if more than 15% of the market value
of the Fund's net assets would be so invested together with
any other investment the Fund may hold for which market
quotations are not readily available.
When-Issued and Delayed Delivery Securities
The Fund may purchase securities on a when-issued or delayed
delivery basis (i.e., delivery and payment can take place a
month or more after the date of the transaction). These
securities are subject to market fluctuation and no interest
accrues to the purchaser during this period. At the time the
Fund makes the commitment to purchase securities on a when-
issued or delayed delivery basis, the Fund will record the
transaction and thereafter reflect the value, each day, of
such security in determining its net asset value. The Fund
will not purchase securities on a when-issued or delayed
delivery basis if, as a result, more than 10% of the Fund's
net assets would be so invested. The Fund will maintain, in a
<PAGE> - 11 -<PAGE>
segregated account, cash or liquid securities having a value
equal to or greater than the Fund's purchase commitments.
Short Sales
The Fund also may engage in short sales transactions under
which the Fund sells a security it does not own in order to
facilitate the management of the Fund s portfolio by enabling
the Fund to meet redemption requests when the liquidation of
portfolio instruments would be inconvenient or
disadvantageous. To complete such a transaction, the Fund
must borrow the security to make delivery to the buyer. The
Fund then is obligated to replace the security borrowed by
purchasing the security at the market price at the time of
replacement. The price at such time may be more or less than
the price at which the security was sold by the Fund. Until
the security is replaced, the Fund is required to pay to the
lender amounts equal to any dividends or interest which accrue
during the period of the loan. To borrow the security, the
Fund also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the
short sale will be retained by the broker, to the extent
necessary to meet the margin requirements, until the short
position is closed out.
Until the Fund closes its short position or replaces the
borrowed security, the Fund will: (a) maintain a segregated
account containing cash, equity securities, or debt securities
of any grade, including non-investment grade debt securities,
which securities will be liquid and marked to the market
daily, and at such a level that (i) the amount deposited in
the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold
short and (ii) the amount deposited in the segregated account
plus the amount deposited with the broker as collateral will
not be less than the market value of the security at the time
the security was sold short; or (b) otherwise cover the Fund s
short position.
Other Investment Policies
W h en the Sub-Advisor determines that market conditions
warrant, the Fund may temporarily invest all or part of the
Fund s assets in cash or cash equivalents, which include, but
are not limited to, short-term money market instruments, U.S.
Government securities, repurchase agreements secured by U.S.
Government securities, commercial paper, and bank money market
instruments, including certificates of deposit, time deposits,
bankers acceptances, and other short-term obligations issued
by United States banks which are members of the Federal
Reserve System. To meet its objective, the Fund may also:
invest in common stocks, rights, or other equity securities,
<PAGE> - 12 -<PAGE>
including preferred and convertible securities; purchase and
sell futures contracts, index futures contracts, and options
thereon; and purchase and sell options on securities and index
options. The Fund also may borrow money and lend portfolio
securities to brokers, dealers, and financial institutions.
The Fund, however, does not presently intend to invest more
than 5% of the Fund s net assets in any of these instruments
or practices. A more-detailed explanation of these investment
practices, including the risks associated with each practice,
is included in the Statement of Additional Information.
Merrill Lynch High Yield Master Index
The MLHY Index is a market capitalization-weighted index
comprised of domestic and foreign high yield corporate bonds,
each with at least $50 million par amount outstanding and more
than one year to maturity (foreign corporate bonds are issued
by foreign corporations, denominated in United States dollars,
and underwritten by United States syndicates for delivery in
the United States). Interest and price return for each
corporate bond included in the MLHY Index are calculated daily
based on accrued schedule and trader pricing. The investment
ratings for the corporate bonds included in the MLHY Index
range from Baa by Moody s or BBB by Standard and Poor s
to C by Moody s or C by Standard & Poor s (the Fund,
however, does not invest in securities rated lower than Caa
by Moody s or CCC by Standard & Poor s). Bonds rated as
being in default ( Daa by Moody s or DDD by Standard and
Poor s), as well as deferred interest bonds and pay-in-kind
bonds, are not included in the MLHY Index. Split-rated issues
(i.e., bonds rated investment grade by one rating agency and
high yield by another rating agency) are included in the MLHY
Index based on the bond s corresponding composite rating.
Prices for the bonds included in the MLHY Index are taken as
of 3:00 P.M., Eastern Time, and only those bonds for which
accurate pricing is available are included in the index. The
index was created in 1984.
SPECIAL RISK FACTORS
Credit and Market Risks
All securities, including those purchased by the Fund, are
subject to some degree of credit risk and market risk.
Credit risk refers to the ability of an issuer of a debt
security to pay its principal and interest, and to the
<PAGE> - 13 -<PAGE>
earnings stability and overall financial soundness of an
issuer of an equity security. Market risk refers to the
volatility of a security s price in response to changes in
conditions in securities markets in general, and, particularly
in the case of debt securities, to changes in the overall
level of interest rates. An increase in interest rates will
tend to reduce the market values of debt securities, whereas a
decline in interest rates will tend to increase their values.
High Yield Securities
The Fund presently intends to invest at least 80% of its net
assets in high yield corporate bonds. Both credit and market
risks are increased by the Fund s investment in debt
securities rated below the top four grades by Standard &
Poor s or Moody s and comparable unrated debt securities.
Below investment grade bonds by Moody s (categories Ba, B,
Caa ) are of poorer quality and may have speculative
characteristics. Bonds rated Caa may be in default or there
may be present elements of danger with respect to principal or
interest. Below investment grade bonds rated by Standard &
Poor s (categories BB, B, CCC ) include those which are
regarded, on balance, as predominantly speculative with
respect to the issuer s capacity to pay interest and repay
principal in accordance with their terms; BB indicates the
lowest degree of speculation and CCC indicates a high degree
of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse
conditions.
The share price and yield of the Fund may be expected to
fluctuate more than in the case of mutual funds that invest in
h i gher quality, shorter term securities. Moreover, a
significant economic downturn or major increase in interest
rates may result in issuers of below investment grade
securities experiencing increased financial stress, which
c o uld adversely affect their ability to service their
principal, interest, and dividend obligations, meet projected
business goals, and obtain additional financing. In this
regard, it should be noted that while the market for high
yield corporate bonds has been in existence for many years and
from time to time has experienced economic downturns in recent
years, this market has involved a significant increase in the
use of high yield corporate debt securities to fund highly
leveraged corporate acquisitions and restructurings. Past
experience may not, therefore, provide an accurate indication
o f future performance of the high yield bond market,
p a rticularly during periods of economic recession.
Furthermore, expenses incurred to recover an investment by the
Fund in a defaulted security may adversely affect the Fund s
net asset value. Finally, the secondary market for high yield
<PAGE> - 14 -<PAGE>
securities may be less liquid than the market for higher
quality securities. The reduced liquidity of the secondary
market for high yield securities may adversely affect the
market price of, and the ability of the Fund to value,
particular securities at certain times, thereby making it
difficult to make specific valuation determinations.
While the Fund attempts to provide investment returns that
correspond to a benchmark for high yield fixed income
securities (currently the MLHY Index), there is no assurance
that it will be able to do so. The Fund will not purchase all
o f the securities that comprise its benchmark index.
Accordingly, changes in the value of the Fund s shares may not
exactly correspond to changes in the benchmark index.
Illiquid Securities
T h e Fund may purchase illiquid securities, including
securities that are not readily marketable and securities that
are not registered ( restricted securities ) under the
Securities Act of 1933, as amended (the 1933 Act ), but which
can be offered and sold to qualified institutional buyers
under Rule 144A under the 1933 Act. The Fund will not invest
more than 15% of the Fund s net assets in illiquid securities.
The Fund will adhere to a more restrictive limitation on the
Fund s investment in illiquid securities as required by the
securities laws of those jurisdictions where shares of the
Fund are registered for sale. The term "illiquid securities"
for this purpose means securities that cannot be disposed of
within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the
securities. Under the current guidelines of the staff of the
Securities and Exchange Commission (the Commission ),
illiquid securities also are considered to include, among
other securities, purchased over-the-counter options, certain
cover for over-the-counter options, repurchase agreements with
maturities in excess of seven days, and certain securities
whose disposition is restricted under the Federal securities
laws. The Fund may not be able to sell illiquid securities
when the Sub-Advisor considers it desirable to do so or may
have to sell such securities at a price that is lower than the
price that could be obtained if the securities were more
liquid. In addition, the sale of illiquid securities also may
require more time and may result in higher dealer discounts
and other selling expenses than does the sale of securities
that are not illiquid. Illiquid securities also may be more
difficult to value due to the unavailability of reliable
market quotations for such securities, and investment in
illiquid securities may have an adverse impact on net asset
value.
<PAGE> - 15 -<PAGE>
Institutional markets for restricted securities have developed
as a result of the promulgation of Rule 144A under the 1933
Act, which provides a safe harbor from 1933 Act registration
requirements for qualifying sales to institutional investors.
When Rule 144A restricted securities present an attractive
investment opportunity and otherwise meet selection criteria,
the Fund may make such investments. Whether or not such
securities are illiquid depends on the market that exists
for the particular security. The Commission staff has taken
the position that the liquidity of Rule 144A restricted
securities is a question of fact for a board of trustees to
determine, such determination to be based on a consideration
of the readily-available trading markets and the review of any
contractual restrictions. The staff also has acknowledged
that, while a board of trustees retains ultimate
responsibility, the trustees may delegate this function to an
investment adviser and/or a sub-adviser. The Trustees have
delegated this responsibility for determining the liquidity of
Rule 144A restricted securities which may be invested in by
the Fund to the Advisor and the Sub-Advisor. It is not
possible to predict with assurance exactly how the market for
Rule 144A restricted securities or any other security will
develop. A security which when purchased enjoyed a fair
degree of marketability may subsequently become illiquid and,
accordingly, a security which was deemed to be liquid at the
time of acquisition may subsequently become illiquid. In such
event, appropriate remedies will be considered to minimize the
effect on the Fund s liquidity.
Portfolio Turnover
The Trust anticipates that investors in the Fund, as part of
an asset-allocation or market-timing investment strategy, will
frequently redeem shares of the Fund, as well as exchange
their shares of the Fund for shares in other Rydex Funds
p u r s u ant to the exchange policy of the Trust (see
"Exchanges"), which would cause the Fund to experience high
portfolio turnover. Because the Fund's portfolio turnover
r a te to a great extent will depend on the purchase,
redemption, and exchange activity of its investors, it is very
difficult to estimate what the Fund's actual turnover rate
generally will be. Pursuant to the formula prescribed by the
Commission, the portfolio turnover rate for the Fund is
calculated without regard to securities, including options and
futures contracts, having a maturity of less than one year.
Significant portfolio turnover will tend to increase the
realization by the Fund of gains (or losses) on securities
that have been held by the Fund for less than three months.
Any such realized gains on securities that have been held by
the Fund for less than three months, and other factors related
to large cash flows into and out of the Fund, will increase
<PAGE> - 16 -<PAGE>
the risk that, in any given year, the Fund may fail to qualify
as a regulated investment company under Subchapter M of the
U.S. Internal Revenue Code of 1986, as amended (the "Code")
(see "Taxes"). If the Fund should so fail to qualify under
the Code, the Fund's net investment income and net capital
gain would become subject to Federal income tax at corporate
rates. The imposition of such taxes would directly reduce the
return to an investor from an investment in the Fund. In
addition, a higher portfolio turnover rate would likely
involve correspondingly greater brokerage commissions and
other expenses which would be borne by the Fund. Furthermore,
the Fund's portfolio turnover level may adversely affect the
ability of the Fund to achieve its investment objective.
Tracking Error
While the Fund does not expect that the returns over a year
will deviate adversely from the performance of the Fund s
benchmark by more than ten percent, several factors may affect
its ability to achieve this correlation. Among those factors
are: (1) Fund expenses, including dealer spreads (which may
be increased by high portfolio turnover); (2) less than all of
the securities in the benchmark being held by the Fund and
securities not included in the benchmark being held by the
Fund; (3) bid-ask spreads (the effect of which may be
i n c reased by portfolio turnover); (4) the Fund holds
instruments traded in a market that has become illiquid or
disrupted; (5) Fund share prices being rounded to the nearest
cent; (6) changes to the benchmark index that are not
disseminated in advance; or (7) the need to conform the Fund s
portfolio holdings to comply with investment restrictions or
policies or regulatory or tax law requirements.
Aggressive Investment Techniques
While the Fund normally will invest substantially all of its
assets in high yield corporate bonds, it has reserved the
right to, and may, from time to time, engage in certain
aggressive investment techniques which may include engaging in
transactions in futures contracts and options on securities,
securities indexes, and futures contracts (which instruments
are commonly known as derivatives ). Participation in the
options or futures markets by the Fund involves distinct
investment risks and transaction costs. Risks inherent in the
use of options, futures contracts, and options on futures
contracts include: (1) adverse changes in the value of such
instruments; (2) imperfect correlation between the price of
o p tions and futures contracts and options thereon and
<PAGE> - 17 -<PAGE>
movements in the price of the underlying securities, index, or
futures contracts; (3) the fact that the skills needed to use
these strategies are different from those needed to select
portfolio securities; (4) the possible absence of a liquid
secondary market for any particular instrument at any time;
and (5) the possible need to defer closing out certain
positions to avoid adverse tax consequences. (For further
i n f ormation regarding these investment techniques, see
"Investment Policies and Techniques in the Statement of
Additional Information.)
PORTFOLIO TRANSACTIONS AND BROKERAGE
W h en selecting broker-dealers to execute portfolio
t r a n sactions, the Sub-Advisor considers many factors,
including the size of the broker-dealer s "spread," the size
and difficulty of the order, the nature of the market for the
security, the willingness of the broker-dealer to position,
the reliability, financial condition, general execution, and
o p erational capabilities of the broker-dealer, and the
research, statistical, and economic data furnished by the
broker-dealer to the Sub-Advisor. The Sub-Advisor uses these
s e rvices in connection with all of the Sub-Advisor s
investment activities, including other investment accounts the
Sub-Advisor advises. Conversely, brokers or dealers which
supply research may be selected for execution of transactions
for such other accounts, while the data may be used by the
Sub-Advisor in providing investment advisory services to the
Fund.
HOW TO INVEST IN THE FUND
For shareholders who have engaged a registered investment
adviser with discretionary authority over the shareholder s
account, the minimum initial investment in the Fund is
$15,000. For all other shareholder accounts ("Self-Directed
Accounts"), the minimum initial investment in the Fund is
$25,000. These minimums also apply to retirement plan
accounts. The Trust, at its discretion, may accept lesser
amounts in certain circumstances.
The shares of the Fund are offered at the daily public
offering price, which is the net asset value per share (see
"Determination of Net Asset Value") next computed after
receipt of the investor s order. No sales charges are imposed
on initial or subsequent investments in the Fund. The Trust
reserves the right to reject or refuse, at the Trust s
discretion, any order for the purchase of the Fund s shares in
whole or in part. There is no minimum amount for subsequent
investments in the Fund.
<PAGE> - 18 -<PAGE>
Investments in the Fund may be made (i) through securities
dealers who have the responsibility to transmit orders
promptly and who may charge a processing fee or (ii) directly
with the Trust by mail or by bank wire transfer as follows:
By Mail: Fill out an application and make out a check payable
to "Rydex Series Trust." Mail the check along with the
application to:
Rydex Series Trust
6116 Executive Boulevard, Suite 400
Rockville, Maryland 20852
By Bank Wire Transfer: Request a wire transfer to:
Star Bank, N.A.
Routing Number: 0420-00013
For Account of Rydex Series Trust
Account Number: 48038-9030
Your Name
Your Account Number or, if a new
account, Federal Tax I.D. Number
(e.g., Social Security Number)
After instructing your bank to transfer money by wire, please
call the Trust and inform the Trust as to the amount you have
transferred and the name of the bank sending the transfer.
Your bank may charge a fee for such services. If the purchase
is canceled because your wire transfer is not received, you
may be liable for any loss that the Trust may incur.
Shares of the Fund are sold at a price based on the net asset
value next calculated after receipt of a purchase order in
good form, as described below. If a purchase order is
received by the Fund at or prior to 2:15 P.M., Eastern Time,
on any business day, the purchase of Fund shares is executed
at the offering price determined as of 3:00 P.M., Eastern
Time, that day. If the purchase order is received after 2:15
P.M., Eastern Time, the purchase of Fund shares will be
effected on the next business day. (See "Procedures for
Redemptions and Exchanges. )
I n the interest of economy and convenience, physical
certificates representing the Fund s shares are not issued.
Shares of the Fund are recorded on a register by the Trust s
transfer agent.
REDEEMING AN INVESTMENT (WITHDRAWALS)
An investor may withdraw all or any portion of his investment
by redeeming Fund shares at the next-determined net asset
value per share after receipt of the order. Redemptions may
<PAGE> - 19 -<PAGE>
be made by letter or by telephone subject to the procedures
set forth below. The privilege to initiate redemption
transactions by telephone will be made available to Fund
shareholders automatically. Telephone redemptions will be
sent only to the address of record of the redeeming investor
or to bank accounts specified by the redeeming investor in his
account application. The Trust charges $15 for each wire
transfer of redemption proceeds; this charge may be waived at
the discretion of the Trust. If any investor purchases shares
of the Fund by check, the purchaser may not wire out any
proceeds of a redemption of such shares for the 30 calendar
days following the purchase.
The proceeds of non-telephone redemptions will be sent
directly to the investor s address of record. If the investor
requests payment of redemptions to a third party or to a
location other than the investor s address of record or a bank
account specified in the investor s account application, this
request must be in writing and the investor s signature must
be guaranteed by a commercial bank; a broker, dealer,
municipal securities dealer, municipal securities broker,
government securities dealer, or government securities broker;
a credit union; a national securities exchange, registered
securities association, or clearing agency; or a savings
association.
The Fund will redeem its shares at a redemption price equal to
the net asset value of the shares as next computed following
the receipt of a request for redemption. There is no
redemption charge. Payment for the redemption price will be
made within seven days after the Trust s receipt of the
request for redemption. For investments that have been made
by check, payment on withdrawal requests may be delayed until
the Trust s transfer agent is reasonably satisfied that the
purchase payment has been collected by the Trust (which may
require up to 10 business days). An investor may avoid a
delay in receiving redemption proceeds by purchasing shares
with a certified check.
Because of the administrative expense of handling small
accounts, any request for a redemption by an investor whose
account balance is (a) below the currently-applicable minimum
investment, or (b) would be below that minimum as a result of
the redemption, will be treated as a request by the investor
for a complete redemption of that account. The Trust reserves
the right to modify its minimum investment requirements.
With respect to the Fund, the right of redemption may be
suspended, or the date of payment postponed: (i) for any
period during which the Federal Reserve Bank of New York (the
New York Fed ), the New York Stock Exchange (the "NYSE"), the
<PAGE> - 20 -<PAGE>
Chicago Mercantile Exchange (the CME ), or the Chicago Board
of Trade (the CBOT ), as appropriate, is closed (other than
customary weekend or holiday closings) or trading on the NYSE,
the CME, or the CBOT, as appropriate, is restricted; (ii) for
any period during which an emergency exists so that disposal
of the Fund s investments or the determination of its net
asset value is not reasonably practicable; or (iii) for such
other periods as the Commission, by order, may permit for
protection of the Fund s investors. On any day that the New
York Fed or the NYSE closes early, the principal government
securities markets close early (such as on days in advance of
holidays generally observed by participants in such markets),
or as permitted by the Commission, the right is reserved to
advance the time on that day by which purchase and redemption
orders must be received. (See "Determination of Net Asset
Value.")
EXCHANGES
Shares of any Rydex Fund may be exchanged, without any charge,
for shares of any other Rydex Fund on the basis of the
respective net asset values next determined of the shares
involved; provided that, in connection with exchanges for
shares of a Rydex Fund, certain minimum investment levels are
maintained. The Trust reserves the right to modify its
minimum investment requirements. Exchanges with respect to
Self-Directed Accounts must be for the lesser of $1,000 or
100% of the account value for the Rydex Fund from which the
transfer is to be made. The Trust currently is composed of
nine separate series, The Nova Fund, The Ursa Fund, The Rydex
OTC Fund (the "OTC Fund"), The Rydex Precious Metals Fund (the
"Metals Fund"), The Rydex U.S. Government Bond Fund (the "Bond
Fund"), The Juno Fund, The Rydex U.S. Government Money Market
Fund (the Money Market Fund ), The Rydex Institutional Money
Market Fund, and The Rydex High Yield Fund (the series
described in this Prospectus); other separate Rydex Funds may
be added in the future. Exchanges may be made by letter or by
telephone subject to the procedures set forth below. An
exchange into the Rydex Institutional Money Market Fund is
permitted only if that Rydex Fund s minimum investment of $2
million is satisfied.
To implement an exchange, shareholders should provide the
following information: account name, account number, taxpayer
identification number, number of or percentage of shares or
dollar value of shares to be exchanged, and the names of the
Rydex Funds involved in the exchange transaction. Exchanges
may be made only if such exchanges are between identically
registered accounts. Shareholders contemplating such an
exchange for shares of a Rydex Fund not described in this
Prospectus should obtain and review the prospectus of the
<PAGE> - 21 -<PAGE>
Rydex Fund to which the investment is to be transferred. The
exchange privilege is available only in states where the
e x change legally may be made and may be modified or
discontinued at any time. Shares of the Money Market Fund
received in an exchange for shares of the OTC Fund or the
Metals Fund are issued on the third business day following the
day on which the Rydex Fund receives the exchange request.
PROCEDURES FOR REDEMPTIONS AND EXCHANGES
Written requests for redemptions and exchanges should be sent
to Rydex Series Trust, 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852, and should be signed by the record
owner or owners. Telephone redemption and exchange requests
with respect to the Rydex Funds may be made by calling (800)
820-0888 or (301) 468-8520, on any day the Trust is open for
business. Such requests may be made only between 8:30 A.M.,
Eastern Time, and the times indicated below (all times are
Eastern Time). For exchanges, the earlier of the times
indicated below for the Rydex Funds whose shares are being
exchanged applies.
The Nova, Ursa, and Rydex OTC Funds . 3:45 P.M.
The Rydex Precious Metals Fund . . . 3:30 P.M.
The Rydex U.S. Government Bond
and Juno Funds . . . . . . . . . . . 2:45 P.M.
The Rydex High Yield Fund . . . . . . 2:15 P.M.
Telephone redemption and exchange orders will be accepted only
during the periods indicated above. If the primary exchange
or market on which the Rydex Fund transacts business closes
early, the above cut-off time will be approximately fifteen
minutes (thirty minutes, in the case of the Metals Fund, and
forty-five minutes in the case of the High Yield Fund) prior
to the close of such exchange or market. Telephone redemption
and exchange privileges may be terminated or modified by the
Trust at any time.
When acting on instructions believed to be genuine, the Trust
will not be liable for any loss resulting from a fraudulent
telephone transaction request and the investor would bear the
risk of any such loss. The Trust will employ reasonable
procedures to confirm that telephone instructions are genuine;
and if the Trust does not employ such procedures, then the
Trust may be liable for any losses due to unauthorized or
f r a u dulent instructions. The Trust follows specific
procedures for transactions initiated by telephone, including,
among others, requiring some form of personal identification
prior to acting upon instructions received by telephone,
providing written confirmation not later than five business
days after such transactions, and/or tape recording of
<PAGE> - 22 -<PAGE>
telephone instructions. Investors also should be aware that
telephone redemptions or exchanges may be difficult to
implement in a timely manner during periods of drastic
economic or market changes. If such conditions occur,
redemption or exchange orders can be made by mail.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund's shares is determined each
day on which both the NYSE and the New York Fed are open at
3:00 P.M., Eastern Time. Currently, the NYSE and the New York
Fed are closed on weekends, and the following holiday closings
have been scheduled for 1997: (i) New Year's Day, Martin
Luther King Jr.'s Birthday, Washington's Birthday, Good
Friday, Memorial Day, July Fourth, Labor Day, Columbus Day,
Thanksgiving Day, and Christmas Day; and (ii) the preceding
Friday when any of those holidays falls on a Saturday or the
subsequent Monday when any one of those holidays falls on a
Sunday. To the extent that portfolio securities of the Fund
are traded in other markets on days when the NYSE or the New
York Fed is closed, the Fund's net asset value may be affected
on days when investors do not have access to the Fund to
purchase or redeem shares. Although the Trust expects the
same holiday schedule to be observed in the future, the NYSE
and the New York Fed each may modify its holiday schedule at
any time. The net asset value of the Fund serves as the basis
for the purchase and redemption price of the Fund's shares.
The Fund s net asset value per share is calculated by dividing
the market value of the Fund s securities plus the values of
its other assets (including dividends and interest accrued but
not collected), less all liabilities (including accrued
expenses), by the number of outstanding shares of the Fund.
If market quotations are not readily available, a security
will be valued at fair value by the Board of Trustees or by
the Sub-Advisor using methods established or ratified by the
Board of Trustees. Debt securities with remaining maturities
of 60 days or less at the time of purchase will be valued at
amortized cost, absent unusual circumstances, so long as the
Board of Trustees believes that valuation method results in a
fair value for such securities.
TAX-SHELTERED RETIREMENT PLANS
Tax-sheltered retirement plans of the following types will be
available to investors:
Individual Retirement Accounts (IRAs)
Keogh Accounts - Defined Contribution
Plans (Profit-Sharing Plans)
<PAGE> - 23 -<PAGE>
Keogh Accounts - Money Purchase Plans
Pension Plans)
Internal Revenue Code Section 403(b)
Plans
Retirement plans are charged an annual $15.00 maintenance fee.
Additional information regarding these accounts, including the
annual maintenance fee, may be obtained by contacting the
Trust.
TRANSACTION CHARGES
In addition to charges described elsewhere in this Prospectus,
the Trust also may make a charge of $25 for items returned for
insufficient or uncollectible funds.
DIVIDENDS AND DISTRIBUTIONS
All income dividends and capital gains distributions of the
Fund automatically will be reinvested in additional shares of
the Fund at the net asset value calculated on the ex-dividend
date, unless an investor has requested otherwise from the
Trust in writing. Dividends and distributions of the Fund are
taxable to the shareholders of the Fund, as discussed below
under "Taxes," whether such dividends and distributions are
reinvested in additional shares of the Fund or are received in
cash. Statements of account will be sent to the Fund
shareholders at least quarterly.
The Fund intends (i) to declare dividends of ordinary income
for shares of the Fund on a daily basis, and to distribute
such dividends to shareholders of the Fund on a monthly basis,
and (ii) to distribute annually any long-term capital gains to
the shareholders of the Fund. The Trustees, however, may
declare a special distribution for the Fund if the Trustees
believe that such a distribution would be in the best interest
of the Fund s shareholders.
TAXES
The U.S. Internal Revenue Code of 1986, as amended (the
"Code"), provides that each investment portfolio of a series
investment company is to be treated as a separate corporation.
Accordingly, the Fund will seek to qualify for treatment as a
regulated investment company (a "RIC") under Subchapter M of
the Code. So long as the Fund qualifies as a RIC and
satisfies the distribution requirements under the Code for any
taxable year, the Fund itself will not be subject to income
<PAGE> - 24 -<PAGE>
t a x on the ordinary income and capital gains it has
distributed to its shareholders for that year.
To qualify as a RIC under the Code, the Fund must satisfy
certain requirements, including the requirements that the Fund
receive at least 90% of the Fund s gross income each year from
dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of securities
or foreign currencies, or other income derived with respect to
the Fund s investments in stock, securities, and foreign
currencies (the "90% Test"), and that the Fund derive less
than 30% of the Fund s gross income from the sale or other
disposition of any of the following instruments which have
been held for less than three months (the "30% Test"): (i)
stock or securities; (ii) certain options, futures, or forward
contracts; or (iii) foreign currencies (or certain options,
futures, or forward contracts on such foreign currencies).
Provided that the Fund (i) is a RIC and (ii) distributes at
least 90% of the Fund s net investment income (including, for
this purpose, net realized short-term capital gains), the Fund
itself will not be subject to Federal income taxes to the
extent the Fund s net investment income and the Fund s net
realized short-term capital gains, if any, are distributed to
the shareholders of that Fund. To avoid an excise tax on its
undistributed income, the Fund generally must distribute at
least 98% of its income, including its net long-term capital
gains.
Satisfaction of the 90% Test will impose limitations on the
investment strategies that may be pursued by the Fund. In
addition, because of the anticipated frequency of redemptions
and exchanges of the shares of the Fund, the Fund will have
greater difficulty than other mutual funds in satisfying the
30% Test. The Trust expects that investors in the Fund, as
part of their market-timing investment strategy, are likely to
redeem or exchange their shares in the Fund frequently to take
advantage of anticipated changes in market conditions. Such
redemptions or exchanges are likely to require the Fund to
sell securities to meet the Fund s payment obligations. The
larger the volume of such redemptions or exchanges, the more
difficult it will be for the Fund to satisfy the 30% Test. To
minimize the risk of failing the 30% Test, the Fund intends to
s a tisfy obligations in connection with redemptions and
exchanges first by using available cash and by selling
securities that have been held for at least three months or as
to which there will be a loss or the smallest gain or by using
borrowing facilities. If the Fund also must sell securities
that have been held for less than three months, then, to the
extent possible, the Fund will seek to conduct such sales in a
manner that will allow such sales to qualify for a special
provision in the Code that excludes from the 30% Test any
gains resulting from sales made as a result of "abnormal
<PAGE> - 25 -<PAGE>
redemptions." To the reduce the risk of failing the 30% Test,
the Fund also may engage in other investment techniques,
including engaging in transactions in futures contracts and
options on futures contracts and indexes on an unrestricted
basis (subject to the investment policies of the Fund and
Commission regulations). Notwithstanding these actions, there
can be no assurance that the Fund will be able to satisfy the
30% Test. For additional information concerning this special
Code provision, see "Dividends, Distributions, and Taxes" in
the Statement of Additional Information.
If the Trust determines that the Fund will not qualify as a
RIC under Subchapter M of the Internal Revenue Code, the Trust
will establish procedures for the Fund to reflect the
anticipated tax liability in the Fund s net asset value. To
the extent that management of the Fund determines that Federal
income taxes will more likely than not be payable by the Fund
with respect to the Fund s current tax year, the Fund intends
to make a good-faith estimate of the potential tax liability
of the Fund and to make an accrual for tax expenses.
Thereafter, the Fund would make a daily determination whether
it is appropriate for the Fund to continue to accrue for a tax
expense and, if so, to make a good-faith estimate of the
Fund s potential tax liability. Any amount by which the
accrual is reduced, or the entire amount of the accrual if the
Fund determines that the accrual is no longer appropriate,
will be reclassified as income to the Fund.
Under current law, dividends derived from interest and
dividends received by the Fund, together with distributions of
any short-term capital gains, if any, are taxable to the
shareholders of the Fund, as ordinary income at Federal income
tax rates of up to 39.6%, whether or not such dividends and
distributions are reinvested in shares of the Fund or are
received in cash.
Under current law, distributions of net long-term gains, if
any, realized by the Fund and designated as capital gains
distributions will be taxed to the shareholders of the Fund as
long-term capital gains regardless of the length of time the
shares of the Fund have been held. Currently, long-term
capital gains of individual investors are taxed at rates of up
to 28%. Statements as to the Federal tax status of
shareholders dividends and distributions will be mailed
annually. Shareholders should consult their tax advisors
concerning the tax status of the Fund s dividends in their own
states and localities.
Ordinary dividends paid to corporate or individual residents
o f foreign countries generally are subject to a 30%
withholding tax. The rate of withholding tax may be reduced
if the United States has an income tax treaty with the foreign
<PAGE> - 26 -<PAGE>
c o u n try where the recipient resides. Capital gains
distributions received by foreign investors should, in most
cases, be exempt from U.S. tax. A foreign investor will be
required to provide the Fund with supporting documentation in
order for the Fund to apply a reduced rate or exemption from
U.S. withholding tax.
Shareholders are required by law to certify that their tax
identification number is correct and that they are not subject
to back-up withholding. In the absence of this certification,
the Fund is required to withhold taxes at the rate of 31% on
dividends, capital gains distributions, and redemptions.
Shareholders who are non-resident aliens may be subject to a
withholding tax on dividends earned. For further information
regarding the taxation of dividends and distributions from the
Fund and the tax treatment of shareholders of the Fund, see
"Dividends, Distributions, and Taxes," in the Statement of
Additional Information.
Shareholders are urged to consult their own tax advisers
regarding specific questions as to Federal, state, or local
taxes.
MANAGEMENT OF THE TRUST
The Advisor
The Trust is provided investment management services by PADCO
Advisors, Inc. (the Advisor ), a Maryland corporation with
offices at 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852. The Advisor was incorporated in the State of
Maryland on February 5, 1993. Albert P. Viragh, Jr., the
Chairman of the Board and the President of the Advisor, owns a
controlling interest in the Advisor.
Under an investment advisory agreement between the Trust and
the Advisor, dated May 14, 1993, and as most-recently amended
on September 25, 1996, the Fund pays the Advisor a fee at an
annualized rate of 0.75% of the average daily net assets of
the Fund. The Advisor is responsible for the management of
the investment and the reinvestment of the assets of the Fund,
in accordance with the investment objective, policies, and
l i m itations of the Fund, and subject to the general
supervision and control of the Trustees and the officers of
the Trust. The Advisor bears all costs associated with
providing these advisory services and the expenses of the
Trustees who are affiliated persons of the Advisor. In
providing these advisory services, the Advisor, at its own
expense, has been authorized by the Trustees to employ a sub-
adviser and to enter into such service agreements as the
Advisor deems appropriate in connection with the management of
<PAGE> - 27 -<PAGE>
the Fund. The Advisor, from its own resources, including
profits from advisory fees received from the Fund, provided
such fees are legitimate and not excessive, also may make
payments to broker-dealers and other financial institutions
for their expenses in connection with the distribution of Fund
shares, which payments, to the extent made by the Advisor, may
be in addition to those payments made pursuant to a plan of
distribution for the Fund adopted by the Trust pursuant to
Rule 12b-1 under the 1940 Act (the "Distribution Plan"). See
"Distribution Plan."
The Sub-Advisor
Loomis, Sayles & Company, L.P. (the Sub-Advisor ), is the
sub-adviser of the Fund. As such, the Sub-Advisor is
responsible for daily managing the investment and reinvestment
of assets of the Fund, subject generally to review and
supervision of the Advisor and the Trustees. The Sub-Advisor
bears all expenses in connection with the performance of its
services, such as compensating and furnishing office space for
its officers and employees connected with the investment and
economic research, trading, and investment management of the
Fund.
The Sub-Advisor is a Delaware limited partnership, registered
as an investment adviser with the Commission, with offices at
2001 Pennsylvania Avenue, N.W., Suite 200, Washington, D. C.
20016. The Sub-Advisor s principal business address is One
Financial Center, Boston, Massachusetts 02111. Founded in
1926, the Sub-Advisor is one of the country's oldest and
largest investment firms. The Sub-Advisor's general partner
is indirectly owned by New England Investment Companies, L.P.,
a publicly-traded limited partnership whose general partner is
a wholly-owned subsidiary of Metropolitan Life Insurance
Company. The portfolio managers of the Fund are Steven J.
Doherty and Stephanie S. Lord. Mr. Doherty is a Vice
President of the Sub-Advisor. From 1986 to 1996, Mr. Doherty
was the portfolio manager of Howard Hughes Medical Institute
in Chevy Chase, Maryland. From 1982 to 1986, Mr. Doherty was
an Assistant Vice President and the portfolio manager of the
National Bank of Washington in Washington, D. C. Mr. Doherty
earned his Chartered Financial Analyst designation in 1990,
received his Master of Business Administration in Finance and
Investments from The George Washington University, Washington,
D. C., in 1986, and received his bachelor's degree in Business
A d m i nistration from The George Washington University,
Washington, D. C., in 1982. Ms. Lord has been a Vice
President of the Sub-Advisor since 1987. Ms. Lord earned her
Chartered Financial Analyst designation in 1991, and received
her bachelor's degree in Business Administration from The
University of Iowa, Iowa City, Iowa, in 1987.
<PAGE> - 28 -<PAGE>
Under an investment sub-advisory agreement between the Advisor
and the Sub-Advisor, dated September 25, 1996, which sub-
advisory agreement has been approved by the Trustees, the
Advisor pays the Sub-Advisor a fee at an annualized rate of
0.375% of the average daily net assets of the Fund.
The Servicer
General administrative, shareholder, dividend disbursement,
transfer agent, and registrar services are provided to the
Trust and the Fund by PADCO Service Company, Inc. (the
Servicer ), 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852, subject to the general supervision and control
of the Trustees and the officers of the Trust, pursuant to a
service agreement between the Trust and the Servicer, dated
September 19, 1995, and as most recently amended on September
25, 1996. Under this service agreement, the Fund pays the
Servicer a fee at an annualized rate of 0.20% of the average
daily net assets of the Fund.
The Servicer provides the Trust and the Fund with all required
g e n eral administrative services, including, without
limitation, office space, equipment, and personnel; clerical
and general back office services; bookkeeping, internal
accounting, and secretarial services; the determination of net
asset values; and the preparation and filing of all reports,
registration statements, proxy statements, and all other
materials required to be filed or furnished by the Trust and
the Fund under Federal and state securities laws. The
Servicer also maintains the shareholder account records for
t h e T r ust and the Fund, distributes dividends and
distributions payable by the Fund, and produces statements
with respect to account activity for the Fund and the
shareholders of the Fund. The Servicer pays all fees and
expenses that are directly related to the services provided by
the Servicer to the Trust; the Fund reimburses the Servicer
for all fees and expenses incurred by the Servicer which are
not directly related to the services the Servicer provides to
the Fund under the service agreement.
The Distributor
Pursuant to the Distribution Plan for the Fund adopted by the
Trust pursuant to Rule 12b-1 under the 1940 Act, the Fund is
provided certain distribution services by PADCO Financial
Services, Inc. (the Distributor ), 6116 Executive Boulevard,
Suite 400, Rockville, Maryland 20852, subject to the general
supervision and control of the Trustees and the officers of
the Trust. Under the Distribution Plan, dated September 25,
1996, the Fund reimburses the Distributor for a portion of the
Distributor's costs incurred in distributing the shares of the
<PAGE> - 29 -<PAGE>
Fund at an annualized rate not to exceed 0.25% of the average
daily net assets of the Fund. See "Distribution Plan."
Costs and Expenses
The Fund bears all expenses of its operations other than those
assumed by the Advisor, the Servicer, or the Distributor.
Fund expenses include: the management fee; the servicing fee
(including administrative, transfer agent, and shareholder
servicing fees); payments to be made by the Fund to the
D i stributor under the Distribution Plan; custodian and
accounting fees and expenses; legal and auditing fees;
securities valuation expenses; fidelity bonds and other
i n surance premiums; expenses of preparing and printing
prospectuses, confirmations, proxy statements, and shareholder
reports and notices; registration fees and expenses; proxy and
annual meeting expenses, if any) (to the extent that these
expenses are not covered by payments made by the Fund under
the Distribution Plan); all Federal, state, and local taxes
(including, without limitation, stamp, excise, income, and
franchise taxes); organizational costs; and non-interested
Trustees fees and expenses.
The Advisor has advanced the organizational expenses of the
Fund. These costs, which are approximately $40,000, will be
reimbursed by the Fund, and the Fund will amortize these costs
over a five-year period from the date the Fund commences
operations.
DISTRIBUTION PLAN
The Trust finances activities which are primarily intended to
result in the sale of Fund shares and has adopted the
Distribution Plan for the Fund pursuant to Rule 12b-1 under
the 1940 Act. The Trust's Distribution Plan for the Fund
provides that the Fund will pay the Distributor monthly up to
a maximum of 0.25% per annum of the Fund's daily net assets
for expenses actually incurred by the Distributor during that
month in the distribution and promotion of the Fund's shares,
including the printing of certain reports used for sales
purposes, expenses for preparation and printing of sales
literature, and related expenses, including any maintenance,
distribution, or service fees paid to securities dealers or
brokers, administrators, investment advisers, institutions,
i n c l u ding bank trust departments, and other persons
("Recipients") who have executed a distribution or service
agreement with the Distributor.
The Glass-Steagall Act generally prohibits Federal and state
chartered or supervised banks from engaging in the business of
underwriting, selling, or distributing securities. Although
<PAGE> - 30 -<PAGE>
the scope of this prohibition under the Glass-Steagall Act has
not been clearly defined by the courts or appropriate
regulatory agencies, the Distributor believes that the Glass-
Steagall Act should not preclude a bank from performing
shareholder support services or servicing and recordkeeping
functions. The Distributor intends to engage banks only to
perform such functions. Changes in Federal or state statutes
and regulations pertaining to the permissible activities of
banks and their affiliates or subsidiaries, as well as further
judicial or administrative decisions or interpretations,
however, could prevent a bank from continuing to perform all
or a part of the contemplated services. If a bank were
prohibited from so acting, the Trustees would consider what
actions, if any, would be necessary to continue to provide
such efficient and effective shareholder services. In such
event, changes in the operation of the Fund might occur,
including possible termination of any automatic investment or
redemption or other services then provided by the bank. It is
not expected that shareholders of the Fund would suffer any
adverse financial consequences as a result of any of these
occurrences. In addition, state securities laws on this issue
may differ from the interpretations of Federal law expressed
herein, and banks and other financial institutions may be
required to register as dealers pursuant to state law.
The Fund may execute portfolio transactions with, and purchase
securities issued by, depository institutions that receive
payments under the Distribution Plan. No preference for the
instruments of such depository institutions will be shown in
the selection of investments. For further information
regarding the Distribution Plan, see "Distribution Plan" in
the Statement of Additional Information.
PERFORMANCE INFORMATION
From time to time, the Fund may advertise its past investment
performance. Any such advertisement would include at least
the average annual total return quotations for one, five, and
ten-year periods, or for the life of the Fund. Other total
return quotations (e.g., aggregate or average total returns
over other time periods for the Fund) and the Fund s current
yield (as described below) may also be included. No
adjustments to total returns or to current yields are made to
reflect any income taxes payable by shareholders on dividends
and distributions paid by the Fund. Total return and current
yield data are based upon the Fund s past investment
performance and are not intended to indicate its future
investment performance. A more-detailed description of the
method by which the Fund s total returns and current yields
are calculated is included in the Fund s Statement of
<PAGE> - 31 -<PAGE>
A d d i t ional Information under Calculation of Return
Quotations and Information on Computation of Yield.
The Fund s total return for a particular period represents the
increase (or decrease) in the value of a hypothetical
investment in the Fund from the beginning to the end of the
period. Total return is calculated by subtracting the value
of the initial investment from the ending value and showing
the difference as a percentage of the initial investment,
assuming all income dividends or capital gains distributions
during the period are reinvested in shares of the Fund.
The Fund s current yield is determined by analyzing its net
income per share for a thirty-day (or one-month) period
(identified in the advertisement), and dividing by the maximum
offering price per share on the last day of the period. A
bond equivalent annualization method is used to reflect a
semi-annual compounding.
The Fund s yield is not fixed and will fluctuate in response
to prevailing interest rates and the market value of portfolio
securities and as a function of the type of securities it
owns, its average portfolio maturity, and its expenses. Yield
quotations should be considered relative to changes in the net
asset value of the Fund s shares, its investment policies, and
the risks of investing in its shares. The investment return
and principal value of an investment in the Fund will
fluctuate so that an investor s shares, when redeemed, may be
worth more or less than their original cost.
GENERAL INFORMATION ABOUT THE TRUST
Organization and Description of Shares of Beneficial Interest
The Trust is a registered open-end investment company under
the 1940 Act. The Trust was organized as a Delaware business
trust on February 10, 1993, and has present authorized capital
of unlimited shares of beneficial interest of no par value
which may be issued in more than one class. Currently, the
Trust has issued shares of nine separate classes: The Nova
Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex Precious
Metals Fund, The Rydex U.S. Government Bond Fund, The Juno
Fund, The Rydex U.S. Government Money Market Fund, The Rydex
Institutional Money Market Fund, and The Rydex High Yield
Fund. Other separate classes may be added in the future.
All shares of the Rydex Funds are freely transferable. The
Rydex Fund shares do not have preemptive rights or cumulative
voting rights, and none of the shares have any preference to
conversion, exchange, dividends, retirements, liquidation,
redemption, or any other feature. Rydex Fund shares have
<PAGE> - 32 -<PAGE>
equal voting rights, except that, in a matter affecting a
particular series in the Trust, only shares of that series may
be entitled to vote on the matter. Shareholder inquiries can
be made by telephone (at 800-820-0888 or 301-468-8520) or by
mail (to 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852).
Under the Delaware General Corporation Law, a registered
i n vestment company is not required to hold an annual
shareholders meeting if the 1940 Act does not require such a
meeting. Generally, there will not be annual meetings of
Trust shareholders. Trust shareholders may remove Trustees of
the Trust from office by votes cast at a meeting of Trust
s h areholders or by written consent. If requested by
shareholders of at least 10% of the outstanding shares of the
Trust, the Trust will call a meeting of Trust shareholders for
the purpose of voting upon the question of removal of a
T r ustee or Trustees of the Trust and will assist in
communications with other Trust shareholders.
Unlike the stockholder of a corporation, shareholders of a
business trust such as the Trust could be held personally
liable, under certain circumstances, for the obligations of
the business trust. The Trust s Declaration of Trust,
however, disclaims liability of the shareholders of the Trust,
the Trustees, or the officers of the Trust for acts or
obligations of the Trust which are binding only on the assets
and property of the Trust. The Declaration of Trust provides
for indemnification out of Trust property for all loss and
expense of any Trust shareholder held personally liable for
the obligations of the Trust. The risk of a Trust shareholder
incurring financial loss on account of shareholder liability
is limited to circumstances in which the Trust itself would
not be able to meet the Trust s obligations and this risk,
thus, should be considered remote.
As of the date of this Prospectus, no officer or Trustee of
the Trust owned any of the Fund s shares.
Trustees and Officers
The Trust has a Board of Trustees which is responsible for the
general supervision of the Trust s business. The day-to-day
operations of the Trust are the responsibility of the Trust s
officers.
Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey
08540, are the auditors of and the independent public
accountants for the Trust and the Fund.
<PAGE> - 33 -<PAGE>
Custodian
Pursuant to a separate custody agreement entered into by the
Trust, Star Bank, N.A. (the "Custodian"), Star Bank Center,
425 Walnut Street, Cincinnati, Ohio 45202, serves as
custodian for the Trust and the Fund. Under the terms of this
c u s t ody agreement, the Custodian holds the portfolio
securities of the Fund and keeps all necessary related
accounts and records.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL
INFORMATION INCORPORATED HEREIN BY REFERENCE, IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR
PRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE TRUST IN ANY JURISDICTION
IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE> - 34 -<PAGE>
APPENDIX A
Bond Ratings
Below is a description of Standard & Poor s Ratings Group
( Standard & Poor s ) and Moody s Investors Service, Inc.
( Moody s ) bond rating categories. The Fund normally invests
in bonds rated BB or lower by Standard & Poor s and/or Ba
or lower by Moody s.
Standard & Poor s Ratings
Group Corporate Bond Ratings
AAA -- This is the highest rating assigned by Standard &
Poor s to a debt obligation and indicates an extremely strong
capacity to pay principal and 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 than bonds in higher rated categories.
BBB -- Bonds rated BBB are regarded as having an
adequate capability to pay principal and interest. Whereas
they normally exhibit adequate protection parameters, adverse
economic 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 higher rated
categories.
BB -- Bonds rated BB have less near-term vulnerability to
default than other speculative issues. However, they face
major ongoing uncertainties or exposure to adverse business,
f i nancial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments.
B -- Bonds rated B have a greater vulnerability to
default but currently have the capacity to meet interest
p a y ments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
CCC -- Bonds rated CCC have a currently identifiable
vulnerability to default and are dependent upon favorable
business, financial, and economic conditions to meet timely
payment of interest and repayment of principal. In the event
<PAGE> - 35 -<PAGE>
of adverse business, financial, or economic conditions, they
are not likely to have the capacity to pay interest and repay
principal.
Moody s Investors Service, Inc.
Corporate Bond Ratings
Aaa -- Bonds rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as gilt-edged. Interest
payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa -- Bonds 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 protections may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long term risk appear
somewhat larger than in Aaa securities.
A -- Bonds rated A possess many favorable investment
attributes, and are to be considered as upper medium grade
obligations. Factors giving security principal and interest
are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds 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
e l e ments may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds rated Ba are judged to have speculative
elements. Their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or maintenance of other terms of the contract over
any longer period of time may be small.
<PAGE> - 36 -<PAGE>
Caa -- Bonds rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
<PAGE> - 37 -<PAGE>
PART B
PAGE
<PAGE>
RYDEX SERIES TRUST
THE RYDEX HIGH YIELD FUND
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852
(800) 820-0888 (301) 468-8520
STATEMENT OF ADDITIONAL INFORMATION
The Rydex High Yield Fund (the "Fund") is a diversified series
of the Rydex Series Trust, an open-end management investment
company (the "Trust"). The investment objective of the Fund is
to seek to provide investment returns that correspond to the
performance of a benchmark for high yield fixed income
securities. The Fund s current benchmark is the Merrill Lynch
High Yield Master Index (the MLHY Index ). Although there
is no assurance that the Fund's objective will be achieved,
the Fund will seek to achieve its objective by investing
primarily in a variety of long-term, intermediate-term, and
short-term below investment grade corporate bonds (including
convertible issues) commonly known as junk bonds and below
investment grade preferred securities. The Fund is part of
the Rydex Group of Funds, which is designed for professional
money managers and knowledgeable investors who intend to
invest in the Rydex Group of Funds as part of an asset-
allocation or market-timing investment strategy.
This Statement of Additional Information is not a prospectus.
It should be read in conjunction with the Fund's Prospectus,
dated December 1, 1996. A copy of the Fund's Prospectus may
be obtained without charge by writing or telephoning the Fund.
The date of this Statement of Additional Information is
December 1, 1996.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
THE RYDEX FUNDS . . . . . . . . . . . . . . . . . . . B-3
INVESTMENT POLICIES AND TECHNIQUES . . . . . . . . . B-3
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . B-12
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . B-14
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . B-14
DISTRIBUTION PLAN . . . . . . . . . . . . . . . . . . B-18
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . B-19
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . B-20
CALCULATION OF RETURN QUOTATIONS . . . . . . . . . . B-20
INFORMATION ON COMPUTATION OF YIELD . . . . . . . . . B-21
DIVIDENDS, DISTRIBUTIONS, AND TAXES . . . . . . . . . B-22
AUDITORS AND CUSTODIAN . . . . . . . . . . . . . . . B-25
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . B-25
APPENDIX A . . . . . . . . . . . . . . . . . . . . . B-26
<PAGE> B-2<PAGE>
THE RYDEX FUNDS
The Trust is an open-end management investment company, and
currently is composed of nine separate series, including The
Rydex High Yield Fund, The Nova Fund, The Ursa Fund, The Rydex
OTC Fund, The Rydex Precious Metals Fund, The Rydex U.S.
Government Bond Fund, The Juno Fund, The Rydex U.S. Government
Money Market Fund, and The Rydex Institutional Money Market
Fund (collectively, the "Rydex Funds"); other separate Rydex
Funds may be added in the future. The Rydex Funds are
principally designed for professional money managers and
investors who intend to follow an asset-allocation or market-
timing investment strategy. Except for the Rydex U.S.
Government Money Market Fund and the Rydex Institutional Money
Market Fund, each Rydex Fund is intended to provide investment
e x posure with respect to a particular segment of the
securities markets. These Rydex Funds seek investment results
that correspond over time to a specified benchmark. The Rydex
Funds may be used independently or in combination with each
other as part of an overall investment strategy.
Shares of any Rydex Fund may be exchanged, without any charge,
for shares of any other Rydex Fund on the basis of the
respective net asset values of the shares involved; provided,
that, in connection with exchanges for shares of the Rydex
Institutional Money Market Fund, certain minimum investment
levels are maintained. Copies of the separate Prospectuses
and Statements of Additional Information for the Rydex Funds
other than the Fund are available, without charge, upon
request to the Trust at 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852, or by telephoning the Trust at
(800) 820-0888 or (301) 468-8520.
INVESTMENT POLICIES AND TECHNIQUES
General
Reference is made to the sections entitled "Investment
Objective and Policies" in the Fund's Prospectus for a
discussion of the investment objective and policies of the
Fund. In addition, set forth below is further information
relating to the Fund. Investment management services are
provided to the Fund by the Trust's investment adviser, PADCO
Advisors, Inc. (the Advisor ), a Maryland corporation with
offices at 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852 and portfolio management services are provided
to the Fund by the Fund s sub-adviser, Loomis, Sayles &
Company, L. P. (the Sub-Advisor ), a Delaware limited
partnership with offices at 2001 Pennsylvania Avenue, N.W.,
Suite 200, Washington, D. C. 20016.
<PAGE> B-3<PAGE>
The investment strategies of the Fund discussed below, and as
discussed in the Fund's Prospectus, may be used by the Fund
if, in the opinion of the Sub-Advisor, these strategies will
be advantageous to the Fund. The Fund is free to reduce or
eliminate the Fund's activity in any of those areas without
changing the Fund's fundamental investment policies. There is
no assurance that any of these strategies or any other
strategies and methods of investment available to the Fund
will result in the achievement of the Fund's objective.
Futures Contracts and Options Thereupon
The Fund may purchase securities index futures contracts as a
substitute for a comparable market position in the underlying
securities. The principal trading markets for Standard &
Poor s 500 Composite Stock Price Index futures contracts and
U . S . Treasury bond futures contracts are the Chicago
Mercantile Exchange (the CME ) and the Chicago Board of Trade
(the CBOT ), respectively.
A futures contract obligates the seller to deliver (and the
purchaser to take delivery of) the specified commodity on the
expiration date of the contract. A securities index futures
contract obligates the seller to deliver (and the purchaser to
take) an amount of cash equal to a specific dollar amount
t i mes the difference between the value of a specific
securities index at the close of the last trading day of the
contract and the price at which the agreement is made. No
physical delivery of the underlying securities in the index is
made.
The Fund may purchase put or call options and write (sell) put
options on securities index futures contracts. When the Fund
purchases a put or call option on a futures contract, the Fund
pays a premium for the right to sell or purchase the
underlying futures contract for a specified price upon
exercise at any time during the option period. By writing
(selling) a put or call option on a futures contract, the Fund
receives a premium in return for granting to the purchaser of
the option the right to sell to or buy from the Fund the
underlying futures contract for a specified price upon
exercise at any time during the option period.
Whether the Fund realizes a gain or loss from futures
activities depends generally upon movements in the underlying
commodity. The extent of the Fund s loss from an unhedged
short position in futures contracts or from writing (selling)
call options on futures contracts is potentially unlimited.
The Fund may engage in related closing transactions with
respect to options on futures contracts. The Fund will only
engage in transactions in futures contracts and options
thereupon that are traded on a United States exchange or board
<PAGE> B-4<PAGE>
of trade. In addition to the uses set forth hereunder, the
F u n d may also engage in futures and futures options
transactions in order to hedge or limit the exposure of its
position to create a synthetic money market position, and for
certain other tax-related purposes. See "Taxes" in the
Prospectus.
The Fund may purchase and sell futures contracts, index
futures contracts, and options thereon only to the extent that
such activities would be consistent with the requirements of
Section 4.5 of the regulations under the Commodity Exchange
Act promulgated by the Commodity Futures Trading Commission
(the "CFTC Regulations"), under which the Fund would be
excluded from the definition of a "commodity pool operator."
Under Section 4.5 of the CFTC Regulations, the Fund may engage
in futures transactions, either for "bona fide hedging"
purposes, as this term is defined in the CFTC Regulations, or
for non-hedging purposes to the extent that the aggregate
initial margins and option premiums required to establish such
non-hedging positions do not exceed 5% of the liquidation
value of the Fund s portfolio. In the case of an option on
futures contracts that is "in-the-money" at the time of
purchase (i.e., the amount by which the exercise price of the
put option exceeds the current market value of the underlying
security or the amount by which the current market value of
the underlying security exceeds the exercise price of the call
o p t i on), the in-the-money amount may be excluded in
calculating this 5% limitation.
When the Fund purchases or sells a securities index futures
contract, or sells an option thereon, the Fund "covers" its
position. To cover its position, the Fund may maintain with
its custodian bank (and mark-to-market on a daily basis) a
segregated account consisting of cash or liquid securities
that, when added to any amounts deposited with a futures
commission merchant as margin, are equal to the market value
of the futures contract or otherwise "cover" its position. If
the Fund continues to engage in the described securities
t r a ding practices and properly segregates assets, the
segregated account will function as a practical limit on the
amount of leverage which the Fund may undertake and on the
potential increase in the speculative character of the Fund s
o u t s tanding portfolio securities. Additionally, such
segregated accounts will generally assure the availability of
adequate funds to meet the obligations of the Fund arising
from such investment activities.
The Fund may cover its long position in a futures contract by
purchasing a put option on the same futures contract with a
strike price (i.e., an exercise price) as high or higher than
the price of the futures contract, or, if the strike price of
<PAGE> B-5<PAGE>
the put is less than the price of the futures contract, the
Fund will maintain in a segregated account cash or liquid
securities equal in value to the difference between the strike
price of the put and the price of the future. The Fund may
also cover its long position in a futures contract by taking a
short position in the instruments underlying the futures
contract, or by taking positions in instruments the prices of
which are expected to move relatively consistently with the
futures contract. The Fund may cover its short position in a
futures contract by taking a long position in the instruments
underlying the futures contract, or by taking positions in
i n struments the prices of which are expected to move
relatively consistently with the futures contract.
The Fund may cover its sale of a call option on a futures
contract by taking a long position in the underlying futures
contract at a price less than or equal to the strike price of
the call option, or, if the long position in the underlying
futures contract is established at a price greater than the
strike price of the written (sold) call, the Fund will
maintain in a segregated account cash or liquid securities
equal in value to the difference between the strike price of
the call and the price of the future. The Fund may also cover
its sale of a call option by taking positions in instruments
t h e prices of which are expected to move relatively
consistently with the call option. The Fund may cover its
sale of a put option on a futures contract by taking a short
position in the underlying futures contract at a price greater
than or equal to the strike price of the put option, or, if
the short position in the underlying futures contract is
established at a price less than the strike price of the
written put, the Fund will maintain in a segregated account
cash or liquid securities equal in value to the difference
between the strike price of the put and the price of the
future. The Fund may also cover its sale of a put option by
taking positions in instruments the prices of which are
expected to move relatively consistently with the put option.
Although the Fund intends to sell futures contracts only if
there is an active market for such contracts, no assurance can
be given that a liquid market will exist for any particular
contract at any particular time. Many futures exchanges and
boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no
trades may be made that day at a price beyond that limit or
trading may be suspended for specified periods during the day.
Futures contract prices could move to the limit for several
consecutive trading days with little or no trading, thereby
p r eventing prompt liquidation of futures positions and
potentially subjecting the Fund to substantial losses. If
trading is not possible, or the Fund determines not to close a
<PAGE> B-6<PAGE>
futures position in anticipation of adverse price movements,
the Fund will be required to make daily cash payments of
variation margin. The risk that the Fund will be unable to
close out a futures position will be minimized by entering
into such transactions on a national exchange with an active
and liquid secondary market.
Index Options Transactions
The Fund may write and purchase put and call options on
securities indexes in order to hedge or limit the exposure of
their positions, to create synthetic money market positions,
and for certain other tax-related purposes. See "Taxes" in
the Prospectus.
A securities index fluctuates with changes in the market
values of the securities included in the index. Options on
securities indexes give the holder the right to receive an
amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the
securities index upon which the option is based being greater
than (in the case of a call) or less than (in the case of a
put) the exercise price of the option. The amount of cash
received, if any, will be the difference between the closing
price of the index and the exercise price of the option,
multiplied by a specified dollar multiple. The writer
(seller) of the option is obligated, in return for the
premiums received from the purchaser of the option, to make
delivery of this amount to the purchaser. Unlike the options
on securities discussed below, all settlements of index
options transactions are in cash.
Some securities index options are based on a broad market
index such as the Standard & Poor s 500 Composite Stock Price
Index , the NYSE Composite Index , or the AMEX Major Market
Index , or on a narrower index such as the Philadelphia Stock
Exchange Over-the Counter Index . Options currently are
traded on the Chicago Board Options Exchange (the "CBOE"), the
AMEX, and other exchanges ("Exchanges"). Purchased over-the-
counter options and the cover for written over-the-counter
options will be subject to the respective Fund s 15%
l i mitation on investment in illiquid securities. See
"Illiquid Securities" in the Prospectus.
Each of the Exchanges has established limitations governing
the maximum number of call or put options on the same index
which may be bought or written (sold) by a single investor,
whether acting alone or in concert with others (regardless of
whether such options are written on the same or different
Exchanges or are held or written on one or more accounts or
through one or more brokers). Under these limitations, option
positions of all investment companies advised by the same
<PAGE> B-7<PAGE>
investment adviser are combined for purposes of these limits.
Pursuant to these limitations, an Exchange may order the
liquidation of positions and may impose other sanctions or
restrictions. These position limits may restrict the number
of listed options which the Fund may buy or sell; however, the
Sub-Advisor intends to comply with all limitations.
Index options are subject to substantial risks, including the
risk of imperfect correlation between the option price and the
value of the underlying securities comprising the securities
index selected and the risk that there might not be a liquid
secondary market for the option. Because the value of an
index option depends upon movements in the level of the index
rather than the price of a particular security, whether the
Fund will realize a gain or loss from the purchase or writing
(sale) of options on an index depends upon movements in the
level of securities prices in the securities market generally
or, in the case of certain indexes, in an industry or market
segment, rather than upon movements in the price of a
particular security. Whether the Fund will realize a profit
or loss by the use of options on securities indexes will
depend on movements in the direction of the securities market
generally or of a particular industry or market segment. This
requires different skills and techniques than are required for
predicting changes in the price of individual securities. The
Fund will not enter into an option position that exposes it to
an obligation to another party, unless the Fund either (i)
owns an offsetting position in securities or other options
and/or (ii) maintains with its custodian bank (and marks-to-
market on a daily basis) a segregated account consisting of
cash or liquid securities that, when added to the premiums
deposited with respect to the option, are equal to the market
value of the underlying securities index not otherwise
covered.
Foreign Securities
The Fund may invest in high yield bonds issued by foreign
c o rporations and denominated in United States dollars.
Investing in foreign companies may involve risks not typically
associated with investing in United States companies. While
not subject to certain risks to which securities denominated
in foreign currencies are subject (for example, the value of
foreign-denominated securities, and of dividends from such
securities, can change significantly when foreign currencies
strengthen or weaken relative to the United States dollar;
securities of foreign-based issuers generally have less
trading volume and less liquidity than securities of United
States issuers; and prices in some foreign markets can be very
volatile), investments in United States dollar-denominated
foreign securities are subject to unique risks. Many foreign
countries lack uniform accounting and disclosure standards
<PAGE> B-8<PAGE>
comparable to those that apply to United States companies, and
it may be more difficult to obtain reliable information
r e g a rding a foreign issuer's financial condition and
operations. Investing in companies located abroad carries
political and economic risks distinct from those associated
with investing in the United States. Foreign investments may
be affected by actions of foreign governments adverse to the
i n t e r ests of United States investors, including the
possibility of expropriation or nationalization of assets,
confiscatory taxation, restrictions on United States
investment, or on the ability to repatriate assets or to
convert currency into U.S. dollars. There may be a greater
possibility of default by foreign governments or foreign-
government sponsored enterprises. Investments in foreign
countries also involve a risk of local political, economic, or
social instability, military action or unrest, or adverse
diplomatic developments.
U.S. Government Securities
The Fund may invest in obligations of the U.S. Treasury or
obligations either issued or guaranteed, as to principal and
i n t e r e st, by the U.S. Government, its agencies or
instrumentalities, including money market instruments ("U.S.
Government Securities"). Securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities
include U.S. Treasury securities, which are backed by the full
faith and credit of the U.S. Treasury and which differ only in
their interest rates, maturities, and times of issuance. U.S.
Treasury bills have initial maturities of one year or less;
U.S. Treasury notes have initial maturities of one to ten
y e ars; and U.S. Treasury bonds generally have initial
maturities of greater than ten years. Certain U.S. Government
S e c u r ities are issued or guaranteed by agencies or
instrumentalities of the U.S. Government including, but not
limited to, obligations of U.S. Government agencies or
instrumentalities such as the Federal National Mortgage
Association, the Government National Mortgage Association, the
S m all Business Administration, the Federal Farm Credit
Administration, the Federal Home Loan Banks, Banks for
Cooperatives (including the Central Bank for Cooperatives),
the Federal Land Banks, the Federal Intermediate Credit Banks,
the Tennessee Valley Authority, the Export-Import Bank of the
United States, the Commodity Credit Corporation, the Federal
Financing Bank, the Student Loan Marketing Association, and
the National Credit Union Administration.
Some obligations issued or guaranteed by U.S. Government
a g encies and instrumentalities, including, for example,
Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of
the U.S. Treasury. These agencies and instrumentalities may
<PAGE> B-9<PAGE>
borrow funds from the U.S. Treasury. Other obligations issued
by or guaranteed by Federal agencies, such as those securities
issued by the Federal National Mortgage Association, are
s u p ported by the discretionary authority of the U.S.
Government to purchase certain obligations of the Federal
agency, while other obligations issued by or guaranteed by
Federal agencies, such as those of the Federal Home Loan
Banks, are supported by the right of the issuer to borrow,
under certain circumstances, an amount limited to a specific
line of credit from the U.S. Treasury. While the U.S.
Government provides financial support to such U.S. Government-
sponsored Federal agencies, no assurance can be given that the
U.S. Government will always do so, since the U.S. Government
is not so obligated by law. These other agencies and
instrumentalities also are supported by the discretionary
a u t hority of the U.S. Government to purchase certain
obligations of an agency or instrumentality or by the credit
of the agency or instrumentality itself. U.S. Treasury notes
and bonds typically pay coupon interest semi-annually and
repay the principal at maturity. The Fund will invest in U.S.
Government Securities only when the Sub-Advisor is satisfied
that the credit risk with respect to the issuer is minimal.
Yields on short-, intermediate-, and long-term U.S. Government
Securities are dependent on a variety of factors, including
the general conditions of the money and bond markets, the size
of a particular offering, and the maturity of the obligation.
Debt securities with longer maturities tend to produce higher
yields and are generally subject to potentially greater
capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market value of U.S.
Government Securities generally varies inversely with changes
in market interest rates. An increase in interest rates,
therefore, would generally reduce the market value of the
Fund s portfolio investments in U.S. Government Securities,
while a decline in interest rates would generally increase the
market value of the Fund s portfolio investments in these
securities.
U.S. Government Securities may be purchased at a discount.
Such securities, when held to maturity or retired, may include
an element of capital gain. Capital losses may be realized
when such securities purchased at a premium are held to
maturity or are called or redeemed at a price lower than their
purchase price. Capital gains or losses also may be realized
upon the sale of securities.
Repurchase Agreements
As discussed in the Fund's Prospectus, the Fund may enter into
repurchase agreements with financial institutions. The Fund
follows certain procedures designed to minimize the risks
<PAGE> B-10<PAGE>
inherent in such agreements. These procedures include
effecting repurchase transactions only with large, well-
capitalized and well-established financial institutions whose
condition will be continually monitored by the Sub-Advisor.
In addition, the value of the collateral underlying the
repurchase agreement will always be at least equal to the
repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy
by a selling financial institution, the Fund will seek to
liquidate such collateral. However, the exercising of the
Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from
any sale upon a default of the obligation to repurchase were
less than the agreed-upon repurchase price, the Fund could
suffer a loss. The Fund also may experience difficulties and
incur certain costs in exercising its rights to the collateral
and may lose the interest the Fund expected to receive under
the repurchase agreement. Repurchase agreements are usually
for short periods, such as one week or less, but may be
longer. It is the current policy of the Fund not to invest in
repurchase agreements that do not mature within seven days if
any such investment, together with any other illiquid assets
held by the Fund, amounts to more than 10% of its total
assets. The Fund's investments in repurchase agreements may,
at times, be substantial when, in the view of the Sub-Advisor,
liquidity or other considerations so warrant.
When-Issued and Delayed Delivery Securities
As discussed in the Fund's Prospectus, the Fund, from time to
time, in the ordinary course of business, may purchase
securities on a when-issued or delayed delivery basis (i.e.,
delivery and payment can take place between a month and 120
days after the date of the transaction). These securities are
subject to market fluctuation and no interest accrues to the
purchaser during this period. At the time the Fund makes the
commitment to purchase securities on a when-issued or delayed
delivery basis, the Fund will record the transaction and
thereafter reflect the value of the securities, each day, of
such security in determining the Fund's net asset value. The
Fund will not purchase securities on a when-issued or delayed-
delivery basis if, as a result, more than 10% of the Fund s
net assets would be so invested. At the time of delivery of
the securities, the value of the securities may be more or
less than the purchase price. The Fund will also establish a
segregated account with its custodian bank in which the Fund
will maintain cash or liquid securities equal to or greater in
value than the Fund s purchase commitments for such when-
issued or delayed-delivery securities. The Fund does not
believe that the Fund's net asset value or income will be
adversely affected by the Fund's purchase of securities on a
when-issued or delayed delivery basis.
<PAGE> B-11<PAGE>
The foregoing strategies, and those discussed in the Fund's
P r ospectus under the heading "Investment Objective and
Policies," may subject the Fund to the effects of interest
rate fluctuations to a greater extent than would occur if such
strategies were not used. While these strategies may be used
by the Fund if, in the opinion of the Sub-Advisor, these
strategies will be advantageous to the Fund, the Fund will be
free to reduce or eliminate its activity in any of those areas
without changing its fundamental investment policies. Certain
provisions of the Internal Revenue Code, related regulations,
and rulings of the Internal Revenue Service may also have the
effect of reducing the extent to which the previously-cited
techniques may be used by the Fund, either individually or in
combination. Furthermore, there is no assurance that any of
these strategies or any other strategies and methods of
i n v estment available to the Fund will result in the
achievement of its objective.
Borrowing
The Fund may borrow money to facilitate management of the
Fund s portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio instruments would
be inconvenient or disadvantageous. Such borrowing is not for
investment purposes and will be repaid by the borrowing Fund
promptly.
As required by the Investment Company Act of 1940, as amended
(the 1940 Act ), the Fund must maintain continuous asset
c o verage (total assets, including assets acquired with
borrowed funds, less liabilities exclusive of borrowings) of
300% of all amounts borrowed. If, at any time, the value of
the Fund s assets should fail to meet this 300% coverage test,
the Fund, within three days (not including Sundays and
holidays), will reduce the amount of the Fund s borrowings to
the extent necessary to meet this 300% coverage. Maintenance
of this percentage limitation may result in the sale of
portfolio securities at a time when investment considerations
otherwise indicate that it would be disadvantageous to do so.
In addition to the foregoing, the Fund is authorized to borrow
money from a bank as a temporary measure for extraordinary or
emergency purposes in amounts not in excess of 5% of the value
of the Fund s total assets. This borrowing is not subject to
the foregoing 300% asset coverage requirement. The Fund is
authorized to pledge portfolio securities as the Sub-Advisor
deems appropriate in connection with any borrowings.
Lending of Portfolio Securities
<PAGE> B-12<PAGE>
The Fund has no present intention of lending portfolio
securities, however the Fund reserves the right, subject to
the investment restrictions set forth below, to lend portfolio
securities to brokers, dealers, and financial institutions;
provided, that cash equal to at least 100% of the market value
of the securities loaned is deposited by the borrower with the
Fund and is maintained each business day in a segregated
account pursuant to applicable regulations. While such
securities of the Fund are on loan, the borrower will pay the
Fund any income accruing thereon, and the Fund may invest the
cash collateral in portfolio securities, thereby earning
additional income. The Fund will not lend its portfolio
securities if such loans are not permitted by the laws or
regulations of any state in which the Fund s shares are
qualified for sale, and the Fund will not lend more than 33 %
of the value of the Fund s total assets. Loans of the Fund s
portfolio securities would be subject to termination by the
Fund on four business days notice, or by the borrower on one
day s notice. Borrowed securities must be returned when the
loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the
loan insures to the Fund and the Fund s shareholders. The
Fund may pay reasonable finders, borrowers, administrative,
and custodial fees in connection with a loan of the Fund s
portfolio securities.
Illiquid Securities
T h e Fund may purchase illiquid securities, including
securities that are not readily marketable and securities that
are not registered ( restricted securities ) under the
Securities Act of 1933, as amended (the 1933 Act ), but which
can be offered and sold to qualified institutional buyers
under Rule 144A under the 1933 Act. The Fund will not invest
more than 15% of the Fund s net assets in illiquid securities.
The Fund will adhere to a more restrictive limitation on the
Fund's investment in illiquid securities as required by the
securities laws of those jurisdictions where shares of the
Fund are registered for sale. The term "illiquid securities"
for this purpose means securities that cannot be disposed of
within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the
securities. Under the current guidelines of the staff of the
Securities and Exchange Commission (the Commission ),
illiquid securities also are considered to include, among
other securities, purchased over-the-counter options, certain
cover for over-the-counter options, repurchase agreements with
maturities in excess of seven days, and certain securities
whose disposition is restricted under the Federal securities
laws. The Fund may not be able to sell illiquid securities
when the Sub-Advisor considers it desirable to do so or may
have to sell such securities at a price that is lower than the
<PAGE> B-13<PAGE>
price that could be obtained if the securities were more
liquid. In addition, the sale of illiquid securities also may
require more time and may result in higher dealer discounts
and other selling expenses than does the sale of securities
that are not illiquid. Illiquid securities also may be more
difficult to value due to the unavailability of reliable
market quotations for such securities, and investment in
illiquid securities may have an adverse impact on net asset
value.
Institutional markets for restricted securities have developed
as a result of the promulgation of Rule 144A under the 1933
Act, which provides a safe harbor from 1933 Act registration
requirements for qualifying sales to institutional investors.
When Rule 144A restricted securities present an attractive
investment opportunity and otherwise meet selection criteria,
the Fund may make such investments. Whether or not such
securities are illiquid depends on the market that exists
for the particular security. The Commission staff has taken
the position that the liquidity of Rule 144A restricted
securities is a question of fact for a board of trustees to
determine, such determination to be based on a consideration
of the readily-available trading markets and the review of any
contractual restrictions. The staff also has acknowledged
t h a t , while a board of trustees retains ultimate
responsibility, the trustees may delegate this function to an
investment adviser and/or a sub-adviser. The trustees of the
Trust (the Trustees ) have delegated this responsibility for
determining the liquidity of Rule 144A restricted securities
which may be invested in by the Fund to the Advisor and the
Sub-Advisor. It is not possible to predict with assurance
exactly how the market for Rule 144A restricted securities or
any other security will develop. A security which when
p u r chased enjoyed a fair degree of marketability may
subsequently become illiquid and, accordingly, a security
which was deemed to be liquid at the time of acquisition may
subsequently become illiquid. In such event, appropriate
remedies will be considered to minimize the effect on the
Fund s liquidity
Other Investment Policies and Risk Considerations
Bank Money Market Instruments. The Fund also may purchase
bank money market instruments, including certificates of
deposit, time deposits, bankers' acceptances, and other short-
term obligations issued by U.S. banks which are members of the
Federal Reserve System. Certificates of deposit are short-
term, interest-bearing negotiable certificates evidencing the
obligation of a bank to repay funds deposited with the bank
for a specified period of time. Time deposits are non-
negotiable deposits maintained in a banking institution for a
specified period of time (in no event longer than seven days)
<PAGE> B-14<PAGE>
at a stated fixed interest rate for which a negotiable
certificate is not received. Time deposits which may be held
by the Fund will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund
administered by the Federal Deposit Insurance Corporation.
Investments in time deposits and certificates of deposits are
limited to domestic banks that have total assets in excess of
o n e billion dollars. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to a time
draft drawn on the bank by a customer of the bank; most
acceptances have maturities of six months or less and are
traded in secondary markets prior to maturity. These credit
instruments reflect the obligation both of the bank (as a
guarantor) and of the drawer (as the payor) to pay the face
amount of the instrument upon maturity. Other short-term bank
obligations in which the Fund may invest include uninsured,
direct obligations of a bank that bear fixed, floating, or
variable interest rates.
Commercial Paper. The Fund also may invest in commercial
paper, including corporate notes. These instruments are
short-term obligations issued by banks and corporations that
have maturities ranging from two to 270 days and are usually
sold on a discount basis. Each commercial paper instrument
may be backed only by the credit of the issuer or may be
backed by some form of credit enhancement, typically in the
form of a guarantee by a commercial bank. Investments in
commercial paper and other short-term promissory notes issued
b y corporations (including variable and floating rate
instruments) must be rated at the time of purchase "A-2" or
better by Standard & Poor's Ratings Group ("S&P"), "Prime-2"
or better by Moody's Investors Service, Inc. ("Moody's"), "F-
2" or better by Fitch Investors Service, Inc. ("Fitch"), "Duff
2" or better by Duff & Phelps Credit Rating Co. ("Duff"), or
"A2" or better by IBCA, Inc., or, if not rated by S&P,
Moody's, Fitch, Duff, or IBCA, Inc., must be determined by
PADCO Advisors, Inc. (the "Advisor"), the Trust's investment
adviser, to be of comparable quality pursuant to guidelines
approved by the trustees of the Trust (the "Trustees").
Please refer to Appendix A to this Prospectus for more
detailed information concerning commercial paper ratings.
The Fund also may make limited investments in guaranteed
i n v estment contracts ("GICs") issued by United States
insurance companies. The Fund will purchase a GIC only when
the Advisor has determined, under guidelines established by
the Trustees of the Trust, that the GIC presents minimal
credit risks to the Fund and is of comparable quality to
i n s truments that are rated "high quality" by certain
nationally-recognized statistical rating organizations.
<PAGE> B-15<PAGE>
Stocks and Other Equity Securities. Stocks and other equity
securities may include common stocks, fixed-rate preferred
stocks, bonds convertible into equity securities, warrants,
and rights. Common stocks, the most familiar type, represent
an equity (ownership) interest in a corporation. Although
equity securities have a history of long-term growth in value,
the prices of these securities fluctuate based on changes in a
company s financial condition and on overall market and
e c onomic conditions. Smaller companies are especially
sensitive to these factors. Common stocks have a history of
long-term growth in value; however, stock prices fluctuate in
response to general market and economic conditions, as well as
to factors affecting individual companies. The Fund intends
to invest only in the common stock of companies believed by
the Sub-Advisor to have appreciation potential, and each
security held will be monitored to determine whether the
security is contributing to the Fund s investment objective.
Preferred stocks, like debt obligations, are generally fixed-
income securities. Preferred stocks have priority as to
income and generally as to assets of the issuer; however,
i n c ome usually is limited to a definitive percentage
regardless of the issuer s earnings, and preferred stock
usually has limited voting rights. Shareholder of preferred
stocks normally have the right to receive dividends at a fixed
rate when and as declared by the issuer s board of directors,
but do not participate in other amounts available for
distribution by the issuing corporation. Dividends on the
p r eferred stock may be cumulative, and all cumulative
dividends usually must be paid prior to common shareholders
receiving any dividends. Preferred stock dividends must be
paid before common stock dividends and, for that reason,
preferred stocks generally entail less risk than common
stocks. Upon liquidation, preferred stocks are entitled to a
specified liquidation preference, which generally is the same
as the par or stated value, and are senior in right of payment
to common stock. Preferred stocks, however, are equity
securities in the sense that these securities do not represent
a liability of the issuer and, therefore, do not offer as
great a degree of protection of capital or assurance of
continued income as investments in corporate debt securities.
In addition, preferred stocks are subordinated in right of
payment to all debt obligations and creditors of the issuer,
and convertible preferred stocks may be subordinated to other
preferred stock of the same issuer.
Warrants and stock rights are almost identical to call options
in their nature, use, and effect, except that warrants and
stock rights are issued by the issuer of the underlying
security, rather than an option writer, and generally have
longer expiration dates than call options. A right is a
p r i vilege granted by a corporation to current common
<PAGE> B-16<PAGE>
shareholders, whereby these shareholders may purchase a
proportionate number of new shares, at a price that is lower
than current market prices, before the public is allowed to
purchase the shares. Because a warrant does not carry with it
the right to dividends or voting rights with respect to the
securities that the warrant holder is entitled to purchase,
and because a warrant does not represent any rights to the
assets of the issuer, a warrant may be considered more
speculative than certain other types of investments. In
addition, the value of a warrant does not necessarily change
with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to its
expiration date. The Fund will invest in only those warrants
or stock rights that are listed on the New York Stock Exchange
or American Stock Exchange.
The Fund also may invest in debt securities and preferred
stocks which are convertible into, or carry the right to
purchase, common stock or other equity securities
( convertible securities ) when, in the opinion of the Sub-
Advisor, the convertible securities may be purchased at prices
favorable relative to the common stock itself. Convertible
securities have several unique investment characteristics,
such as (1) higher yields than common stocks, but lower yields
than comparable nonconvertible fixed income securities, (2) a
lesser degree of fluctuation in value than the underlying
s t o cks since convertible securities have fixed income
characteristics, and (3) the potential for capital
appreciation if the market price of the underlying common
stock increases. A convertible security might be subject to
redemption at the option of the issuer at a price established
in the convertible security s governing instrument. If a
c o n vertible security held by the Fund is called for
redemption, the Fund might be required to permit the issuer to
redeem the security, convert the security into the underlying
common stock or sell the security to a third party.
T h e Sub-Advisor believes that the characteristics of
c o n v ertible securities make these securities suitable
investments for an investment company seeking investment
returns, including capital appreciation. These
characteristics include the potential for capital appreciation
if the value of the underlying common stock increases, the
relatively high yield received from dividends, and decreased
risks of decline in value, relative to the underlying common
stock due to their fixed income nature. In selecting
convertible securities for the Fund, the Sub-Advisor considers
the following factors: (1) the Sub-Advisor s own evaluation
of the basic underlying value of the assets and business of
the issuers of the securities; (2) the interest or dividend
income generated by the securities; (3) the potential for
capital appreciation of the securities and the underlying
<PAGE> B-17<PAGE>
common stocks; (4) the prices of the securities relative to
the underlying common stocks; (5) whether the securities are
entitled to the benefits of sinking funds or other protective
conditions; (6) the existence of any anti-dilution protections
of the security; (7) the diversification of the Fund s
portfolio as to issuers; and (8) an investment rating of Caa
or higher by Moody's Investors Service, inc. ( Moody s ) or
CCC or higher by Standard & Poor's Ratings Group ( Standard
& Poor's. ). Lower-rated and some non-rated convertible
securities are predominantly speculative with respect to the
issuer s capacity to repay principal and pay interest.
Investment in lower-rated and non-rated convertible securities
normally involves a greater degree of investment and credit
risk than does investment in convertible securities having
higher ratings. In addition, the market for non-rated
convertible securities usually is less broad than the market
for rated securities, which could affect the marketability of
the convertible securities. To the extent that the Fund holds
any lower-rated or non-rated convertible securities, the Fund
may be negatively affected by adverse economic developments,
increased volatility, or lack of liquidity.
Portfolio Turnover
As discussed in the Fund s prospectus, the Trust anticipates
that investors in the Fund, as part of a market-timing or
asset allocation investment strategy, will frequently exchange
shares of the Fund for shares in other Rydex Funds pursuant to
the exchange policy of the Trust as well as frequently redeem
shares of the Rydex Funds (see "Exchanges" in the Fund's
Prospectus). The nature of the Rydex Funds has caused the
Rydex Funds to experience substantial portfolio turnover.
Because each Rydex Fund's portfolio turnover rate to a great
extent will depend on the purchase, redemption, and exchange
activity of the Rydex Fund's investors, it is very difficult
to estimate what the Rydex Fund's actual turnover rate will be
in the future. However, the Trust expects that the portfolio
turnover experienced the Rydex Funds will continue to be
substantial.
"Portfolio Turnover Rate" is defined under the rules of the
Securities and Exchange Commission as the value of the
s e curities purchased or securities sold, excluding all
securities whose maturities at time of acquisition were one
year or less, divided by the average monthly value of such
securities owned during the year. Based on this definition,
instruments with remaining maturities of less than one year
are excluded from the calculation of portfolio turnover rate.
I n struments excluded from the calculation of portfolio
turnover generally would include the futures contracts and
option contracts in which the Rydex Funds invest since such
<PAGE> B-18<PAGE>
contracts generally have a remaining maturity of less than one
year. All instruments held by a Rydex Fund during a specified
period may have a remaining maturity of less than one year in
which case the portfolio turnover rate for that period, under
the definition, would be equal to zero. However, because of
the nature of Rydex Funds as described above, the actual
portfolio turnover of the Rydex Funds has been and it is
anticipated that their actual portfolio turnover in the future
will be unusually high.
INVESTMENT RESTRICTIONS
As described in the section of the Fund's Prospectus entitled
"Investment Objective and Policies," the Fund has adopted
certain investment restrictions as fundamental policies which
cannot be changed without the approval of the holders of a
"majority" of the outstanding shares of the Fund, as that term
is defined in the 1940 Act. The term "majority" is defined in
the 1940 Act as the lesser of: (i) 67% or more of the shares
of the series present at a meeting of shareholders, if the
holders of more than 50% of the outstanding shares of the Fund
are present or represented by proxy; or (ii) more than 50% of
the outstanding shares of the series. (All policies of the
F u nd not specifically identified in this Statement of
Additional Information or the Fund's Prospectus as fundamental
may be changed without a vote of the shareholders of the
Fund.) For purposes of the following limitations, all
percentage limitations apply immediately after a purchase or
initial investment. Any subsequent change in a particular
percentage resulting from fluctuations in value does not
require the elimination of any security from the Fund's
portfolio.
These restrictions provide that the Fund may not:
1. Lend any security or make any other loan if, as a
result, more than 33 % of the value of the Fund's
total assets would be lent to other parties, except
(i) through the purchase of a portion of an issue of
debt securities in accordance with the Fund's
investment objective, policies, and limitations, or
(ii) by engaging in repurchase agreements with
respect to portfolio securities, or (iii) through
the loans of portfolio securities provided the
borrower maintains collateral equal to at least 100%
of the value of the borrowed security and marked-to-
market daily.
<PAGE> B-19<PAGE>
2. Underwrite securities of any other issuer.
3. Purchase, hold, or deal in real estate or oil and
gas interests, although the Fund may purchase and
sell securities that are secured by real estate or
interests therein and may purchase mortgage-related
securities and may hold and sell real estate
acquired for the Fund as a result of the ownership
of securities.
4. Issue any senior security (as such term is defined
in Section 18(f) of the 1940 Act) (including the
amount of senior securities issued but excluding
liabilities and indebtedness not constituting senior
securities), except that the Fund may issue senior
s e curities in connection with transactions in
options, futures, options on futures, and other
s i m ilar investments, and except as otherwise
permitted herein and in Investment Restriction Nos.
5, 7, 8, and 9, as applicable to the Fund.
5. Pledge, mortgage, or hypothecate the Fund's assets,
except to the extent necessary to secure permitted
borrowings and to the extent related to the deposit
of assets in escrow in connection with (i) the
writing of covered put and call options, (ii) the
purchase of securities on a forward-commitment or
delayed-delivery basis, and (iii) collateral and
i n itial or variation margin arrangements with
respect to currency transactions, options, futures
contracts, including those relating to indexes, and
options on futures contracts or indexes.
6. Invest in commodities except that the Fund may
purchase and sell futures contracts, including those
relating to securities, currencies, indexes, and
o p t ions on futures contracts or indexes and
currencies underlying or related to any such futures
contracts, and purchase and sell currencies (and
o p tions thereon) or securities on a forward-
commitment or delayed-delivery basis.
7. Invest 25% or more of the value of the Fund's total
assets in the securities of one or more issuers
conducting their principal business activities in
the same industry. This limitation does not apply
to investments or obligations of the U.S. Government
or any of its agencies or instrumentalities.
8. Borrow money, except the Fund may borrow money
(i) from a bank in an amount not in excess of 33 %
of the total value of the Fund's assets (including
<PAGE> B-20<PAGE>
the amount borrowed) less the Fund's liabilities
(not including the Fund's borrowings), and (ii) for
temporary purposes in an amount not in excess of 5%
of the total value of the Fund's assets.
9. Make short sales of portfolio securities or maintain
a short position unless at all times when a short
position is open (i) the Fund maintains a segregated
account with the Fund's custodian to cover the short
position in accordance with the position of the
Securities and Exchange Commission or (ii) the Fund
o w n s an equal amount of such securities or
securities convertible into or exchangeable, without
payment of any further consideration, for securities
of the same issue as, and equal in amount to, the
securities sold short.
Furthermore, the Trustees have adopted additional investment
restrictions for the Fund. These restrictions are not
fundamental investment policies, but rather are operating
policies of the Fund, and may be changed by the Trustees
w i t h out Fund shareholder approval. These additional
investment restrictions adopted by the Trustees, to date, are
as follows:
1. The Fund will not invest in warrants.
2. The Fund will not invest in real estate limited
partnerships.
3. The Fund will not invest in mineral leases.
If a percentage restriction is adhered to at the time of an
investment, a later increase or decrease in the investment s
percentage of the value of the Fund s total assets resulting
from a change in such values or assets will not constitute a
violation of the percentage restriction.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Trustees, and in
conformity with the 1940 Act, the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder,
the Sub-Advisor is responsible for decisions to buy and sell
securities for the Fund and the selection of brokers and
dealers to effect the transactions. In seeking to implement
the Fund's policies, the Sub-Advisor effects transactions with
those brokers and dealers who the Sub-Advisor believes provide
<PAGE> B-21<PAGE>
the most favorable prices and are capable of providing
efficient executions. If such prices and executions are
obtainable from more than one dealer, the Sub-Advisor may give
consideration to placing portfolio transactions with dealers
who also furnish research and other services to the Fund or
the Sub-Advisor. Such services may include, but are not
limited to, any one or more of the following: information as
to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to
investment; wire services; and appraisals or evaluations of
portfolio securities.
The Sub-Advisor may serve as an investment manager to a number
of clients, including other investment companies. It is the
practice of the Sub-Advisor to cause purchase and sale
transactions to be allocated among the Fund and others whose
assets the Sub-Advisor manages in such manner as the Sub-
Advisor deems equitable. The main factors considered by the
Sub-Advisor in making such allocations among the Fund and
other client accounts of the Sub-Advisor are the respective
investment objectives, the relative size of portfolio holdings
of the same or comparable securities, the availability of cash
for investment, the size of investment commitments generally
held, and the opinions of the person(s) responsible, if any,
for managing the portfolios of the Fund and the other client
accounts. Purchases and sales of corporate debt securities
are normally transacted through major dealers acting as
principals. Such transactions are made on a net basis, do not
involve payment of brokerage commissions, and normally reflect
the spread between bid and asked prices.
The information and services received by the Sub-Advisor from
dealers may be of benefit to the Sub-Advisor in the management
of accounts of some of the Sub-Advisor's other clients and may
not in all cases benefit the Fund directly. While the receipt
of such information and services is useful in varying degrees
and would generally reduce the amount of research or services
otherwise performed by the Sub-Advisor and thereby reduce the
Sub-Advisor's expenses, this information and these services
are of indeterminable value and the management fee paid to the
Sub-Advisor is not reduced by any amount that may be
attributable to the value of such information and services.
Portfolio turnover rate is defined as the value of the
s e curities purchased or securities sold, excluding all
securities whose maturities at time of acquisition were one
year or less, divided by the average monthly value of such
securities owned during the year. The Fund s portfolio
turnover rate is expected to be 500%.
<PAGE> B-22<PAGE>
MANAGEMENT OF THE TRUST
The Trustees are responsible for the general supervision of
the Trust's business. The day-to-day operations of the Trust
are the responsibilities of the Trust's officers. The names
and addresses (and ages) of the Trustees and the officers of
the Trust and the officers of the Advisor, together with
information as to their principal business occupations during
the past five years, are set forth below. Fees and expenses
for non-interested Trustees will be paid by the Trust.
<PAGE> B-23<PAGE>
Trustees
*Albert P. Viragh, Jr. (55)
Chairman of the Board of Trustees and President of the
Trust; Chairman of the Board, President, and Treasurer of
PADCO Advisors, Inc., investment adviser to the Trust,
1993 to present; Chairman of the Board, President, and
Treasurer of PADCO Service Company, Inc., shareholder and
transfer agent servicer to the Trust, 1993 to present;
Chairman of the Board of Managers of the Rydex Advisor
Variable Annuity Account (the Separate Account ), a
separate account of Great American Reserve Insurance
C o mpany, 1996 to present; Chairman of the Board,
President, and Treasurer of PADCO Advisors II, Inc.,
investment adviser to the Separate Account, 1996 to
present; Chairman of the Board, President, and Treasurer
of PADCO Financial Services, Inc., a registered broker-
dealer firm, and the Rydex High Yield Fund s and the
R y dex Institutional Money Market Fund s principal
underwriter, 1996 to present; Vice President of Rushmore
I n v estment Advisors Ltd., a registered investment
adviser, 1985 to 1993. Address: 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852.
Corey A. Colehour (51)
Trustee of the Trust; Manager of the Separate Account,
1996 to present; Senior Vice President of Marketing of
Schield Management Company, a registered investment
adviser, 1985 to present. Address: 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852.
J. Kenneth Dalton (55)
Trustee of the Trust; Manager of the Separate Account,
1 9 9 6 to present; Mortgage Banking Consultant and
Investor, The Dalton Group, April 1995 to present;
President, CRAM Mortgage Group, Inc. 1966 to April 1995.
Address: 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852.
Roger Somers (52)
Trustee of the Trust; Manager of the Separate Account,
1996 to present; President, Arrow Limousine, 1963 to
present. Address: 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
<PAGE> B-24<PAGE>
Officers
Timothy P. Hagan (54)
Treasurer and Vice President of the Trust; Vice President
of PADCO Advisors, Inc., investment adviser to the Trust,
1993 to present; Treasurer and Vice President of the
Separate Account, 1996 to present; Vice President of
PADCO Advisors II, Inc., investment adviser to the
Separate Account, 1996 to present; Employee of PADCO
Service Company, Inc., shareholder and transfer agent
servicer to the Trust, 1993 to present; President and
D i rector of Rushmore Services, Inc., a registered
transfer agent, 1981 to 1993. Address: 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852.
Robert M. Steele (38)
Secretary and Vice President of the Trust; Vice President
of PADCO Advisors, Inc., investment adviser to the Trust,
1994 to present; Secretary and Vice President of the
Separate Account, 1996 to present; Vice President of
PADCO Advisors II, Inc., investment adviser to the
Separate Account, 1996 to present; Vice President of The
Boston Company, Inc., an institutional money management
firm, 1987 to 1994. Address: 6116 Executive Boulevard,
Suite 400, Rockville, Maryland 20852.
Michael P. Byrum (26)
Assistant Secretary of the Trust; Employee of PADCO
Advisors, Inc., 1993 to present; portfolio manager of The
Ursa Fund (since 1996), The Rydex Precious Metals Fund
(since 1993), The Juno Fund (since 1995), The Rydex U.S.
Government Money Market Fund (since 1993), and The Rydex
Institutional Money Market Fund (since 1996), each a
series of the Trust; Assistant Secretary of the Separate
Account, 1996 to present; Employee of PADCO Advisors II,
I n c., investment adviser to the Separate Account;
Investment Representative, Money Management Associates, a
registered investment adviser, 1992 to 1993; Student,
M i ami University, of Oxford, Ohio (B.A., Business
A d m inistration, 1992). Address: 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852.
_________________________
* This Trustee is deemed to be an "interested person" of
the Trust, within the meaning of Section 2(a)(19) of the
1940 Act, inasmuch as this person is affiliated with the
Advisor, as described herein.
The Advisor, which has its office at 6116 Executive Boulevard,
Suite 400, Rockville, Maryland 20852, provides the Fund with
investment management services. The Advisor was incorporated
<PAGE> B-25<PAGE>
in the State of Maryland on February 5, 1993. Albert P.
Viragh, Jr., the Chairman of the Board of Trustees and the
President of the Advisor, owns a controlling interest in the
Advisor.
The Fund bears all expenses of its operations other than those
assumed by the Advisor, the Sub-Advisor, and the Servicer.
Fund expenses include: the management fee; the servicing fee
(including administrative, transfer agent, and shareholder
servicing fees); custodian and accounting fees and expenses;
legal and auditing fees; fidelity bonds and other insurance
premiums; expenses of preparing and printing prospectuses,
confirmations, proxy statements, and shareholder reports and
notices; registration fees and expenses; proxy and annual
meeting expenses, if any; all Federal, state, and local taxes
(including, without limitation, stamp, excise, income, and
franchise taxes); organizational costs; non-interested
trustees' fees and expenses; the costs and expenses of
redeeming shares of the Fund; fees and expenses paid to any
securities pricing organization; dues and expenses associated
with membership in any mutual fund organization; and costs for
incoming telephone WATTS lines. In addition, each of the nine
Rydex Funds, including the Fund, pays an equal portion of the
Trustee fees and expenses for attendance at Trustee meetings
for the Trustees of the Trust who are not affiliated with or
interested persons of the Advisor.
The aggregate compensation paid by the Trust to each of its
Trustees serving during the fiscal year ended June 30, 1996,
is set forth in the table below:
<TABLE>
<CAPTION>
Name of Aggregate Pension or Estimated
Person, Compensation Retirement Annual Benefit
Position from the Benefits upon
Trust** Accrued as Part Retirement
of the Trust s
Expenses
<S> <C> <C> <C>
Albert P. $0 $0 $0
Viragh, Jr.*
Chairman and
President
Corey A. $7,500 $0 $0
Colehour
Trustee
J. Kenneth $4,500 $0 $0
Dalton
Trustee
Roger Somers $7,500 $0 $0
Trustee
</TABLE>
___________________________
<PAGE> B-26<PAGE>
* Denotes an "interested person" of the Trust.
** Mr. David R. Petersen, who resigned as a Trustee,
effective October 13, 1995, was paid $2,000 in aggregate
compensation by the Trust during the fiscal year ended
June 30, 1996.
As of the date of this Statement of Additional Information, no
person, other than the Advisor, was a record owner or, to the
knowledge of the Trust, beneficial owner of 5% or more of the
shares of the Fund.
The Advisory Agreement
Under an investment advisory agreement with the Advisor, dated
May 14, 1993, and amended on November 2, 1993, December 13,
1994, March 8, 1996, and September 25, 1996, the Advisor
serves as the investment adviser for each series of the Trust
and oversees the day-to-day operations of the Fund (including
monitoring the performance of the Sub-Advisor, as discussed
below), subject to direction and control by the Trustees and
the officers of the Trust. The Trust currently is composed of
nine separate series, The Nova Fund, The Ursa Fund, The Rydex
OTC Fund, The Rydex Precious Metals Fund, The Rydex U.S.
Government Bond Fund, The Juno Fund, The Rydex U.S. Government
Money Market Fund, The Rydex Institutional Money Market Fund,
and The Rydex High Yield Fund; other separate series may be
added in the future. As of November 1, 1996, net Trust assets
under management of the Advisor were approximately $1 billion.
Pursuant to the advisory agreement, the Fund pays the Advisor
a fee at an annual rate based on 0.75% of the net assets of
the Fund. The Advisor is responsible for the management of
the investment and the reinvestment of the assets of the Fund,
in accordance with the investment objective, policies, and
limitations of the Fund, and subject to the general
supervision and control of the officers of the Trust and the
Trustees. The Advisor bears all costs associated with
providing these advisory services. In providing these
advisory services, the Advisor, at its own expense, has been
authorized by the Trustees to employ a sub-adviser and to
enter into such service agreements as the Advisor deems
appropriate in connection with the management of the Fund.
The Advisor, from its own resources, including profits from
advisory fees received from the Fund, provided such fees are
legitimate and not excessive, also may make payments to
broker-dealers and other financial institutions for their
expenses in connection with the distribution of Fund shares,
which payments, to the extent made by the Advisor, may be in
addition to those payments made pursuant to a plan of
distribution for the Fund adopted by the Trust pursuant to
Rule 12b-1 under the 1940 Act (the "Distribution Plan"). See
"Distribution Plan."
The Sub-Advisory Agreement
<PAGE> B-27<PAGE>
Loomis, Sayles & Company, L.P. (the Sub-Advisor ), is the
sub-adviser of the Fund. As such, the Sub-Advisor is
responsible for daily managing the investment and reinvestment
of assets of the Fund, subject generally to review and
supervision of the Advisor and the Trustees. The Sub-Advisor
bears all expenses in connection with the performance of its
services, such as compensating and furnishing office space for
its officers and employees connected with the investment and
economic research, trading, and investment management of the
Fund.
The Sub-Advisor is a Delaware limited partnership, registered
as an investment adviser with the Commission. The Sub-
Advisor s principal business address is One Financial Center,
Boston, Massachusetts 02111. Founded in 1926, the Sub-Advisor
is one of the country's oldest and largest investment firms.
The Sub-Advisor's general partner is indirectly owned by New
England Investment Companies, L.P., a publicly-traded limited
partnership whose general partner is a wholly-owned subsidiary
of Metropolitan Life Insurance Company. The portfolio
managers of the Fund are Steven J. Doherty and Stephanie S.
Lord. Mr. Doherty is a Vice President of the Sub-Advisor.
From 1986 to 1996, Mr. Doherty was the portfolio manager of
Howard Hughes Medical Institute in Chevy Chase, Maryland.
From 1982 to 1986, Mr. Doherty was an Assistant Vice President
and the portfolio manager of the National Bank of Washington
in Washington, D. C. Mr. Doherty earned his Chartered
Financial Analyst designation in 1990, received his Master of
Business Administration in Finance and Investments from The
George Washington University, Washington, D. C., in 1986, and
received his bachelor's degree in Business Administration from
The George Washington University, Washington, D. C., in 1982.
Ms. Lord has been a Vice President of the Sub-Advisor since
1987. Ms. Lord earned her Chartered Financial Analyst
designation in 1991, and received her bachelor's degree in
Business Administration from The University of Iowa, Iowa
City, Iowa, in 1987.
Under an investment sub-advisory agreement between the Advisor
and the Sub-Advisor, dated September 25, 1996, which sub-
advisory agreement has been approved by the Trustees, the
Advisor pays the Sub-Advisor a fee at an annualized rate of
0.375% of the average daily net assets of the Fund.
The Service Agreement
General administrative, shareholder, dividend disbursement,
transfer agent, and registrar services are provided to the
Trust and the Fund by PADCO Service Company, Inc., 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852
(the "Servicer"), subject to the general supervision and
control of the Trustees and the officers of the Trust,
pursuant to a service agreement between the Trust and the
Servicer, dated September 19, 1995, and as amended on March 8,
1996, and as further amended on September 25, 1996. The
<PAGE> B-28<PAGE>
Servicer is wholly-owned by Albert P. Viragh, Jr., who is the
Chairman of the Board and the President of the Trust and the
sole controlling person and majority owner of the Advisor.
Under the service agreement with the Servicer, the Fund pays
the Servicer an annual fee based on 0.20% of the net assets of
the Fund. Under the service agreement, the Servicer provides
the Fund with all required general administrative services,
including, without limitation, office space, equipment, and
p e r sonnel; clerical and general back office services;
bookkeeping, internal accounting, and secretarial services;
the determination of net asset values; and the preparation
and filing of all reports, registration statements, proxy
statements, and all other materials required to be filed or
furnished by the Fund under Federal and state securities laws.
The Servicer also maintains the shareholder account records
for the Fund, distributes dividends and distributions payable
by the Fund, and produces statements with respect to account
activity for the Fund and its shareholders. The Servicer pays
all fees and expenses that are directly related to the
services provided by the Servicer to the Fund; the Fund
reimburses the Servicer for all fees and expenses incurred by
the Servicer which are not directly related to the services
the Servicer provides to the Fund under the service agreement.
DISTRIBUTION PLAN
Pursuant to the Trust's plan of distribution for the Fund
adopted by the Trust pursuant to Rule 12b-1 under the 1940 Act
(the "Distribution Plan"), the Fund will pay PADCO Financial
Services, Inc. (the "Distributor"), monthly at a rate not to
exceed 0.25% of the average daily net assets of the Fund
during that month for expenses actually incurred in the
distribution and promotion of the Fund's shares, and the
Distributor, in turn, on a quarterly basis will pay certain
securities dealers or brokers, administrators, investment
advisers, institutions, including bank trust departments, and
other persons ("Recipients") amounts based on the average
daily net asset value of shares of the Fund owned by that
Recipient or its customers during that month. No such
payments, however, will be made to any Recipient in any month
if the aggregate net asset value of all Fund shares held by
the Recipient or its customers at the end of such month, taken
without regard to the minimum holding period, does not exceed
a minimum amount. The minimum holding period and minimum
level of holdings, if any, will be determined from time to
time by a majority of the Trustees of the Trust who are not
"interested persons" of the Trust, as defined in the 1940 Act,
and who have no direct or indirect financial interest in the
operation of the Distribution Plan or any agreements related
to the Distribution Plan (the "Rule 12b-1 Trustees"). The
services to be provided by the Recipients may include, but are
not limited to, distributing sales literature, answering
routine customer inquiries regarding the Trust and the Fund,
<PAGE> B-29<PAGE>
assisting in establishing and maintaining shareholder accounts
and processing purchase and redemption transactions, making
the Trust's investment plans and shareholder services options
available and providing such other information and services as
the Distributor or the Trust may reasonably request from time
to time.
Pursuant to the Distribution Plan, the Distributor, in
addition to being reimbursed by the Fund for any payments to
Recipients, also will be entitled to reimbursement monthly (up
to the maximum of 0.25% per annum of the average net assets of
the Fund) for the Distributor's other expenses incurred in the
distribution and promotion of the Fund's shares, including,
but not limited to, the printing of certain reports used for
sales purposes, advertisements, expenses of preparation and
printing of sales literature, and other distribution related
expenses, including any distribution or service fees paid to
Recipients who have executed a distribution or service
agreement with the Distributor. The maximum amount which may
be paid to these Recipients by the Distributor (which will be
determined according to the services provided in assisting
investors with their accounts and/or shares sold) is 0.25% (on
an annual basis) of the Fund's average net assets owned by
those Recipients or by clients of those Recipients.
The Distributor is required to report in writing to the
Trustees of the Trust at least quarterly on the monies
reimbursed to the Distributor under the Distribution Plan, as
well as to furnish the Trustees with such other information as
may reasonably be requested in connection with the payments
made under the Distribution Plan in order to enable the
Trustees to make an informed determination as to whether the
Distribution Plan should be continued.
The Trustees of the Trust have determined that a consistent
cash flow resulting from the sale of new shares of the Fund is
necessary and appropriate to meet redemptions and to take
advantage of buying opportunities without having to make
unwarranted liquidations of portfolio securities of the Fund.
The Trustees, therefore, felt that it will likely benefit the
Fund to have monies available for the direct distribution
activities of the Distributor in promoting the sale of the
Fund's shares. The Trustees, including the Rule 12b-1
Trustees, concluded, in the exercise of their reasonable
business judgment and in light of their fiduciary duties, that
there is a reasonable likelihood that the Distribution Plan
will benefit the Fund and its shareholders.
The Distribution Plan has been approved by the Trustees of the
Trust, including all of the Rule 12b-1 Trustees, and by the
Fund's initial shareholder. The Distribution Plan must be
renewed annually by the Trustees of the Trust, including by a
majority of the Rule 12b-1 Trustees, cast in person at a
meeting called for that purpose. The Distribution Plan and
any distribution or service agreement may be terminated at any
<PAGE> B-30<PAGE>
time, without any penalty, by the Trustees or by a vote of a
majority of the Fund's outstanding shares on sixty (60) days'
written notice. The Distributor or any Recipient also may
terminate their respective distribution or service agreement
at any time upon written notice.
T h e Distribution Plan and any distribution or service
agreement may not be amended to increase materially the amount
spent for distribution expenses or in any other material way
without approval by a majority of the Fund's outstanding
shares, and all material amendments to the Distribution Plan
or any distribution or service agreement shall be approved by
the Rule 12b-1 Trustees, cast in person at a meeting called
for the purpose of voting on any such amendment.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund's shares is determined each
day on which both the New York Stock Exchange (the "NYSE") and
the Federal Reserve Bank of New York (the New York Fed ) are
open for business at 3:00 P.M., Eastern Time. Currently, the
NYSE and the New York Fed are closed on weekends, and the
following holiday closings have been scheduled for 1997: (i)
N e w Y ear's Day, Martin Luther King Jr.'s Birthday,
Washington's Birthday, Good Friday, Memorial Day, July Fourth,
Labor Day, Columbus Day, Thanksgiving Day, and Christmas Day;
and (ii) the preceding Friday when any of those holidays falls
on a Saturday or the subsequent Monday when any one of those
holidays falls on a Sunday. To the extent that portfolio
securities of the Fund are traded in other markets on days
when the NYSE or the New York Fed is closed, the Fund's net
asset value may be affected on days when investors do not have
access to the Fund to purchase or redeem shares. Although the
Trust expects the same holiday schedule to be observed in the
future, the NYSE and the New York Fed each may modify its
holiday schedule at any time. The net asset value of the Fund
serves as the basis for the purchase and redemption price of
the Fund's shares.
PERFORMANCE INFORMATION
From time to time, the Fund may include its total return in
advertisements or reports to shareholders or prospective
shareholders. Quotations of average annual total return for
the Fund will be expressed in terms of the average annual
compounded rate of return on a hypothetical investment in the
Fund over a period of at least one, five, and ten years (up to
the life of the Fund) (the ending date of the period will be
stated). Total return of the Fund is calculated from two
factors: the amount of dividends earned by the Fund share and
by the increase or decrease in value of the Fund's share
price. See "Calculation of Return Quotations."
<PAGE> B-31<PAGE>
Performance information for the Fund contained in reports to
shareholders or prospective shareholders, advertisements, and
other promotional literature may be compared to the record of
various unmanaged indexes. Performance information for the
Fund may be compared to its current benchmark, the MLHY Index
and to various other unmanaged indexes, including, but not
limited to, the Shearson Lehman Government (LT) Index.
Unmanaged indexes may assume reinvestment of dividends, but
generally do not reflect payments of brokerage commissions or
d e d uctions for operating costs and other expenses of
investing, as do the total return calculations for the Fund.
In addition, the Fund's total return may be compared to the
performance of broad groups of comparable mutual funds with
similar investment goals, as such performance is tracked and
p u b lished by such independent organizations as Lipper
Analytical Services, Inc. ("Lipper"), and CDA Investment
Technologies, Inc., among others. When Lipper's tracking
results are used, the Fund will be compared to Lipper's
appropriate fund category, that is, by fund objective and
portfolio holdings. Accordingly, the Lipper ranking and
comparison, which may be used by the Trust in performance
reports for the Fund will include those for high yield funds.
Since the assets in all mutual funds are always changing, the
Fund may be ranked within one Lipper asset-size class at one
time and in another Lipper asset-size class at some other
time. Footnotes in advertisements and other marketing
literature will include the time period and Lipper asset-size
c l a s s , as applicable, for the ranking in question.
Performance figures are based on historical results and are
not intended to indicate future performance.
CALCULATION OF RETURN QUOTATIONS
For purposes of quoting and comparing the performance of the
Fund to that of other mutual funds and to other relevant
m a r k e t indexes in advertisements or in reports to
shareholders, performance for the Fund may be stated in terms
of total return. Under the rules of the Securities and
Exchange Commission ("SEC Rules"), funds advertising
performance must include total return quotes calculated
according to the following formula:
P(1+T)n=ERV
Where: P = a hypothetical initial payment of
$1,000;
T = average annual total return;
n = number of years (1, 5, or 10); and
<PAGE> B-32<PAGE>
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of
the 1, 5, or 10 year periods at the end of
t h e 1, 5, or 10 year periods (or
fractional portion thereof).
Under the foregoing formula, the time periods used in
advertising will be based on rolling calendar quarters,
updated to the last day of the most recent quarter prior to
submission of the advertising for publication, and will cover
1, 5, and 10 year periods or a shorter period dating from the
inception of the Fund. In calculating the ending redeemable
value, all dividends and distributions by the Fund are assumed
to have been reinvested at net asset value as described in the
Trust's Prospectus on the reinvestment dates during the
period. Total return, or "T" in the formula above, is
computed by finding the average annual compounded rates of
return over the 1, 5, and 10 year periods (or fractional
portion thereof) that would equate the initial amount invested
to the ending redeemable value.
From time to time, the Fund also may include in such
advertising a total return figure that is not calculated
according to the formula set forth above in order to compare
more accurately the performance of the Fund with other
measures of investment return. For example, in comparing the
total return of the Fund with data published by Lipper
Analytical Services, Inc., with the performance of the MLHY
Index or the Shearson Lehman Government (LT) Index, or with
t h e performance of another unmanaged index, the Fund
calculates its aggregate total return for the specified
periods of time by assuming the investment of $10,000 in Fund
shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial
value of the investment from the ending value and by dividing
the remainder by the beginning value. Such alternative total
return information will be given no greater prominence in such
advertising than the information prescribed under SEC Rules.
INFORMATION ON COMPUTATION OF YIELD
In addition to the total return quotations discussed above,
the Fund also may advertise its yield based on a thirty-day
(or one month) period ended on the date of the most recent
balance sheet included in the Trust's Registration Statement,
computed by dividing the net investment income per share of
the Fund earned during the period by the maximum offering
price per Fund share on the last day of the period, according
to the following formula:
YIELD = 2[( a-b +1)6-1]
cd
<PAGE> B-33<PAGE>
Where: a = d i vidends and interest earned
during the period;
b = expenses accrued for the period
(net of reimbursements);
c = the average daily number of shares
outstanding during the period that
were entitled to receive
dividends; and
d = the maximum offering price per
share on the last day of the
period.
Under this formula, interest earned on debt obligations for
purposes of "a" above, is calculated by (i) computing the
yield to maturity of each obligation held by the Fund based on
the market value of the obligation (including actual accrued
interest) at the close of business on the last day of each
month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest), (ii)
dividing that figure by 360 and multiplying the quotient by
the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest
income on the obligation that is in the Fund's portfolio
(assuming a month of thirty days), and (iii) computing the
total of the interest earned on all debt obligations and all
dividends accrued on all equity securities during the thirty-
day or one month period. In computing dividends accrued,
dividend income is recognized by accruing 1/360 of the stated
dividend rate of a security each day that the security is in
the Fund's portfolio. Undeclared earned income, computed in
accordance with generally accepted accounting principles, may
be subtracted from the maximum offering price calculation
required pursuant to "d" above.
The Fund from time to time may also advertise its yield based
on a thirty-day period ending on a date other than the most
recent balance sheet included in the Trust's Registration
Statement, computed in accordance with the yield formula
described above, as adjusted to conform with the differing
period for which the yield computation is based.
Any quotation of performance stated in terms of yield (whether
based on a thirty-day or one month period) will be given no
greater prominence than the information prescribed under SEC
Rules. In addition, all advertisements containing performance
data of any kind will include a legend disclosing that such
performance data represents past performance and that the
investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be
worth more or less than the original cost of such shares.
<PAGE> B-34<PAGE>
DIVIDENDS, DISTRIBUTIONS, AND TAXES
Dividends and Distributions. As discussed in the Fund's
Prospectus, the Fund intends (i) to declare dividends of
ordinary income for shares of the Fund on a daily basis, and
to distribute such dividends to shareholders of the Fund on a
monthly basis, and (ii) to distribute annually any long-term
capital gains to the shareholders of the Fund. The Trustees,
however, may declare a special distribution for the Fund if
the Trustees believe that such a distribution would be in the
b e st interest of the Fund s shareholders. All such
distributions of the Fund normally automatically will be
invested without charge in additional shares of the Fund.
Regulated Investment Company Status. The Fund intends to
qualify as a regulated investment company (a "RIC") under
Subchapter M of the U.S. Internal Revenue Code of 1986, as
amended (the "Code"). As a RIC, the Fund would not be subject
to Federal income taxes on the net investment income and
capital gains that the Fund distributes to the Fund's
shareholders. The distribution of net investment income and
capital gains will be taxable to Fund shareholders regardless
o f w h ether the shareholder elects to receive these
d i s t r i b utions in cash or in additional shares.
Distributions reported to Fund shareholders as long-term
capital gains shall be taxable as such, regardless of how long
the shareholder has owned the shares. Fund shareholders will
be notified annually by the Fund as to the Federal tax status
of all distributions made by the Fund. Distributions may be
subject to state and local taxes.
The Fund will seek to qualify for treatment as a RIC under the
Code. Provided that the Fund (i) is a RIC and (ii)
distributes at least 90% of the Fund's net investment income
(including, for this purpose, net realized short-term capital
gains), the Fund itself will not be subject to Federal income
taxes to the extent the Fund's net investment income and the
Fund's net realized short-term capital gains, if any, are
distributed to the Fund's shareholders. To avoid an excise
tax on its undistributed income, the Fund generally must
distribute at least 98% of its income. One of several
requirements for RIC qualification is that the Fund must
receive at least 90% of the Fund's gross income each year from
dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of securities
or foreign currencies, or other income derived with respect to
the Fund's investments in stock, securities, and foreign
currencies (the "90% Test").
In addition, under the Code, the Fund will not qualify as a
RIC for any taxable year if more than 30% of the Fund's gross
income for that year is derived from gains on the sale of
securities held less than three months (the "30% Test").
<PAGE> B-35<PAGE>
These requirements may also restrict the extent of the Fund's
a c tivities in option and other portfolio transactions.
Specifically, the 30% Test will limit the extent to which the
Fund may: (i) sell securities held for less than three
months; (ii) write options which expire in less than three
months; and (iii) effect closing transactions with respect to
call or put options that have been written or purchased within
the preceding three months. Finally, as discussed below, this
30% Test requirement also may limit investments by the Fund in
f u t u res contracts and options on securities indexes,
securities, and futures contracts.
The Fund expects to have greater difficulty than other mutual
f u nds in satisfying the 30% Test because of frequent
redemptions and exchanges of shares that are expected to occur
as investors in the Fund seek to take advantage of anticipated
changes in market conditions as a part of their market-timing
investment strategies. To minimize the risk that it will not
satisfy the 30% Test because of such frequent redemptions and
e x changes of shares, the Fund will seek to meet its
obligations in connection with redemptions and exchanges
without the realization of gains on the sales of securities,
options, futures or forward contracts, options on futures
c o n tracts, or foreign currencies (or options, futures
contracts, or forward contracts on such foreign currencies).
In this regard, the Fund will seek (consistent with the Fund's
investment strategies) to use available cash, proceeds of
borrowing facilities, proceeds of the sale of stock or
securities, options, futures or forward contracts, options on
futures contracts, or foreign currencies (or options, futures
contracts, or forward contracts on such foreign currencies)
that have been held for three months or more, and the proceeds
of the sale of such assets that produce either no gain or the
smallest amount of such gain.
Section 851(h)(3) of the Code provides a special rule for
series mutual funds with respect to the 30% Test. Pursuant to
Section 851(h)(3), a RIC that is part of a series fund will
not fail the 30% Test as a result of sales made within five
days of "abnormal redemptions" if: (i) the sum of the
percentages for abnormal redemptions exceeds 30%; and (ii) the
RIC of which such fund is a part would meet the 30% Test if
all the funds of the investment company were treated as a
single corporation. Abnormal redemptions are defined as
redemptions which occur on any day when net redemptions exceed
one percent of net asset value. If abnormal redemptions
require the Fund to sell securities with a holding period of
less than three months, the Fund intends to make those sales
within five days of such redemptions so as to qualify for the
exclusion afforded by Section 851(h)(3) of the Code if it is
possible to do so. Despite the Fund's objective to satisfy
the requirements of Section 851 of the Code, there can be no
assurance that the Fund's efforts to achieve that objective
will be successful.
<PAGE> B-36<PAGE>
If the Fund does not satisfy the 30% Test for the Fund's first
taxable year, or for any subsequent taxable year, the Fund
will not qualify as a RIC for that year. If the Fund fails to
qualify as a RIC for any taxable year, the Fund would be taxed
in the same manner as an ordinary corporation. In that event,
the Fund would not be entitled to deduct the distributions
which the Fund had paid to shareholders and, thus, would incur
a corporate income tax liability on all of the Fund's taxable
income whether or not distributed. The imposition of
corporate income taxes on the Fund would directly reduce the
return to an investor from an investment in the Fund.
In the event of a failure by the Fund to qualify as a RIC, the
Fund's distributions, to the extent such distributions are
derived from the Fund's current or accumulated earnings and
profits, would constitute dividends that would be taxable to
the shareholders of the Fund as ordinary income and would be
eligible for the dividends-received deduction for corporate
shareholders. This treatment would also apply to any portion
of the distributions that might have been treated in the
shareholder's hands as long-term capital gains, as discussed
below, had the Fund qualified as a RIC.
If the Fund were to fail to qualify as a RIC for one or more
taxable years, the Fund could then qualify (or requalify) as a
RIC for a subsequent taxable year only if the Fund had
distributed to the Fund's shareholders a taxable dividend
equal to the full amount of any earnings or profits (less the
interest charge mentioned below, if applicable) attributable
to such period. The Fund might also be required to pay to the
U.S. Internal Revenue Service (the "IRS") interest on 50% of
such accumulated earnings and profits. In addition, pursuant
to the Code and an interpretative notice issued by the IRS, if
the Fund should fail to qualify as a RIC and should thereafter
seek to requalify as a RIC, the Fund may be subject to tax on
the excess (if any) of the fair market of the Fund's assets
over the Fund's basis in such assets, as of the day
immediately before the first taxable year for which the Fund
seeks to requalify as a RIC.
If the Fund determines that the Fund will not qualify as a RIC
under Subchapter M of the Code, the Fund will establish
procedures to reflect the anticipated tax liability in the
Fund's net asset value.
When the Fund is required to sell securities to meet
significant redemptions or exchanges, the Fund may enter into
futures contracts as a hedge against price changes in the
securities to be sold. Gains realized by the Fund upon
closing out the Fund's position in these contracts are subject
to the 30% Test. Ordinarily, these gains could not be offset
by declines in the value of the hedged securities for purposes
of the 30% Test. Section 851(g)(1) of the Code, however,
provides that, in the case of a "designated hedge," for
purposes of the 30% Test, increases and decreases in value
<PAGE> B-37<PAGE>
(during the period of the hedge) of positions which are part
of the hedge are to be netted. Section 851(g)(2) of the Code
provides that a "designated hedge" exists when: (i) the
taxpayer's risk of loss with respect to any position in
property is reduced by reason of a contractual obligation to
sell substantially identical property; and (ii) the taxpayer
clearly identifies the positions which are part of the hedge
in the manner prescribed in the IRS regulations.
IRS regulations have not yet been issued specifying how this
identification requirement can be satisfied. The legislative
history with respect to Section 851(g) states that, prior to
issuance of regulations, the identification requirement is
satisfied either by: (i) placing the positions that are part
of the hedge in a separate account that is maintained by a
broker, futures commission merchant ("FCM"), custodian, or
similar person, and that is designated as a hedging account,
provided that such person maintaining such account makes
notations identifying the hedged and hedging positions and the
d a te on which the hedge is established; or (ii) the
designation by such a broker, FCM, custodian, or similar
person of such positions as a hedge for purposes of these
provisions, provided that the RIC is provided with a written
confirmation stating the date that the hedge is established
and identifying the hedged and hedging positions.
When the Fund enters into futures contracts to hedge against
price changes of securities to be sold, the Fund may identify
such securities and contracts as a hedge so as to qualify
under Section 851(g)(1) of the Code. There can be no
assurances, however, that the Fund (or the Fund's agents) will
be able to comply with the identification requirements that
may be contained in future IRS regulations. Moreover, the
netting rule of Section 851(g)(1) is available only if the
securities to be sold and the property subject to the futures
contracts constitute "substantially identical" property. The
Fund generally intends to sell pro rata the securities being
hedged, but it is unclear whether the securities and the
futures contracts would constitute "substantially identical"
property.
Transactions By the Fund. If a call option written by the
Fund expires, the amount of the premium received by the Fund
for the option will be short-term or long-term capital gain to
the Fund depending on the Fund's holding period for the
underlying security or underlying futures contract. If such
an option is closed by the Fund, any gain or loss realized by
the Fund as a result of the closing purchase transaction will
be short-term or long-term capital gain or loss depending on
the Fund's holding period for the underlying security or
underlying futures contract. If the holder of a call option
exercises the holder's right under the option, any gain or
loss realized by the Fund upon the sale of the underlying
security or underlying futures contract pursuant to such
exercise will be short-term or long-term capital gain or loss
<PAGE> B-38<PAGE>
to the Fund depending on the Fund's holding period for the
underlying security or underlying futures contract.
With respect to call options purchased by the Fund, the Fund
will realize short-term or long-term capital gain or loss if
such option is sold and will realize short-term or long-term
capital loss if the option is allowed to expire depending on
the Fund's holding period for the call option. If such a call
option is exercised, the amount paid by the Fund for the
option will be added to the basis of the securities or futures
contract so acquired.
The Fund in its operations also may utilize options on
securities indexes. Options on "broad based" securities
indexes are classified as "nonequity options" under the Code.
Gains and losses resulting from the expiration, exercise, or
closing of such nonequity options, as well as gains and losses
resulting from futures contract transactions, will be treated
as long-term capital gain or loss to the extent of 60% thereof
and short-term capital gain or loss to the extent of 40%
thereof (hereinafter, "blended gain or loss"). In addition,
any nonequity option and futures contract held by the Fund on
the last day of a fiscal year will be treated as sold for
market value on that date, and gain or loss recognized as a
result of such deemed sale will be blended gain or loss.
The trading strategies of the Fund involving nonequity options
on securities indexes may constitute "straddle" transactions.
"Straddles" may affect the taxation of such instruments and
may cause the postponement of recognition of losses incurred
in certain closing transactions. The Fund will also have
available to it a number of elections under the Code
concerning the treatment of option transactions for tax
purposes. The Fund will utilize the tax treatment that, in
the Fund's judgment, will be most favorable to a majority of
investors in the Fund. Taxation of these transactions will
vary according to the elections made by the Fund. These tax
considerations may have an impact on investment decisions made
by the Fund.
The Fund's transactions in options, under some circumstances,
could preclude the Fund's qualifying for the special tax
treatment available to investment companies meeting the
requirements of Subchapter M of the Code. However, it is the
intention of the Fund's portfolio management to limit gains
from such investments to less than 10% of the gross income of
the Fund during any fiscal year in order to maintain this
qualification.
Back-Up Withholding. The Fund is required to withhold and
remit to the U.S. Treasury 31% of (i) reportable taxable
dividends and distributions and (ii) the proceeds of any
redemptions of Fund shares with respect to any shareholder who
is not exempt from withholding and who fails to furnish the
Trust with a correct taxpayer identification number, who fails
<PAGE> B-39<PAGE>
to report fully dividend or interest income, or who fails to
certify to the Trust that the shareholder has provided a
c o r r e ct taxpayer identification number and that the
shareholder is not subject to withholding. (An individual's
taxpayer identification number is the individual's social
security number.) The 31% "back-up withholding tax" is not an
additional tax and may be credited against a taxpayer's
regular Federal income tax liability.
Other Issues. The Fund may be subject to tax or taxes in
certain states where the Fund does business. Furthermore, in
those states which have income tax laws, the tax treatment of
t h e F und and of Fund shareholders with respect to
distributions by the Fund may differ from Federal tax
treatment.
Shareholders are urged to consult their own tax advisors
regarding the application of the provisions of tax law
described in this Statement of Additional Information in light
of the particular tax situations of the shareholders and
regarding specific questions as to Federal, state, or local
taxes.
AUDITORS AND CUSTODIAN
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey
08540, are the auditors and the independent certified public
accountants of the Trust and the Fund. Star Bank, N.A., 425
Walnut Street, Cincinnati, Ohio 45202, acts as the Custodian
bank for the Trust and the Fund.
FINANCIAL STATEMENTS
As of the date of this Statement of Additional Information,
the Fund has not commenced a public offering of its shares
and, therefore, the Fund has no assets and no financial
statements are presented with respect to the Fund.
<PAGE> B-40<PAGE>
APPENDIX A
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Commercial paper rated "Prime" by Moody's Investors
Service, Inc. ("Moody's"), is based upon Moody's evaluation of
many factors including: (1) the management of the issuer; (2)
the issuer's industry or industries and the speculative-type
risks which may be inherent in certain areas; (3) the issuer's
products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6)
trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist
with the issue; and (8) recognition by the management of
obligations which may be present or may arise as a result of
public interest questions and preparations to meet such
obligations. Relative differences in these factors determine
whether the issuer's commercial paper is rated "Prime-1,"
"Prime-2," or "Prime-3" by Moody's.
"Prime-1" indicates a superior capacity for repayment of
short-term promissory obligations. Prime-1 repayment capacity
will normally be evidenced by the following characteristics:
(1) leading market positions in well-established industries;
(2) high rates of return on funds employed; (3) conservative
capitalization structures with moderate reliance on debt and
ample asset protection; (4) broad margins in earnings coverage
of fixed financial charges and high internal cash generation;
and (5) well-established access to a range of financial
markets and assured sources of alternative liquidity.
"Prime-2" indicates a strong capacity for repayment of
short-term promissory obligations. This repayment capacity
normally will be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to
v a riation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
Standard & Poor's Rating Group
Commercial paper rated by Standard & Poor's Rating Group
("S&P") has the following characteristics: (1) liquidity
ratios adequate to meet cash requirements; (2) long-term
senior debt is rated "A" or better; (3) the issuer has access
to at least two additional channels of borrowing; (4) basic
earnings and cash flow have an upward trend with allowance
made for unusual circumstances; (5) typically, the issuer's
industry is well-established and the issuer has a strong
position within the industry; and (6) the reliability and
quality of management are unquestioned. The relative strength
<PAGE> B-41<PAGE>
or weakness of the above factors determine whether the
issuer's commercial paper is rated "A-1," "A-2," or "A-3."
A-1 -- This designation rating indicates that the degree
of safety regarding timely payment is either overwhelming or
very strong. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign
designation.
A-2 -- The capacity for timely payment on issues with
this designation rating is strong; however, the relative
degree of safety is not as high as for issues designated "A-
1."
Fitch Investors Service, Inc.
Commercial paper rated by Fitch Investors Service, Inc.
("Fitch"), reflects Fitch's current appraisal of the degree of
assurance of timely payment of such debt. An appraisal
results in the rating of an issuer's paper as "F-1," "F-2,"
"F-3," or "F-4."
F-1 -- This designation rating indicates that the
commercial paper is regarded as having the strongest degree of
assurance for timely payment.
F-2 -- Commercial paper issues assigned this designation
rating reflect an assurance of timely payment only slightly
less in degree than those issues rated "F-1."
Duff and Phelps Credit Rating Co.
Short-term ratings by Duff & Phelps Credit Rating Co.
("Duff") are consistent with the rating criteria utilized by
m o ney market participants. The ratings apply to all
obligations with maturities of under one year, including
commercial paper, the uninsured portion of certificates of
d e p o sit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper
is also rated according to this scale.
An emphasis of Duff's short-term ratings is placed on
" l i quidity," which is defined as not only cash from
operations, but also access to alternative sources of funds
including trade credit, bank lines, and the capital markets.
An important consideration is the level of an obligor's
reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff's short-term ratings
is the refinement of the traditional "1" category. The
majority of short-term debt issuers carry the highest rating,
yet quality differences exist within that tier. As a
consequence, Duff has incorporated gradations of "1+" (one
<PAGE> B-42<PAGE>
plus) and "1-" (one minus) to assist investors in recognizing
those differences.
Duff 1+ -- This designation rating indicates the highest
certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
Duff 1 -- This designation rating indicates a very high
certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1- -- This designation rating indicates a high
certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk
factors are very small.
Good Grade
Duff 2 -- This designation rating indicates a good
certainty of timely payment. Liquidity factors and company
fundamental are sound. Although ongoing funding needs may
enlarge total financing requirements, access capital markets
is good. Risk factors are small.
IBCA, Inc.
In addition to conducting a careful review of an
institution's reports and published figures, IBCA's analysts
regularly visit the companies for discussions with senior
management. These meetings are fundamental to the preparation
of individual reports and ratings. To keep abreast of any
changes that may affect assessments, analysts maintain contact
throughout the year with the management of the companies that
the analysts cover.
IBCA's analysts speak the languages of the countries that
the analysts cover, which is essential to maximize the value
of their meetings with management and to analyze properly a
company's written materials. IBCA's analysts also have a
thorough knowledge of the laws and accounting practices that
govern the operations and reporting of companies within the
various countries.
Often, in order to ensure a full understanding of their
position, companies entrust IBCA with confidential data.
While these data cannot be disclosed in reports, these data
are taken into account by IBCA when assigning IBCA's ratings.
Before dispatch to subscribers, a draft of the report is
submitted to each company to permit the correction of any
factual errors and to enable the clarification of issues
raised.
<PAGE> B-43<PAGE>
IBCA's Rating Committees meet at regular intervals to
review all ratings and to ensure that individual ratings are
assigned consistently for institutions in all the countries
covered. Following these committee meetings, IBCA ratings are
issued directly to subscribers. At the same time, the company
is informed of the ratings as a matter of courtesy, but not
for discussion.
A1+ -- This designation rating indicates obligations
supported by the highest capacity for timely repayment.
A1 -- This designation rating indicates obligations
supported by a very strong capacity for timely repayment.
A2 -- This designation rating indicates obligations
supported by a strong capacity for timely repayment, although
such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
<PAGE> B-44<PAGE>
WDC #: 4600-1
<PAGE> B-45<PAGE>
