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STATEMENT OF ADDITIONAL INFORMATION
RYDEX SERIES TRUST
6116 EXECUTIVE BOULEVARD, SUITE 400
ROCKVILLE, MARYLAND 20852
301/468-8520
Rydex Series Trust (the "Trust") is a no-load mutual fund complex with
twenty-two separate investment portfolios (the "Funds"). This Statement of
Additional Information ("SAI") relates to shares of the following portfolios:
NOVA FUND
URSA FUND
OTC FUND
ARKTOS FUND
PRECIOUS METALS FUND
U.S. GOVERNMENT BOND FUND
JUNO FUND
BANKING FUND
BASIC MATERIALS FUND
BIOTECHNOLOGY FUND
CONSUMER PRODUCTS FUND
ELECTRONICS FUND
ENERGY FUND
ENERGY SERVICES FUND
FINANCIAL SERVICES FUND
HEALTH CARE FUND
LEISURE FUND
RETAILING FUND
TECHNOLOGY FUND
TELECOMMUNICATIONS FUND
TRANSPORTATION FUND
U.S. GOVERNMENT MONEY MARKET FUND
This SAI is not a prospectus. It should be read in conjunction with the Trust's
Prospectus, dated August 1, 1999. A copy of the Trust's Prospectus is available,
without charge, upon request to the Trust at the address above or by telephoning
the Trust at the telephone number above.
The date of this SAI is August 1, 1999.
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STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
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GENERAL INFORMATION ABOUT THE TRUST......................................3
ADDITIONAL INFORMATION ABOUT THE SECTOR FUNDS............................3
DESCRIPTION OF THE MONEY MARKET FUND.....................................7
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS.........................7
INVESTMENT RESTRICTIONS.................................................16
PORTFOLIO TRANSACTIONS AND BROKERAGE....................................20
MANAGEMENT OF THE TRUST.................................................21
PRINCIPAL HOLDERS OF SECURITIES.........................................27
DETERMINATION OF NET ASSET VALUE........................................27
PERFORMANCE INFORMATION.................................................29
CALCULATION OF RETURN QUOTATIONS........................................30
INFORMATION ON COMPUTATION OF YIELD.....................................31
PURCHASE AND REDEMPTION OF SHARES.......................................33
DIVIDENDS, DISTRIBUTIONS, AND TAXES.....................................34
OTHER INFORMATION.......................................................37
COUNSEL.................................................................38
AUDITORS AND CUSTODIAN..................................................38
FINANCIAL STATEMENTS....................................................38
APPENDIX...............................................................A-1
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GENERAL INFORMATION ABOUT THE TRUST
The Trust was organized as a Delaware business trust on February 10, 1993. The
Trust is permitted to offer separate portfolios and different classes of shares.
The Trust currently offers two separate classes of shares, Investor Class Shares
and Advisor Class Shares. Investor Class Shares are sold principally to
professional money managers and to investors who take part in certain
asset-allocation investment strategies. Advisor Class Shares are offered through
broker-dealers and other financial institutions ("intermediaries") that have
entered into arrangements with the Trust's Distributor (the "Distributor") to
sell Advisor Class Shares to their customers. Advisor Class Shares differ from
Investor Class Shares primarily in the allocation of certain shareholder
servicing and distribution expenses and in the minimum initial investment
requirement. Sales of shares of each Class are made without a sales charge at
each Fund's per share net asset value. Additional Funds and/or classes may be
created from time to time.
Currently, the Trust has twenty-two separate series. The Nova, Ursa, OTC,
Arktos, Precious Metals, U.S. Government Bond and Juno Funds (collectively,
the "Benchmark Funds") are designed to provide investment results which match
the performance of a specific benchmark. The Banking, Basic Materials,
Biotechnology, Consumer Products, Electronics, Energy, Energy Services,
Financial Services, Health Care, Leisure, Retailing, Technology,
Telecommunications and Transportation Funds (collectively, the "Sector
Funds") are designed to provide exposure to specific economic sectors. The
Trust also offers shares of the U.S. Government Money Market Fund (the "Money
Market Fund"). All payments received by the Trust for shares of any Fund
belong to that Fund. Each Fund has its own assets and liabilities.
ADDITIONAL INFORMATION ABOUT THE SECTOR FUNDS
BANKING FUND
The Fund may invest in companies engaged in accepting deposits and making
commercial and principally non-mortgage consumer loans. In addition, these
companies may offer services such as merchant banking, consumer and commercial
finance, discount brokerage, leasing and insurance. These companies may
concentrate their operations within a specific part of the country rather than
operating predominantly on a national or international scale.
BASIC MATERIALS FUND
The Fund may invest in companies engaged in the manufacture, mining, processing,
or distribution of raw materials and intermediate goods used in the industrial
sector. The Fund may invest in companies handling products such as chemicals,
lumber, paper, copper, iron ore, nickel, steel, aluminum, textiles, cement, and
gypsum. The Fund may also invest in the securities of mining, processing,
transportation, and distribution companies, including equipment suppliers and
railroads.
BIOTECHNOLOGY FUND
The Fund may invest in companies engaged in the research, development, sale, and
manufacture of various biotechnological products, services and processes. These
include companies involved with developing or experimental technologies such as
generic engineering, hybridoma and recombinant DNA techniques and monoclonal
antibodies. The Fund may also invest in companies that manufacture and/or
distribute biotechnological and biomedical products, including devices and
instruments, and that provide or benefit significantly from scientific and
technological advances in biotechnology. Some biotechnology companies may
provide processes or services instead of, or in addition to, products.
The description of the biotechnology sector may be interpreted broadly to
include applications and developments in such areas as human health care
(cancer, infectious disease, diagnostics and therapeutics); pharmaceuticals (new
drug development and production); agricultural and veterinary applications
(improved seed varieties, animal growth hormones); chemicals (enzymes, toxic
waste treatment); medical/surgical (epidermal growth factor, in vivo
imaging/therapeutics); and industry (biochips, fermentation, enhanced mineral
recovery).
CONSUMER PRODUCTS FUND
The Fund may invest in companies engaged in the manufacture of goods to
consumers, both domestically and internationally. The Fund may invest in
companies that manufacture durable products such as furniture, major
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appliances, and personal computers. The Fund also may invest in companies that
manufacture, wholesale or retail non-durable goods such as beverages, tobacco,
health care products, household and personal care products, apparel, and
entertainment products (E.G., books, magazines, TV, cable, movies, music,
gaming, and sports). In addition, the Fund may invest in consumer products and
services such as lodging, child care, convenience stores, and car rentals.
ELECTRONICS FUND
The Fund may invest in companies engaged in the design, manufacture, or sale of
electronic components (semiconductors, connectors, printed circuit boards and
other components); equipment vendors to electronic component manufacturers;
electronic component distributors; and electronic instruments and electronic
systems vendors. In addition, the Fund may invest in companies in the fields of
defense electronics, medical electronics, consumer electronics, advanced
manufacturing technologies (computer-aided design and computer-aided
manufacturing electro-optics, and other developing electronics technologies.
ENERGY FUND
The Fund may invest in companies in the energy field, including the conventional
areas of oil, gas, electricity and coal, and alternative sources of energy such
as nuclear, geothermal, oil shale and solar power. The business activities of
companies in which the Fund may invest include production, generation,
transmission, refining, marketing, control, distribution or measurement of
energy or energy fuels such as petrochemicals; providing component parts or
services to companies engaged in the above activities; energy research or
experimentation; and environmental activities related to pollution control.
Companies participating in new activities resulting from technological advances
or research discoveries in the energy field may also be considered for this
Fund.
ENERGY SERVICES FUND
The Fund may invest in companies in the energy service field, including those
that provide services and equipment to the conventional areas of oil, gas,
electricity and coal, and alternative sources of energy such as nuclear,
geothermal, oil shale and solar power. The Fund may invest in companies involved
in providing services and equipment for drilling processes such as offshore and
onshore drilling, drill bits, drilling rig equipment, drilling string equipment,
drilling fluids, tool joints and wireline logging. Many energy service companies
are engaged in production and well maintenance, providing such products and
services as packers, perforating equipment, pressure pumping, downhole
equipment, valves, pumps, compression equipment, and well completion equipment
and service. Certain companies supply energy providers with exploration
technology such as seismic data, geological and geophysical services, and
interpretation of this data. The Fund may also invest in companies with a
variety of underwater well services, helicopter services, geothermal plant
design or construction, electric and nuclear plant design or construction,
energy related capital equipment, mining related equipment or services, and high
technology companies serving these industries.
FINANCIAL SERVICES FUND
The Fund may invest in companies that are involved in the financial sector,
including commercial and investment banks, savings and loan associations,
consumer and industrial finance companies, securities brokerage companies,
and a variety of firms in all segments of the insurance industry such as
multi-line, property and casualty, and life insurance.
The financial services sector is currently undergoing relatively rapid change as
existing distinctions between financial service segments become less clear. For
instance, recent business combinations have included insurance, finance, and
securities brokerage under single ownership. Some primarily retail corporations
have expanded into securities and insurance industries. Moreover, the federal
laws generally separating commercial and investment banking are currently being
studied by Congress.
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Securities and Exchange Commission ("SEC") regulations provide that the Fund may
not invest more than 5% of its total assets in the securities of any one company
that derives more than 15% of its revenues from brokerage or investment
management activities. These companies, as well as those deriving more than 15%
of profits from brokerage and investment management activities, will be
considered to be "principally engaged" in this Fund's business activity. Rule
12d3-1 under the Investment Company Act of 1940 (the "1940 Act"), allows
investment portfolios such as this Fund, to invest in companies engaged in
securities-related activities subject to certain conditions. Purchases of
securities of a company that derived 15% or less of gross revenues during its
most recent fiscal year from securities-related activities (I.E., broker/dealer,
underwriting, or investment advisory activities) are subject only to the same
percentage limitations as would apply to any other security the Fund may
purchase. The Fund may purchase securities of an issuer that derived more than
15% of it gross revenues in its most recent fiscal year from securities-related
activities, subject to the following conditions:
a. the purchase cannot cause more than 5% of the Fund's total assets to be
invested in securities of that issuer;
b. for any equity security, the purchase cannot result in the Fund owning
more than 5% of the issuer's outstanding securities in that class;
c. for a debt security, the purchase cannot result in the fund owning more
than 10% of the outstanding principal amount of the issuer's debt
securities.
In applying the gross revenue test, an issuer's own securities-related
activities must be combined with its ratable share of securities-related
revenues from enterprises in which it owns a 20% or greater voting or equity
interest. All of the above percentage limitations, as well as the issuer's gross
revenue test, are applicable at the time of purchase. With respect to warrants,
rights, and convertible securities, a determination of compliance with the above
limitations shall be made as though such warrant, right, or conversion privilege
had been exercised. The Fund will not be required to divest its holding of a
particular issuer when circumstances subsequent to the purchase cause one of the
above conditions to not be met. The purchase of a general partnership interest
in a securities-related business is prohibited.
HEALTH CARE FUND
The Fund may invest in companies that are involved in the health care industry
including companies engaged in the design, manufacture, or sale of products or
services used for or in connection with health care or medicine. Companies in
the health care sector may include pharmaceutical companies; firms that design,
manufacture, sell, or supply medical, dental, and optical products, hardware or
services; companies involved in biotechnology, medical diagnostic, and
biochemical research and development, as well as companies involved in the
operation of health care facilities.
LEISURE FUND
The Fund may invest in companies engaged in the design, production, or
distribution of goods or services in the leisure industries including television
and radio broadcasting or manufacturing (including cable television); motion
pictures and photography; recordings and musical instruments; publishing,
including newspapers and magazines; sporting goods and camping and recreational
equipment; and sports arenas. Other goods and services may include toys and
games (including video and other electronic games), amusement and theme parks,
travel and travel-related services, hotels and motels, leisure apparel or
footwear, tobacco products, and gaming casinos.
RETAILING FUND
The Fund may invest in companies that are involved in the retailing sector
including companies engaged in merchandising finished goods and services
primarily to individual consumers. Companies in which the Fund may invest
include general merchandise retailers, department stores, restaurant franchises,
drug stores, motor vehicle and marine dealers, and any specialty retailers
selling a single category of merchandise such as apparel, toys,
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jewelry, consumer electronics, or home improvement products. The Fund may also
invest in companies engaged in selling goods and services through alternative
means such as direct telephone marketing, mail order, membership warehouse
clubs, computer, or video based electronic systems.
TECHNOLOGY FUND
The Fund may invest in companies that are involved in the technology sector
including companies which the Advisor believes have, or will develop, products,
processes or services that will provide or will benefit significantly from
technological advances and improvements. These may include, for example,
companies that develop, produce, or distribute products or services in the
computer, semiconductor, electronics, communications, health care, and
biotechnology sectors.
TELECOMMUNICATIONS FUND
The Fund may invest in companies that are involved in the telecommunications
sector including companies engaged in the development, manufacture, or sale of
communications services and/or equipment. Companies in the telecommunications
field offer a variety of services and products, including local and
long-distance telephone service; cellular, paging, local and wide-area product
networks; satellite, microwave and cable television; Internet access; and
equipment used to provide these products and services. Long-distance telephone
companies may also have interests in developing technologies, such as fiber
optics and data transmission. Certain types of companies in which the Fund may
invest are engaged in fierce competition for a share of the market for goods or
services such as private and local area networks, or are engaged in the sale of
telephone set equipment.
TRANSPORTATION FUND
The Fund may invest in companies that are involved in the transportation sector,
including companies engaged in providing transportation services or companies
engaged in the design, manufacture, distribution, or sale of transportation
equipment. Transportation services may include companies involved in the
movement of freight and/or people such as airline, railroad, ship, truck, and
bus companies. Other service companies include those that provide leasing and
maintenance for automobiles, trucks, containers, rail cars, and planes.
Equipment manufacturers include makers of trucks, automobiles, planes,
containers, rail cars, or any other mode of transportation and its related
products. In addition, the Fund may invest in companies that sell fuel-saving
devices to the transportation industries and those that sell insurance and
software developed primarily for transportation companies.
DESCRIPTION OF THE MONEY MARKET FUND
The Money Market Fund seeks to provide security of principal, high current
income, and liquidity. The Money Market Fund invests primarily in money market
instruments issued or guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities, and may invest any remaining
assets in receipts and enter into repurchase agreements fully collateralized by
U.S. Government Securities.
The Money Market Fund is governed by SEC rules which impose certain liquidity,
maturity and diversification requirements. The Money Market Fund's assets are
valued using the amortized cost method, which enables the Money Market Fund to
maintain a stable NAV. All securities purchased by the Money Market Fund must
have remaining maturities of 397 days or less. Although the Money Market Fund is
managed to maintain a stable price per share of $1.00, there is no guarantee
that the price will be constantly maintained.
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
GENERAL
Each Fund's investment objective and permitted investments are described in the
Prospectuses. The investment objective of each Fund (except the Sector Funds),
including the benchmark of the Nova Fund and Ursa Fund are fundamental policies
of the Funds which cannot be changed with respect to a Fund without the
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consent of the holders of a majority of that Fund's outstanding shares. The
following information supplements, and should be read in conjunction with, those
sections of the Prospectuses.
Portfolio management is provided to each Fund by the Trust's investment adviser,
PADCO Advisors, Inc., a Maryland corporation with offices at 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852 (the "Advisor"). The investment
strategies of the Funds discussed below and in the Prospectuses may be used by a
Fund if, in the opinion of the Advisor, these strategies will be advantageous to
that Fund. A Fund is free to reduce or eliminate its 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 a Fund will result in the achievement of that Fund's
objectives.
BORROWING
The Nova Fund, the Bond Fund and the Sector Funds may borrow money, including
borrowing for investment purposes. Borrowing for investment is known as
leveraging. Leveraging investments, by purchasing securities with borrowed
money, is a speculative technique which increases investment risk, but also
increases investment opportunity. Since substantially all of a Fund's assets
will fluctuate in value, whereas the interest obligations on borrowings may be
fixed, the net asset value per share of the Fund will increase more when the
Fund's portfolio assets increase in value and decrease more when the Fund's
portfolio assets decrease in value than would otherwise be the case. Moreover,
interest costs on borrowings may fluctuate with changing market rates of
interest and may partially offset or exceed the returns on the borrowed funds.
Under adverse conditions, the Nova Fund, the Bond Fund, or the Sector Funds
might have to sell portfolio securities to meet interest or principal payments
at a time investment considerations would not favor such sales. The Nova Fund,
the Bond Fund and the Sector Funds intend to use leverage during periods when
the Advisor believes that the respective Fund's investment objective would be
furthered.
Each 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 1940 Act, a Fund must maintain continuous asset coverage
(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 Funds are 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 Funds are
authorized to pledge portfolio securities as the Advisor deems appropriate in
connection with any borrowings.
FOREIGN ISSUERS
The Metals Fund and the Sector Funds may invest in issuers located outside the
United States. The Metals Fund and the Sector Funds may purchase American
Depositary Receipts ("ADRs"), "ordinary shares," or "New York shares" in the
United States. ADRs are dollar-denominated receipts representing interests in
the securities of a foreign issuer, which securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by United States banks and trust
companies which evidence ownership of underlying securities issued by a foreign
corporation. Generally, ADRs in registered form are designed for use in domestic
securities markets and are traded on exchanges or over-the-counter in the United
States. Ordinary shares are shares of foreign issuers that are traded abroad and
on a United States exchange. New York shares are shares that a foreign issuer
has allocated for trading in the United States. ADRs,
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ordinary shares, and New York shares all may be purchased with and sold for
U.S. dollars, which protect the Funds from the foreign settlement risks
described below.
Investing in foreign companies may involve risks not typically associated with
investing in United States companies. The value of securities denominated in
foreign currencies, and of dividends from such securities, can change
significantly when foreign currencies strengthen or weaken relative to the U.S.
dollar. Foreign securities markets generally have less trading volume and less
liquidity than United States markets, and prices in some foreign markets can be
very volatile. Many foreign countries lack uniform accounting and disclosure
standards comparable to those that apply to United States companies, and it may
be more difficult to obtain reliable information regarding a foreign issuer's
financial condition and operations. In addition, the costs of foreign investing,
including withholding taxes, brokerage commissions, and custodial fees,
generally are higher than for United States investments.
Investing in companies located abroad carries political and economic risks
distinct from those associated with investing in the United States. Foreign
investment may be affected by actions of foreign governments adverse to the
interests 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.
With regard to the Metals Fund, at the present time, five countries are the
major producers and processors of gold bullion and other precious metals and
minerals. In order of magnitude, these producers and processors are: the
Republic of South Africa, the former republics of the former Soviet Union,
Canada, the United States, and Australia. Political and economic conditions in
South Africa and the former republics of the former Soviet Union may have a
direct effect on the mining, distribution, and price of precious metals and
minerals, and on the sales of central bank gold holdings. South African mining
stocks represent a special risk in view of the history of political unrest in
that country. Besides that factor, various government bodies such as the South
African Ministry of Mines and the Reserve Bank of South Africa exercise
regulatory authority over mining activity and the sale of gold. The policies of
these South African government bodies in the future could be detrimental to the
Metals Fund's ability to achieve its objectives.
ILLIQUID SECURITIES
While none of the Funds anticipates doing so, each 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. A Fund will
not invest more than 15% (10% with respect to the Money Market Fund) of the
Fund's net assets in illiquid securities. Each 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 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.
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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 meet other selection criteria, a Fund may make such investments
whether or not such securities are "illiquid" depends on the market that exists
for the particular security. The trustees of the Trust (the "Trustees") have
delegated the responsibility for determining the liquidity of Rule 144A
restricted securities which may be invested in by a Fund to the Advisor.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
The Funds (other than the Bond Fund, the Money Market Fund, and the Sector
Funds) presently may invest in the securities of other investment companies to
the extent that such an investment would be consistent with the requirements of
Section 12(d)(1) of the 1940 Act. A Fund, therefore, may invest in the
securities of another investment company (the "acquired company") provided that
the Fund, immediately after such purchase or acquisition, does not own in the
aggregate: (i) more than 3% of the total outstanding voting stock of the
acquired company; (ii) securities issued by the acquired company having an
aggregate value in excess of 5% of the value of the total assets of the Fund; or
(iii) securities issued by the acquired company and all other investment
companies (other than Treasury stock of the Fund) having an aggregate value in
excess of 10% of the value of the total assets of the Fund. The Bond Fund, the
Money Market Fund and the Sector Funds may invest in the securities of other
investment companies only as part of a merger, reorganization, or acquisition,
subject to the requirements of the 1940 Act.
If a Fund invests in, and, thus, is a shareholder of, another investment
company, the Fund's shareholders will indirectly bear the Fund's proportionate
share of the fees and expenses paid by such other investment company, including
advisory fees, in addition to both the management fees payable directly by the
Fund to the Fund's own investment adviser and the other expenses that the Fund
bears directly in connection with the Fund's own operations.
LENDING OF PORTFOLIO SECURITIES
Subject to the investment restrictions set forth below, each of the Funds may
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 are on loan, the borrower will pay the lending Fund any income
accruing thereon, and the Fund may invest the cash collateral in portfolio
securities, thereby earning additional income. A 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 Funds
will not lend more than 33 1/3% of the value of the Fund's total assets, except
that the Money Market Fund will not lend more than 10% of the value of the Money
Market Fund's total assets. Loans would be subject to termination by the lending
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 inures to the lending Fund and that Fund's shareholders. A lending
Fund may pay reasonable finders, borrowers, administrative, and custodial fees
in connection with a loan.
OPTIONS TRANSACTIONS
OPTIONS ON SECURITIES. The Nova Fund, the OTC Fund, the Metals Fund and the
Sector Funds may buy call options and write (sell) put options on securities,
and the Ursa Fund and the Arktos Fund may buy put options and write call options
on securities for the purpose of realizing the Fund's investment objective. By
writing a call option on securities, a Fund becomes obligated during the term of
the option to sell the securities underlying the option at the exercise price if
the option is exercised. By writing a put option, a Fund becomes obligated
during the term of the option to purchase the securities underlying the option
at the exercise price if the option is exercised.
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During the term of the option, the writer may be assigned an exercise notice by
the broker-dealer through whom the option was sold. The exercise notice would
require the writer to deliver, in the case of a call, or take delivery of, in
the case of a put, the underlying security against payment of the exercise
price. This obligation terminates upon expiration of the option, or at such
earlier time that the writer effects a closing purchase transaction by
purchasing an option covering the same underlying security and having the same
exercise price and expiration date as the one previously sold. Once an option
has been exercised, the writer may not execute a closing purchase transaction.
To secure the obligation to deliver the underlying security in the case of a
call option, the writer of a call option is required to deposit in escrow the
underlying security or other assets in accordance with the rules of the Option
Clearing Corporation (the "OCC"), an institution created to interpose itself
between buyers and sellers of options. The OCC assumes the other side of every
purchase and sale transaction on an exchange and, by doing so, gives its
guarantee to the transaction.
OPTIONS ON SECURITY INDEXES. The Nova Fund, the OTC Fund, the Metals Fund and
the Sector Funds may purchase call options and write put options, and the Ursa
Fund and the Arktos Fund may purchase put options and write call options, on
stock indexes listed on national securities exchanges or traded in the
over-the-counter market as an investment vehicle for the purpose of realizing
the Fund's investment objective.
Options on indexes are settled in cash, not in delivery of securities. The
exercising holder of an index option receives, instead of a security, cash equal
to the difference between the closing price of the securities index and the
exercise price of the option. When a Fund writes a covered option on an index,
the Fund will be required to deposit and maintain with a custodian cash or
liquid securities equal in value to the aggregate exercise price of a put or
call option pursuant to the requirements and the rules of the applicable
exchange. If, at the close of business on any day, the market value of the
deposited securities falls below the contract price, the Fund will deposit with
the custodian cash or liquid securities equal in value to the deficiency.
OPTIONS ON FUTURES CONTRACTS. Under Commodities Futures Trading Commission
("CFTC") Regulations, a Fund (other than the Money Market 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 option), the in-the-money amount may be excluded in
calculating this 5% limitation.
When a Fund purchases or sells a stock index futures contract, or sells an
option thereon, the Fund "covers" its position. To cover its position, a Fund
may maintain with its custodian bank (and marked-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 trading 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 outstanding
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.
A 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. In the
alternative, if the strike price of 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 futures contract. A 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 with prices which
are expected to move relatively consistently with the futures contract. A Fund
may cover its short position in a futures
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contract by taking a long position in the instruments underlying the futures
contracts, or by taking positions in instruments with prices which are expected
to move relatively consistently with the futures contract.
A 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. In the alternative, if the long position
in the underlying futures contracts 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 futures contract. A Fund may also
cover its sale of a call option by taking positions in instruments with prices
which are expected to move relatively consistently with the call option. A 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 futures contract. A Fund may also cover its sale of a put
option by taking positions in instruments with prices which are expected to move
relatively consistently with the put option.
PORTFOLIO TURNOVER
As discussed in the Trust's prospectus, the Trust anticipates that investors in
the Funds, as part of an asset allocation investment strategy, will frequently
purchase and/or redeem shares of the Funds . The nature of the Funds as asset
allocation tools will cause the Funds to experience substantial portfolio
turnover. (See "More Information About Risk" in the Trust's Prospectuses).
Because each Fund's portfolio turnover rate to a great extent will depend on the
purchase, redemption, and exchange activity of the Fund's investors, it is very
difficult to estimate what the Fund's actual turnover rate will be in the
future. However, the Trust expects that the portfolio turnover experienced by
the Funds will be substantial.
REPURCHASE AGREEMENTS
As discussed in the Trust's Prospectus, each of the Funds may enter into
repurchase agreements with financial institutions. The Funds each follow certain
procedures designed to minimize the risks 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 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, a Fund will seek to liquidate such collateral. However, the
exercising of each 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 repurchase price, the
Fund could suffer a loss. It is the current policy of each of the Funds, other
than the Money Market 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 15% (10% with respect to
the Money Market Fund) of the Fund's total assets. The investments of each of
the Funds in repurchase agreements, at times, may be substantial when, in the
view of the Advisor, liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS
The Ursa Fund, the Juno Fund, and the Money Market Fund may use reverse
repurchase agreements as part of that Fund's investment strategy. Reverse
repurchase agreements involve sales by a Fund of portfolio assets concurrently
with an agreement by the Fund to repurchase the same assets at a later date at a
fixed price. Generally, the effect of such a transaction is that the Fund can
recover all or most of the cash invested in the portfolio securities involved
during the term of the reverse repurchase agreement, while the Fund will be able
to keep the interest income associated with those portfolio securities. Such
transactions are advantageous only if the interest cost to the Fund of the
reverse repurchase transaction is less than the cost of obtaining the cash
otherwise. Opportunities to achieve this advantage may not always be available,
and the Funds intend to use the reverse repurchase technique only when this will
be to the Fund's advantage to do so. Each Fund will establish a
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segregated account with the Trust's custodian bank in which the Fund will
maintain cash or cash equivalents or other portfolio securities equal in value
to the Fund's obligations in respect of reverse repurchase agreements.
SHORT SALES
The Ursa Fund, the Arktos Fund, and the Juno Fund also may engage in short sales
transactions under which the Fund sells a security it does not own. 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 Ursa Fund, Arktos Fund, or Juno Fund closes its short position or
replaces the borrowed security, the Fund will: (a) maintain a segregated account
containing cash or liquid securities 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.
Each of the Funds may sell up to 100% of its portfolio short.
The Nova Fund, the OTC Fund, the Metals Fund and the Sector Funds each may
engage in short sales if, at the time of the short sale, the Fund owns or has
the right to acquire an equal amount of the security being sold at no additional
cost. These Funds may make a short sale when the Fund wants to sell the security
the Fund owns at a current attractive price, in order to hedge or limit the
exposure of the Fund's position.
STOCK INDEX FUTURES CONTRACTS
A Fund may buy and sell stock index futures contracts with respect to any stock
index traded on a recognized stock exchange or board of trade. A stock index
futures contract is a contract to buy or sell units of an index at a specified
future date at a price agreed upon when the contract is made. The stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract.
At the time a Fund purchases a futures contract, an amount of cash, U.S.
Government securities or other liquid securities equal to the market value of
the futures contract will be deposited in a segregated account with the Fund's
custodian. When writing a futures contract, the Fund will maintain with its
custodian liquid assets that, when added to the amounts deposited with a futures
commission merchant or broker as margin, are equal to the market value of the
instruments underlying the contract. Alternatively, a Fund may "cover" its
position by owning the instruments underlying the contract (or, in the case of
an index futures contract, a portfolio with a volatility substantially similar
to that of the index on which the futures contract is based), or holding a call
option permitting the Fund to purchase the same futures contract at a price no
higher than the price of the contract written by the Fund (or at a higher price
if the difference is maintained in liquid assets with the Fund's custodian).
TRACKING ERROR
While Funds which seek to duplicate the performance of their respective
benchmarks on a daily basis, as discussed in the Prospectuses, do not expect
that the aggregate returns over a year will deviate adversely from their
respective benchmarks by more than ten percent, several factors may affect their
ability to achieve this correlation. Among these are: (1) Fund expenses,
including brokerage (which may be increased by high portfolio turnover); (2)
less than all of the securities in the benchmark being held by a Fund and
securities not included in the benchmark being held by a Fund; (3) an imperfect
correlation between the performance of
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instruments held by a Fund, such as futures contracts and options, and the
performance of the underlying securities in the market; (4) bid-ask spreads (the
effect of which may be increased by portfolio turnover); (5) a Fund holds
instruments traded in a market that has become illiquid or disrupted; (6) Fund
share prices being rounded to the nearest cent; (7) changes to the benchmark
index that are not disseminated in advance; (8) the need to conform a Fund's
portfolio holdings to comply with investment restrictions or policies or
regulatory or tax law requirements; or (9) market movements that run counter to
a leveraged Fund's investments (which will cause divergence between the Fund and
its benchmark over time due to the mathematical effects of leveraging). Market
movements that run counter to a leveraged Fund's investments will cause some
divergence between the Fund and its benchmark over time due to the mathematical
effects of leveraging. The magnitude of the divergence is dependent upon the
magnitude of the market movement, its duration, and the degree to which the Fund
is leveraged. The tracking error of a leveraged Fund is generally small during a
well-defined uptrend or downtrend in the market when measured from price peak to
price peak, access a market decline and subsequent recovery, however, the
deviation of the Fund from its benchmark may be significant.
U.S. GOVERNMENT SECURITIES
The Bond Fund invests primarily in U.S. Government Securities, and each of the
other Funds also may invest in U.S. Government Securities. The Juno Fund may
enter into short transactions on 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 years; and
U.S. Treasury bonds generally have initial maturities of greater than ten years.
Certain U.S. Government Securities 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 Fannie Mae,
the Government National Mortgage Association, the Small 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 agencies 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. Other obligations issued by or guaranteed by
Federal agencies, such as those securities issued by Fannie Mae, are supported
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 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. U.S. Treasury notes
and bonds typically pay coupon interest semi-annually and repay the principal at
maturity. The Bond Fund will invest in such U.S. Government Securities only when
the Advisor is satisfied that the credit risk with respect to the issuer is
minimal.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each 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 a 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. A Fund will not purchase securities on a when-issued or delayed-delivery
basis if, as a result, more than 15% (10% with respect to the Money Market Fund)
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
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or less than the purchase price. The Fund will also establish a segregated
account with the Fund's 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 Trust does
not believe that a 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.
ZERO COUPON BONDS
The Bond Fund and the Juno Fund may invest in U.S. Treasury zero-coupon bonds.
These securities are U.S. Treasury bonds which have been stripped of their
unmatured interest coupons, the coupons themselves, and receipts or certificates
representing interests in such stripped debt obligations and coupons. Interest
is not paid in cash during the term of these securities, but is accrued and paid
at maturity. Such obligations have greater price volatility than coupon
obligations and other normal interest-paying securities, and the value of zero
coupon securities reacts more quickly to changes in interest rates than do
coupon bonds. Since dividend income is accrued throughout the term of the zero
coupon obligation, but is not actually received until maturity, the Fund may
have to sell other securities to pay said accrued dividends prior to maturity of
the zero coupon obligation. Unlike regular U.S. Treasury bonds which pay
semi-annual interest, U.S. Treasury zero coupon bonds do not generate
semi-annual coupon payments. Instead, zero coupon bonds are purchased at a
substantial discount from the maturity value of such securities, the discount
reflecting the current value of the deferred interest; this discount is
amortized as interest income over the life of the security, and is taxable even
though there is no cash return until maturity. Zero coupon U.S. Treasury issues
originally were created by government bond dealers who bought U.S. Treasury
bonds and issued receipts representing an ownership interest in the interest
coupons or in the principal portion of the bonds. Subsequently, the U.S.
Treasury began directly issuing zero coupon bonds with the introduction of
"Separate Trading of Registered Interest and Principal of Securities" (or
"STRIPS"). While zero coupon bonds eliminate the reinvestment risk of regular
coupon issues, that is, the risk of subsequently investing the periodic interest
payments at a lower rate than that of the security held, zero coupon bonds
fluctuate much more sharply than regular coupon-bearing bonds. Thus, when
interest rates rise, the value of zero coupon bonds will decrease to a greater
extent than will the value of regular bonds having the same interest rate.
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INVESTMENT RESTRICTIONS
FUNDAMENTAL POLICIES
The following investment limitations (and those set forth in the Prospectuses)
are fundamental policies of the Funds which cannot be changed with respect to a
Fund without the consent of the holders of a majority of that Fund's outstanding
shares. The term "majority of the outstanding shares" means the vote of (i) 67%
or more of a Fund's shares present at a meeting, if more than 50% of the
outstanding shares of that Fund are present or represented by proxy, or (ii)
more than 50% of that Fund's outstanding shares, whichever is less.
A Benchmark Fund shall not:
1. Lend any security or make any other loan if, as a result, more
than 33 1/3% 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.
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
securities in connection with transactions in options, futures,
options on futures, and other similar 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 initial 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 options on futures contracts or indexes
and currencies underlying or related to any such futures
contracts, and purchase and sell currencies (and options thereon)
or securities on a forward-commitment or delayed-delivery basis.
6.1 THE METALS FUND MAY (a) TRADE IN FUTURES CONTRACTS AND
OPTIONS ON FUTURES CONTRACTS; OR (b) INVEST IN
PRECIOUS-METALS AND PRECIOUS MINERALS.
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.
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7.1 THE METALS FUND WILL INVEST 25% OR MORE OF THE VALUE OF THE
ITS TOTAL ASSETS IN THE SECURITIES IN THE METALS-RELATED AND
MINERALS-RELATED INDUSTRIES.
8. Borrow money, except (i) as a temporary measure for extraordinary
or emergency purposes and then only in amounts not in excess of 5%
of the value of the Fund's total assets from a bank or (ii) in an
amount up to one-third of the value of the Fund's total assets,
including the amount borrowed, in order to meet redemption
requests without immediately selling portfolio instruments. This
provision is not for investment leverage but solely to facilitate
management of the portfolio by enabling the Fund to meet
redemption requests when the liquidation of portfolio instruments
would be inconvenient or disadvantageous.
8.1 THE NOVA FUND AND THE BOND FUND MAY BORROW MONEY, SUBJECT TO
THE CONDITIONS OF PARAGRAPH 8, FOR THE PURPOSE OF INVESTMENT
LEVERAGE.
8.2 THE JUNO FUND MAY BORROW MONEY, SUBJECT TO THE CONDITIONS OF
PARAGRAPH 8, BUT SHALL NOT MAKE PURCHASES WHILE BORROWING IN
EXCESS OF 5% OF THE VALUE OF ITS ASSETS. FOR PURPOSES OF THIS
SUBPARAGRAPH, FUND ASSETS INVESTED IN REVERSE REPURCHASE
AGREEMENTS ARE INCLUDED IN THE AMOUNTS BORROWED.
9. Make short sales of portfolio securities or purchase any portfolio
securities on margin, except for such short-term credits as are
necessary for the clearance of transactions. The deposit or
payment by the Fund of initial or variation margin in connection
with futures or options transactions is not considered to be a
securities purchase on margin. The Fund may engage in short sales
if, at the time of the short sale, the Fund owns or has the right
to acquire an equal amount of the security being sold at no
additional cost ("selling against the box").
9.1 THE URSA FUND, THE ARKTOS FUND, AND THE JUNO FUND MAY ENGAGE
IN SHORT SALES OF PORTFOLIO SECURITIES OR MAINTAIN A SHORT
POSITION IF 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 OWNS 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.
FUNDAMENTAL POLICIES APPLICABLE TO THE MONEY MARKET FUND
The Money Market Fund shall not:
10. Make loans to others except through the purchase of qualified debt
obligations, loans of portfolio securities and entry into
repurchase agreements.
11. Lend the Money Market Fund's portfolio securities in excess of 15%
of the Money Market Fund's total assets. Any loans of the Money
Market Fund's portfolio securities will be made according to
guidelines established by the Board of Trustees of the Trust,
including maintenance of cash collateral of the borrower equal at
all times to the current market value of the securities loaned.
12. Issue senior securities, except as permitted by the Money Market
Fund's investment objectives and policies.
13. Write or purchase put or call options.
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14. Invest in securities of other investment companies, except as
these securities may be acquired as part of a merger,
consolidation, acquisition of assets, or plan of reorganization.
15. Mortgage, pledge, or hypothecate the Money Market Fund's assets
except to secure permitted borrowings. In those cases, the Money
Market Fund may mortgage, pledge, or hypothecate assets having a
market value not exceeding the lesser of the dollar amounts
borrowed or 15% of the value of total assets of the Money Market
Fund at the time of the borrowing.
16. Make short sales of portfolio securities or purchase any portfolio
securities on margin, except for such short-term credits as are
necessary for the clearance of transactions.
FUNDAMENTAL POLICIES OF THE SECTOR FUNDS
A Sector Fund may not:
17. Borrow money in an amount exceeding 33 1/3% of the value of its
total assets, provided that, for purposes of this limitation,
investment strategies which either obligate the Fund to purchase
securities or require that Fund to segregate assets are not
considered to be borrowing. Asset coverage of a least 300% is
required for all borrowing, except where the Fund has borrowed
money for temporary purposes in amounts not exceeding 5% of its
total assets. The Fund will not purchase securities while its
borrowing exceeds 5% of its total assets.
18. Make loans if, as a result, more than 33 1/3% of its total assets
would be lent to other parties, except that the Fund may (i)
purchase or hold debt instruments in accordance with its
investment objective and policies; (ii) enter into repurchase
agreements; and (iii) lend its securities.
19. Purchase or sell real estate, physical commodities, or commodities
contracts, except that the Fund may purchase (i) marketable
securities issued by companies which own or invest in real estate
(including real estate investment trusts), commodities, or
commodities contracts; and (ii) commodities contracts relating to
financial instruments, such as financial futures contracts and
options on such contracts.
20. Issue senior securities (as defined in the 1940 Act) except as
permitted by rule, regulation or order of the SEC.
21. Act as an underwriter of securities of other issuers except as it
may be deemed an underwriter in selling a portfolio security.
22. Invest in interests in oil, gas, or other mineral exploration or
development programs and oil, gas or mineral leases.
NON-FUNDAMENTAL POLICIES
The following investment limitations are non-fundamental policies of the Funds
and may be changed with respect to any Fund by the Board of Trustees.
Each Fund may not:
1. Invest in warrants.
2. Invest in real estate limited partnerships.
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3. Invest in mineral leases.
Each Sector Fund may not:
4. Pledge, mortgage or hypothecate assets except to secure borrowing
permitted by the Fund's fundamental limitation on borrowing.
5. Invest in companies for the purpose of exercising control.
6. Purchase securities on margin or effect short sales, except that a
Fund may (i) obtain short-term credits as necessary for the
clearance of security transactions; (ii) provide initial and
variation margin payments in connection with transactions
involving futures contracts and options on such contracts; and
(iii) make short sales "against the box" or in compliance with the
SEC's position regarding the asset segregation requirements
imposed by Section 18 of the 1940 Act.
7. Invest its assets in securities of any investment company, except
as permitted by the 1940 Act or any rule, regulation or order of
the SEC.
8. Purchase or hold illiquid securities, I.E., securities that cannot
be disposed of for their approximate carrying value in seven days
or less (which term includes repurchase agreements and time
deposits maturing in more than seven days) if, in the aggregate,
more than 15% of its net assets would be invested in illiquid
securities.
The foregoing percentages are: (i) based on total assets (except for the
limitation on illiquid securities, which is based on net assets); (ii) will
apply at the time of the purchase of a security; and (iii) shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of a purchase of such security.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Trustees, the Advisor is responsible
for decisions to buy and sell securities for each of the Funds, the selection of
brokers and dealers to effect the transactions, and the negotiation of brokerage
commissions, if any. The Advisor expects that the Funds may execute brokerage or
other agency transactions through registered broker-dealers, for a commission,
in conformity with the 1940 Act, the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
The Advisor may serve as an investment manager to a number of clients, including
other investment companies. It is the practice of the Advisor to cause purchase
and sale transactions to be allocated among the Funds and others whose assets
the Advisor manages in such manner as the Advisor deems equitable. The main
factors considered by the Advisor in making such allocations among the Funds and
other client accounts of the 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 Funds and the other client accounts.
The policy of each Fund regarding purchases and sales of securities for the
Fund's portfolio is that primary consideration will be given to obtaining the
most favorable prices and efficient executions of transactions. Consistent with
this policy, when securities transactions are effected on a stock exchange, each
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. Each Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Advisor from obtaining a high quality of brokerage and
research services. In seeking to determine the
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reasonableness of brokerage commissions paid in any transaction, the Advisor
relies upon its experience and knowledge regarding commissions generally charged
by various brokers and on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction. Such determinations
are necessarily subjective and imprecise, as in most cases an exact dollar value
for those services is not ascertainable.
Purchases and sales of U.S. Government securities are normally transacted
through issuers, underwriters or major dealers in U.S. Government securities
acting as principals. Such transactions are made on a net basis and do not
involve payment of brokerage commissions. The cost of securities purchased from
an underwriter usually includes a commission paid by the issuer to the
underwriters; transactions with dealers normally reflect the spread between bid
and asked prices.
In managing the investment portfolios of the Funds, the Advisor effects
transactions with those brokers and dealers who the Advisor believes provide the
most favorable prices and are capable of providing efficient executions. If the
Advisor believes such prices and executions are obtainable from more than one
broker or dealer, the Advisor may give consideration to placing portfolio
transactions with those brokers and dealers who also furnish research and other
services to the Fund or the Advisor. In addition, Section 28(e) of the
Securities Exchange Act of 1934 permits the Advisor to cause a Fund to pay
commission rates in excess of those another dealer or broker would have charged
for effecting the same transaction, if the Advisor determines, in good faith,
that the commission paid is reasonable in relation to the value of brokerage and
research services provided. While the Advisor currently does not intend to pay
higher commissions to dealers and brokers who supply it with brokerage and
research services, in the event such higher payments would be made or are deemed
to have been made, such higher payments would be in accordance with Section
28(e).
Such research services may include information on the economy, industries,
groups of securities, individual companies, statistical information, accounting
and tax law interpretations, political developments, legal developments
affecting portfolio securities, technical market action, pricing and appraisal
services, credit analysis, risk measurement analysis, performance analysis,
analysis of corporate responsibility issues or in the form of access to various
computer-generated data, computer hardware and software. Such research may be
provided by brokers and dealers in the form of written reports, telephone
contacts and personal meetings with security analysts, corporate and industry
spokespersons, economists, academicians, and government representatives.
Brokerage services and equipment may facilitate the execution and monitoring of
securities transactions, for example, by providing rapid communications with
financial markets and brokers or dealers, or by providing real-time tracking of
orders, settlements, investment positions and relevant investment criteria and
restrictions applicable to the execution of securities transactions. In some
cases, brokerage and research services are generated by third parties but are
provided to the Advisor by or through brokers and dealers. The Advisor may
allocate brokerage for research services that are also available for cash, where
appropriate and permitted by law. The Advisor may also pay cash for certain
research services received from external sources.
In addition, the information and services received by the Advisor from brokers
and dealers may not in all cases benefit a Fund directly. For example, such
information and services received by the Advisor as a result of the brokerage
allocation of one of the Funds may be of benefit to the Advisor in the
management
19
<PAGE>
of other accounts of the Advisor, including other Funds of the Trust and other
investment companies advised by the Advisor. 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 Advisor and
thereby reduce the Advisor's expenses, this information and these services are
of indeterminable value and the management fee paid to the Advisor is not
reduced by any amount that may be attributable to the value of such information
and services.
For the fiscal period ended March 31, 1999, the Advisor paid no commissions on
brokerage transactions, pursuant to an agreement or understanding, to brokers in
consideration of research services.
For the fiscal periods ended March 31, 1997, March 31, 1998 and March 31, 1999
the Funds paid the following brokerage commissions:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
AGGREGATE BROKERAGE COMMISSIONS
--------------------------------------------------------
FUND 1997* 1998 1999
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nova Fund $259,900 $836,833 $1,950,042
- -----------------------------------------------------------------------------------------
Ursa Fund $236,053 $284,054 $ 381,892
- -----------------------------------------------------------------------------------------
OTC Fund $15,491 $20,402 $ 4,966
- -----------------------------------------------------------------------------------------
Arktos Fund n/a n/a $ 5,446
- -----------------------------------------------------------------------------------------
Metals Fund $276,434 $415,695 $ 268,247
- -----------------------------------------------------------------------------------------
Bond Fund $7,829 $18,172 $ 34,498
- -----------------------------------------------------------------------------------------
Juno Fund $24,387 $40,740 $ 36,994
- -----------------------------------------------------------------------------------------
Money Market Fund $0 $0 $0
- -----------------------------------------------------------------------------------------
Banking Fund n/a n/a $ 574,673
- -----------------------------------------------------------------------------------------
Basic Materials Fund n/a n/a $ 280,569
- -----------------------------------------------------------------------------------------
Biotechnology Fund n/a n/a $ 122,671
- -----------------------------------------------------------------------------------------
Consumer Products Fund n/a n/a $ 110, 820
- -----------------------------------------------------------------------------------------
Electronics Fund n/a n/a $ 556,126
- -----------------------------------------------------------------------------------------
Energy Fund n/a n/a $ 250,391
- -----------------------------------------------------------------------------------------
Energy Services Fund n/a n/a $1,024,957
- -----------------------------------------------------------------------------------------
Financial Services Fund n/a n/a $1,717,650
- -----------------------------------------------------------------------------------------
Health Care Fund n/a n/a $ 508,052
- -----------------------------------------------------------------------------------------
Leisure Fund n/a n/a $ 213,807
- -----------------------------------------------------------------------------------------
Retailing Fund n/a n/a $ 764,655
- -----------------------------------------------------------------------------------------
Technology Fund n/a n/a $ 475,721
- -----------------------------------------------------------------------------------------
Telecommunications Fund n/a n/a $ 232,192
- -----------------------------------------------------------------------------------------
20
<PAGE>
<CAPTION>
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
AGGREGATE BROKERAGE COMMISSIONS
--------------------------------------------------------
FUND 1997* 1998 1999
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Transportation Fund n/a n/a $ 263,982
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
*For the nine-month period from July 1, 1996 to March 31, 1997
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.
TRUSTEES
*/Albert P. Viragh, Jr. (58)
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 Trustees of The Rydex Variable Trust, a
separate account of Great American Reserve Insurance Company, 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, 1996 to
present; Vice President of Rushmore Investment Advisors Ltd., a
registered investment adviser, 1985 to 1993. Address: 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852.
COREY A. COLEHOUR (53)
Trustee of the Trust and Rydex Variable Trust; 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 (58)
Trustee of the Trust and Rydex Variable Trust; Manager of the Separate
Account, 1996 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.
JOHN O. DEMARET (58)
- ----------
*/ 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.
21
<PAGE>
Trustee of the Trust and Rydex Variable Trust; Founder and Chief
Executive Officer, Health Cost Controls America, Chicago, Illinois,
1987 to 1996; sole practitioner, Chicago, Illinois, 1984 to 1987;
General Counsel for the Chicago Transit Authority, 1981 to 1984; Senior
Partner, O'Halloran, LaVarre & Demaret, Northbrook, Illinois, 1978 to
1981. Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland
20852.
PATRICK T. McCARVILLE (56)
Trustee of the Trust and Rydex Variable Trust; Manager of the Separate
Account, 1997 to present; Founder and Chief Executive Officer, Par
Industries, Inc., Northbrook, Illinois, 1977 to present; President and
Chief Executive Officer, American Health Resources, Northbrook,
Illinois, 1984 to 1986. Address: 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
ROGER SOMERS (54)
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.
OFFICERS
ROBERT M. STEELE (40)
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.
CARL G. VERBONCOEUR (46)
Vice President and Treasurer of the Trust; Senior Vice President,
Crestar Bank, 1995 to 1997; Senior Vice President, Crestar Asset
Management Company, a registered investment adviser, 1993 to 1995; Vice
President Perpetual Savings Bank, 1987 to 1993. Address: 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852.
MICHAEL P. BYRUM (29)
Assistant Secretary of the Trust; Employee and senior portfolio manager
of PADCO Advisors, Inc., 1993 to present; portfolio manager of The
Rydex OTC Fund (since 1997) and The Rydex U.S. Government Bond Fund
(since 1997), each a series of the Trust; Assistant Secretary of the
Separate Account, 1996 to present; Employee of PADCO Advisors II Inc.,
investment adviser to the Separate Account; Investment Representative,
Money Management Associates, a registered investment adviser, 1992 to
1993; Student, Miami University of Oxford, Ohio (B.A., Business
Administration, 1992). Address: 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
The aggregate compensation paid by the Trust to each of its Trustees serving
during the fiscal year ended March 31, 1999, is set forth in the table below:
22
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
AGGREGATE PENSION OR ESTIMATED TOTAL
NAME OF PERSON, COMPENSATION RETIREMENT ANNUAL BENEFITS COMPENSATION
POSITION FROM TRUST BENEFITS ACCRUED UPON RETIREMENT FROM FUND
AS PART OF TRUST'S COMPLEX FOR
EXPENSES SERVICE ON TWO
BOARDS**
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Albert P. Viragh, Jr.*, $0 $0 $0
CHAIRMAN AND PRESIDENT
- ------------------------------------------------------------------------------------------------------------------------
Corey A. Colehour, $20,000 $0 $0 $27,500
TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------
J. Kenneth Dalton, $20,000 $0 $0 $27,500
TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------
Roger Somers, $20,000 $0 $0 $27,500
TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------
John O. Demaret, $20,000 $0 $0 $27,500
TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------
Patrick T. McCarville, $20,000 $0 $0 $27,500
TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Denotes an "interested person" of the Trust.
** Each member of the Board of Trustees also serves as a Trustee to the Rydex
Variable Trust.
As of the date of this Statement of Additional Information, the Trustees and the
officers of the Trust, as a group, owned, of record and beneficially, less than
1% of the outstanding shares of each Fund.
THE ADVISORY AGREEMENT
Under an investment advisory agreement the Advisor serves as the investment
adviser for each series of the Trust and provides investment advice to the Funds
and oversees the day-to-day operations of the Funds, subject to direction and
control by the Trustees and the officers of the Trust. As of June 30, 1999, net
assets under management of the Advisor were approximately 4 billion. Pursuant to
the advisory agreement with the Advisor, the Funds pay the Advisor the following
fees at an annual rate based on the average daily net assets for each respective
Fund, as set forth below:
For the fiscal periods ended March 31, 1997, March 31, 1998, and March 31, 1999
the Advisor received the following investment advisory fees:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FUND ADVISORY FEES PAID
-----------------------------------------------------------------------------------
ANNUAL ADVISORY
FEE CONTRACTUAL 1997* 1998 1999
RATE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nova Fund 0.75% $1,812,740 $4,588,393 $5,775,479
- --------------------------------------------------------------------------------------------------------------------------
Ursa Fund 0.90% $2,070,135 $2,956,581 $4,849,228
- --------------------------------------------------------------------------------------------------------------------------
OTC Fund 0.75% $775,607 $2,529,352 $5,142,021
- --------------------------------------------------------------------------------------------------------------------------
Arktos Fund 0.90% n/a n/a $ 297,921
- --------------------------------------------------------------------------------------------------------------------------
Metals Fund 0.75% $185,396 $ 200,264 $ 222,795
- --------------------------------------------------------------------------------------------------------------------------
Bond Fund 0.50% $35,394 $ 91,744 $ 180,288
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
23
<PAGE>
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
FUND ADVISORY FEES PAID
-----------------------------------------------------------------------------------
ANNUAL ADVISORY
FEE CONTRACTUAL 1997* 1998 1999
RATE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Juno Fund 0.90% $130,573 $ 160,954 $ 113,091
- --------------------------------------------------------------------------------------------------------------------------
Money Market Fund 0.50% $671,957 $1,361,674 $ 3,913,720
- --------------------------------------------------------------------------------------------------------------------------
Banking Fund 0.85% n/a n/a $ 98,045
- --------------------------------------------------------------------------------------------------------------------------
Basic Materials Fund 0.85% n/a n/a $ 51,654
- --------------------------------------------------------------------------------------------------------------------------
Biotechnology Fund 0.85% n/a n/a $ 203,735
- --------------------------------------------------------------------------------------------------------------------------
Consumer Products Fund 0.85% n/a n/a $ 64,921
- --------------------------------------------------------------------------------------------------------------------------
Electronics Fund 0.85% n/a n/a $ 287,912
- --------------------------------------------------------------------------------------------------------------------------
Energy Fund 0.85% n/a n/a $ 56,392
- --------------------------------------------------------------------------------------------------------------------------
Energy Services Fund 0.85% n/a n/a $ 147,529
- --------------------------------------------------------------------------------------------------------------------------
Financial Services Fund 0.85% n/a n/a $ 224,408
- --------------------------------------------------------------------------------------------------------------------------
Health Care Fund 0.85% n/a n/a $ 219,227
- --------------------------------------------------------------------------------------------------------------------------
Leisure Fund 0.85% n/a n/a $ 45,641
- --------------------------------------------------------------------------------------------------------------------------
Retailing Fund 0.85% n/a n/a $ 285,542
- --------------------------------------------------------------------------------------------------------------------------
Technology Fund 0.85% n/a n/a $ 342,246
- --------------------------------------------------------------------------------------------------------------------------
Telecommunications Fund 0.85% n/a n/a $ 118,715
- --------------------------------------------------------------------------------------------------------------------------
Transportation Fund 0.85% n/a n/a $ 41,446
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For the nine-month period from July 1, 1996 to March 31, 1997
The Advisor manages the investment and the reinvestment of the assets of each of
the Funds, in accordance with the investment objectives, policies, and
limitations of the Fund, 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 of the
Trust who are affiliated with or interested persons of the Advisor. The Advisor,
from its own resources, including profits from advisory fees received from the
Funds, provided such fees are legitimate and not excessive, may make payments to
broker-dealers and other financial institutions for their expenses in connection
with the distribution of Fund shares, and otherwise currently pay all
distribution costs for Fund shares.
The Advisor, which has its office at 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852, was incorporated 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 SERVICE AGREEMENT AND ACCOUNTING SERVICE AGREEMENT
General administrative, shareholder, dividend disbursement, transfer agent, and
registrar services are provided to the Trust and the Funds 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
24
<PAGE>
of the Trust, pursuant to a service agreement between the Trust and the
Servicer. The 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.
For the fiscal periods ended March 31, 1997, March 31, 1998, and March 31, 1999
the Funds paid PADCO the following service fees:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
SERVICE FEES PAID
----------------------------------------------------
ANNUAL SERVICE 1997* 1998 1999
FUND FEE RATE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nova Fund 0.25% $606,411 $1,529,464 $1,913,364
- ----------------------------------------------------------------------------------------------------------
Ursa Fund 0.25% $575,038 $ 821,273 $1,367,076
- ----------------------------------------------------------------------------------------------------------
OTC Fund 0.20% $205,328 $ 674,494 $1,371,206
- ----------------------------------------------------------------------------------------------------------
Arktos Fund 0.25% n/a n/a $ 82,742
- ----------------------------------------------------------------------------------------------------------
Metals Fund 0.20% $49,439 $ 53,408 $ 59,123
- ----------------------------------------------------------------------------------------------------------
Bond Fund 0.20% $14,158 $ 36,617 $ 72,115
- ----------------------------------------------------------------------------------------------------------
Juno Fund 0.25% $36,374 $ 44,710 $ 31,414
- ----------------------------------------------------------------------------------------------------------
Money Market Fund 0.20% $268,855 $ 544,706 $1,565,488
- ----------------------------------------------------------------------------------------------------------
Banking Fund 0.25% n/a n/a $ 28,671
- ----------------------------------------------------------------------------------------------------------
Basic Materials Fund 0.25% n/a n/a $ 15,293
- ----------------------------------------------------------------------------------------------------------
Biotechnology Fund 0.25% n/a n/a $ 59,922
- ----------------------------------------------------------------------------------------------------------
Consumer Products Fund 0.25% n/a n/a $ 19,094
- ----------------------------------------------------------------------------------------------------------
Electronics Fund 0.25% n/a n/a $ 84,680
- ----------------------------------------------------------------------------------------------------------
Energy Fund 0.25% n/a n/a $ 16,586
- ----------------------------------------------------------------------------------------------------------
Energy Services Fund 0.25% n/a n/a $ 43,391
- ----------------------------------------------------------------------------------------------------------
Financial Services Fund 0.25% n/a n/a $ 66,623
- ----------------------------------------------------------------------------------------------------------
Health Care Fund 0.25% n/a n/a $ 64,478
- ----------------------------------------------------------------------------------------------------------
Leisure Fund 0.25% n/a n/a $ 13,424
- ----------------------------------------------------------------------------------------------------------
Retailing Fund 0.25% n/a n/a $ 83,983
- ----------------------------------------------------------------------------------------------------------
Technology Fund 0.25% n/a n/a $ 100,661
- ----------------------------------------------------------------------------------------------------------
Telecommunications Fund 0.25% n/a n/a $ 34,916
- ----------------------------------------------------------------------------------------------------------
Transportation Fund 0.25% n/a n/a $ 12,190
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* For the nine-month period from July 1, 1996 to March 31, 1997
Under the service agreement, the Servicer provides the Trust and each Fund with
all required general administrative services, including, without limitation,
office space, equipment, and personnel; clerical and general
25
<PAGE>
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 each Fund under
Federal and state securities laws. The Servicer also maintains the shareholder
account records for each Fund, disburses dividends and distributions payable by
each Fund, and produces statements with respect to account activity for each
Fund and each Fund's shareholders. The Servicer pays all fees and expenses that
are directly related to the services provided by the Servicer to each Fund; each
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. Pursuant to an Accounting Service Agreement the
Servicer serves as Accounting Services Agent and performs certain record keeping
and accounting functions. The Servicer received the following fees for the
fiscal period ended March 31, 1998: Nova Fund - $205,109; Ursa Fund - $150,376;
Money Market Fund - $202,742; OTC Fund - $182,519; Metals Fund - $30,681; Bond
Fund - $32,901; Juno Fund - $17,273; Arktos Fund - $39,764; Banking Fund -
$11,907; Basic Materials Fund - $7,487; Biotechnology Fund - $22,396; Consumer
Products Fund - $8,750; Electronics Fund - $24,166; Energy Fund - $8,684; Energy
Services Fund - $17,085; Financial Services Fund - $22,966; Health Care Fund -
$24,042; Leisure Fund - $7,413; Retailing Fund - $27,688; Technology Fund -
$32,508; Telecommunications Fund - $14,839; Transportation Fund - $6,719.
DISTRIBUTION
Pursuant to the Distribution Agreement adopted by the Trust, PADCO Financial
Services, Inc. (the "Distributor"), 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852, acts as distributor for the Advisor Class Shares of
the Trust under the general supervision and control of the Trustees and the
officers of the Trust.
Under a Distribution and Shareholder Services Plan, Service Providers may use
their fees for: (i) compensation for its services in connection with
distribution assistance; or (ii) payments to financial institutions and
intermediaries such as banks, savings and loan associations, insurance companies
and investment counselors, broker-dealers, mutual fund supermarkets and the
Distributor's affiliates and subsidiaries as compensation for services or
reimbursement of expenses incurred in connection with distribution assistance.
The Distributor may, at its discretion, retain a portion of such payments to
compensate itself for distribution services and distribution related expenses
such as the costs of preparation, printing, mailing or otherwise disseminating
sales literature, advertising, and prospectuses (other than those furnished to
current shareholders of the Fund), promotional and incentive programs, and such
other marketing expenses that the Distributor may incur.
A Service Provider also may perform some or all of the following shareholder
services:
- maintaining accounts relating to clients that invest in shares;
- arranging for bank wires;
- responding to client inquiries relating to the services performed by
the Services Provider;
- responding to inquiries from clients concerning their investment in
shares;
- assisting clients in changing dividend options, account designations
and addresses;
- providing information periodically to clients showing their position in
shares;
- forwarding shareholder communications from the Funds such as proxies,
shareholder reports, annual reports, and dividend distribution and tax
notices to clients; and
- processing dividend payments from the Funds on behalf of clients.
These shareholder services are different from the distribution services
discussed above, and are not primarily intended to result in the sale of the
Advisor Class Shares of the Funds. Following are the fees paid under this plan
for the fiscal year ended March 31, 1999:
26
<PAGE>
<TABLE>
<CAPTION>
FUND FEES PAID
---- ---------
<S> <C>
Banking Fund $ 13,940
Basic Materials Fund $ 11,484
Biotechnology Fund $ 47,070
Consumer Products Fund $ 28,246
Electronics Fund $ 47,564
Energy Fund $ 6,432
FUND FEES PAID
---- ---------
Energy Services Fund $ 10,760
Financial Services Fund $ 23,220
Health Care Fund $ 37,536
Leisure Fund $ 336
Retailing Fund $ 67,216
Technology Fund $ 43,286
Telecommunications Fund $ 9,276
Transportation Fund $ 490
U.S. Government Money Market Fund $1,071,214
Nova $ 56,070
Ursa $ 219,840
OTC $ 28, 076
</TABLE>
COSTS AND EXPENSES
Each Fund bears all expenses of its operations other than those assumed by the
Advisor or 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; securities valuation expenses; 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 Funds 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.
PRINCIPAL HOLDERS OF SECURITIES
As of July 1, 1999, the following persons were the only persons who were record
owners or, to the knowledge of the Trust, beneficial owners of 5% or more of the
shares of the Funds.
Accounts with More than 5% Holdings in Fund as of 7/09/99
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Government Bond Fund
- ---------------------------------------------------------------------------------------------------------
27
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
National Investor Services Corp. For the Exclusive 161,678.230 8.22%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 146,244.910 7.44%
Benefit of Customers
P.O. Box 3752 Church St. Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
Independent Trust Corporation Custodian Funds 895 105,110.702 5.34%
15255 S. 94th Avenue
Suite 303
Orland Park, IL 60462
- ---------------------------------------------------------------------------------------------------------
Donaldson Lufkin Jenrette 101,499.270 5.16%
Pershing Division
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------
Juno Fund
- ---------------------------------------------------------------------------------------------------------
National Investor Services Corp. 336,284.336 18.46%
For the Exclusive Benefit of our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
FTC & Co. 286,407.796 15.72%
P.O. Box 173736
Denver, CO 80217
- ---------------------------------------------------------------------------------------------------------
ABN AMRO Incorporated 212,848.829 11.68%
P.O. Box 6108
Chicago, IL 60680-6108
- ---------------------------------------------------------------------------------------------------------
ABN AMRO Incorporated 158,124.776 8.68%
P.O. Box 6108
Chicago, IL 60680-6108
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 127,321.256 6.99%
Benefit of Customers
P.O. Box 372 Church Street Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
28
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nova Fund
- ---------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 5,013,567.085 21.98%
Special Custody Account - REINV for Benefit of
Customers
101 Montgomery Street
San Francisco, CA 94101
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 2,588,498.470 11.35%
Benefit of Customers
P.O. Box 3752 Church Street Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
National Investor Services Corp. For the Exclusive 1,442,107.906 6.32%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
Precious Metals Fund
- ---------------------------------------------------------------------------------------------------------
Trust Company of America 1,644,237.840 24.65%
FBO: FPI
7103 S Revere Parkway
Englewood, CO 80112
- ---------------------------------------------------------------------------------------------------------
FTC & Co. 552,035.596 8.28%
P.O. Box 173736
Denver, CO 80217
- ---------------------------------------------------------------------------------------------------------
URSA Fund
- ---------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 7,750,098.922 18.14%
Special Custody Account - REINV For Benefit of
Customers
101 Montgomery Street
San Francisco, CA 94101
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 3,889,934.367 9.10%
Benefit of Customers
P.O. Box 3752 Church Street Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
29
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
National Investor Services Corp. For the Exclusive 2,682,883.827 6.28%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 2,418,111.232 5.66%
Special Custody Account - Cash For Benefit of
Customers
101 Montgomery Street
San Francisco, CA 94101
- ---------------------------------------------------------------------------------------------------------
OTC Fund
- ---------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 7,567,306.066 25.99%
Special Custody Account - REINV For Benefit of
Customers
101 Montgomery Street
San Francisco, CA 94101
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 4,437,154.531 15.24%
Benefit of Customers
P.O. Box 3752 Church St. Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
National Investor Services Corp. For the Exclusive 2,570,547.157 8.83%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
Donaldson Lufkin Jenrette 1,533,396.977 5.27%
Pershing Division
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 2,072,648.580 15.73%
Special Custody Account - REINV For Benefit of
Customers
101 Montgomery Street
San Francisco, CA 94101
- ---------------------------------------------------------------------------------------------------------
30
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
National Financial Services Corp. For Exclusive 1,565,409.136 11.88%
Benefit of Customers
P.O. Box 3752 Church St. Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
National Investor Services Corp. For the Exclusive 770,598.697 5.85%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
Energy - Investor
- ---------------------------------------------------------------------------------------------------------
RSBCO 149,768.282 20.62%
P.O. Drawer 1410
Ruston, LA 71273
- ---------------------------------------------------------------------------------------------------------
ABN AMRO Incorporated 145,636.974 20.05%
P.O. Box 6108
Chicago, IL 60680-6108
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 45,713.219 6.29%
Benefit of Customers
P.O. Box 3752 Church St. Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
Financial Services - Investor
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 285,882.562 12.67%
Benefit of Customers
P.O. Box 3752 Church St. Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
Health Care - Investor
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 217,244.458 10.94%
Benefit of Customers
P.O. Box 3752 Church St. Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
ABN AMRO Incorporated 132,818.525 6.69%
P.O. Box 6108
Chicago, IL 60680-6108
- ---------------------------------------------------------------------------------------------------------
31
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Donaldson Lufkin Jenrette 130,632.252 6.58%
Pershing Division
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 818,898.347 16.79%
Benefit of Customers
P.O. Box 3752 Church St. Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
Independent Trust Corp. 354,024.174 7.26%
Custodian Funds 930
15255 S. 94th Avenue
Suite 300
Orland Park, IL 60462
- ---------------------------------------------------------------------------------------------------------
Kinemarket Research Inc. 264,059.204 5.41%
Money Purchase Plan
70 Standish Circle
Wellesley, MA 02181
- ---------------------------------------------------------------------------------------------------------
Agawam Fund Corporation 247,402.276 5.07%
Windermere House
404 East Bay Street
P.O. Box SS 6639
Nassau, Bahamas 00000
- ---------------------------------------------------------------------------------------------------------
Basic Materials - Investor
- ---------------------------------------------------------------------------------------------------------
RSBCO 149,622.557 9.73%
P.O. Drawer 1410
Ruston, LA 71273
- ---------------------------------------------------------------------------------------------------------
Independent Trust Corporation 148,194.299 9.64%
Custodian Funds 86
15255 S 94th Avenue
Suite 303
Orland Park, IL 60462
- ---------------------------------------------------------------------------------------------------------
Independent Trust Corporation 144,248.595 9.38%
Custodian Funds 895
15255 S 94th Avenue
Suite 303
Orland Park, IL 60462
- ---------------------------------------------------------------------------------------------------------
32
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
National Investor Services Corp. For the Exclusive 137,383.204 8.94%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
Independent Trust Corp. 97,581.353 6.35%
Custodian Funds 8641
15255 S 94th Avenue, Suite 303
Orland Park, IL 60462
- ---------------------------------------------------------------------------------------------------------
Donaldson Lufkin Jenrette 89,865.820 5.85%
Pershing Division
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------
Trust Company of America 78,344.533 5.10%
Cust FBO HCM - HT
P.O. Box 6503
Englewood, CO 80155
- ---------------------------------------------------------------------------------------------------------
Consumer Prod - Investor
- ---------------------------------------------------------------------------------------------------------
Independent Trust Corporation 100,744.250 63.59%
Custodian Funds 865
15255 S 94th Avenue
Suite 303
Orland Park, IL 60462
- ---------------------------------------------------------------------------------------------------------
Leisure - Investor
- ---------------------------------------------------------------------------------------------------------
Independent Trust Corporation 138,686.098 23.75%
Custodian Funds 965
15255 S 94th Avenue
Suite 303
Orland Park, IL 60462
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 113,836.771 19.49%
Benefit of Customers
P.O. Box 3752 Church St. Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
33
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Independent Trust Corporation 97,334.419 16.67
Custodian Funds 86
15255 S 94th Avenue
Suite 303
Orland Park, IL 60462
- ---------------------------------------------------------------------------------------------------------
Independent Trust Corporation 88,697.626 15.19%
Custodian Funds 865
15255 S 94th Avenue
Suite 303
Orland Park, IL 60462
Retailing - Investor
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For the Exclusive 885,342.716 38.81%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
Independent Trust Corporation 172,696.803 7.57%
Custodian Funds 930
15255 S 94th Avenue
Suite 303
Orland Park, IL 60462
- ---------------------------------------------------------------------------------------------------------
Telecomm - Investor
- ---------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 497,374.708 18.65%
Special Custody Account - REINV For Benefit of
Customers
101 Montgomery Street
San Francisco, CA 94101
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 361,499.051 13.55%
Benefit of Customers
P.O. Box 3752 Church St. Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
Transportation - Investor
- ---------------------------------------------------------------------------------------------------------
Trust Company of America 229,505.369 35.44%
Cust FBO HCM - HT
P.O. Box 6503
Englewood, CO 80155
- ---------------------------------------------------------------------------------------------------------
34
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trust Company of America 88,508.881 13.67
FBO RFS
P.O. Box 6503
Englewood, CO 80155
- ---------------------------------------------------------------------------------------------------------
Trust Company of America 79,000.164 12.20%
Cust FBO D.G.S.
P.O. Box 6503
Englewood, CO 80155
- ---------------------------------------------------------------------------------------------------------
Canadian Commercial Workers 36,043.513 5.57%
Industry Pension Plan
135 Queens Plate Drive, Suite 220
Etobicoke
Ontario, Canada M9W 6V1 00000
- ---------------------------------------------------------------------------------------------------------
Energy Services - Investor
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 897,381.471 22.07%
Benefit of Customers
P.O. Box 3752 Church St. Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
National Investor Services Corp. For the Exclusive 489,182.561 12.03%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 338,449.452 8.33%
Special Custody Account - Cash For Benefit of
Customers
101 Montgomery Street
San Francisco, CA 94101
- ---------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 332,862.778 8.19%
Special Custody Account - REINV For Benefit of
Customers
101 Montgomery Street
San Francisco, CA 94101
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 71,994.962 28.56%
Benefit of Customers
P.O. Box 3752 Church St. Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
35
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles Schwab & Co., Inc. 64,599.750 25.63%
Special Custody Account - REINV For Benefit of
Customers
101 Montgomery Street
San Francisco, CA 94101
- ---------------------------------------------------------------------------------------------------------
National Investor Services Corp. For the Exclusive 16,322.820 6.48%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
Biotechnology - Investor
- ---------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 791,242.881 27.05%
Special Custody Account - REINV For Benefit of
Customers
101 Montgomery Street
San Francisco, CA 94101
- ---------------------------------------------------------------------------------------------------------
Trust Co Of America FBO AMM 284,191.904 9.71%
P.O. Box 6503
Englewood, CO 80112
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 157,616.276 5.39%
Benefit of Customers
P.O. Box 3752 Church St. Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
Electronics - Investor
- ---------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 948,969.609 18.07%
Special Custody Account - REINV For Benefit of
Customers
101 Montgomery Street
San Francisco, CA 94101
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 799,350.088 15.22%
Benefit of Customers
P.O. Box 3752 Church St. Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
36
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles Schwab & Co., Inc. 299,591.143 5.70%
Special Custody Account - Cash For Benefit of
Customers
101 Montgomery Street
San Francisco, CA 94101
- ---------------------------------------------------------------------------------------------------------
Advisor Money Market
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. For Exclusive 58,102,985.221 25.83%
Benefit of Customers
P.O. Box 3752 Church St. Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------
Independent Trust Corporation 52,181,563.850 23.19%
Custodian Funds 92-5
15255 S 94th Avenue, Suite 303
Orland Park, IL 60462
- ---------------------------------------------------------------------------------------------------------
Independent Trust Corporation 12,718,283.540 5.65%
Custodian Funds 965
15255 S 94th Avenue, Suite 303
Orland Park, IL 60462
- ---------------------------------------------------------------------------------------------------------
Nova Fund - Advisor
- ---------------------------------------------------------------------------------------------------------
FTC & Co. 161,150.580 25.65%
P.O. Box 173736
Denver, CO 80217
- ---------------------------------------------------------------------------------------------------------
Independent Trust Corporation 73,218.957 11.66%
Custodian Funds AMIC
15255 S 94th Avenue, Suite 303
Orland Park, IL 60462
- ---------------------------------------------------------------------------------------------------------
URSA Fund - Advisor
- ---------------------------------------------------------------------------------------------------------
Independent Trust Corporation 113,799.743 30.67%
CFBO BCMC
15225 S 94th Avenue, Suite 303
Orland Park, IL 60462
- ---------------------------------------------------------------------------------------------------------
National Financial Services Corp. 60,763.498 16.38%
200 Liberty Street
One World Financial Center
New York, NY 10281
- ---------------------------------------------------------------------------------------------------------
37
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Demeter Charitable Annuity III 22,527.588 6.07%
3134 Lombardy Road
Pasadena, CA 91107
- ---------------------------------------------------------------------------------------------------------
OTC Fund - Advisor
- ---------------------------------------------------------------------------------------------------------
IBEW Seventh District Retirement 180,492.730 15.04%
Benefit Trust
418 S. Polk
Suite 200
Amarillo, TX 79101
- ---------------------------------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette 115,685.127 9.64%
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------
Energy - Advisor
- ---------------------------------------------------------------------------------------------------------
Trust Company of America 77,173.000 58.05%
FCO: FPI
7103 S Revere Parkway
Englewood, CO 80112
- ---------------------------------------------------------------------------------------------------------
FTC & Co. 46,672.360 35.11%
P.O. Box 173736
Denver, CO 80217
- ---------------------------------------------------------------------------------------------------------
National Investor Services Corp. For the Exclusive 7,705.760 5.80%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
Financial Services - Advisor
- ---------------------------------------------------------------------------------------------------------
National Investor Services Corp. For the Exclusive 5,700.280 69.61%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
National Financial Services 1,527.262 18.65%
200 Liberty Street
One World Financial Center
New York, NY 10281
- ---------------------------------------------------------------------------------------------------------
38
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Donaldson, Lufkin & Jenrette 951.475 11.62%
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------
Health Care - Advisor
- ---------------------------------------------------------------------------------------------------------
Trust Company of America 398,806.000 83.39%
Cust FPI
P.O. Box 6503
Englewood, CO 80155
- ---------------------------------------------------------------------------------------------------------
National Investor Services Corp. For the Exclusive 28,940.135 6.05%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
Technology - Advisor
- ---------------------------------------------------------------------------------------------------------
Centurion Trust Co F/B/O 1,720,314.687 75.22%
Omnibus/Centurion Capital Management
2425 E Camelback Road
Suite 530
- ---------------------------------------------------------------------------------------------------------
Salomon Smith Barney 146,317.592 6.40%
388 Greenwich Street
New York, NY 10013
- ---------------------------------------------------------------------------------------------------------
Basic Materials - Advisor
- ---------------------------------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette 31,684.194 76.31%
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------
National Investor Services Corp. For the Exclusive 6,592.934 15.88%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
National Financial Services 3,233.911 7.79%
200 Liberty Street
One World Financial Center
New York, NY 10281
- ---------------------------------------------------------------------------------------------------------
Consumer Prod - Advisor
- ---------------------------------------------------------------------------------------------------------
39
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Donaldson Lufkin Jenrette 111.972 60.09%
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------
National Financial Services 62.537 33.56%
200 Liberty Street
One World Financial Center
New York, NY 10281
- ---------------------------------------------------------------------------------------------------------
PADCO Advisors Inc. 11.833 6.35%
Sector Fund Account
6116 Executive Blvd.
Rockville, MD 20852
- ---------------------------------------------------------------------------------------------------------
Leisure - Advisor
- ---------------------------------------------------------------------------------------------------------
National Investor Services Corp. For the Exclusive 849.857 98.76%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
Retailing - Advisor
- ---------------------------------------------------------------------------------------------------------
Donaldson Lufkin Jenrette 4,441.155 46.79%
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------
National Investor Services Corp. For the Exclusive 4,436.441 46.74%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
Sterling Trust Company Agent for Matrix Capital 513.782 5.41%
Bank FBO Investrack
P.O. Box 2526
Waco, TX 76702
- ---------------------------------------------------------------------------------------------------------
Centurion Trust Co F/B/O 2,185,746.815 95.48%
Omnibus/Centurion Capital Management
2425 E Camelback Road
Suite 530
- ---------------------------------------------------------------------------------------------------------
40
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trust Company of America 98,719.000 99.65%
FBO: FPI
7103 S Revere Parkway
Englewood, CO 80112
- ---------------------------------------------------------------------------------------------------------
Energy Services - Advisor
- ---------------------------------------------------------------------------------------------------------
Investec Ernst & Company 109,318.815 44.14%
One Battery Park Plaza
New York, NY 10004
- ---------------------------------------------------------------------------------------------------------
Investec Ernst & Company 57,048.858 23.04%
One Battery Park Plaza
New York, NY 10004
- ---------------------------------------------------------------------------------------------------------
National Investor Services Corp. For the Exclusive 49,253.436 19.89%
Benefit of Our Customers
55 Water Street
32nd Floor
New York, NY 10041
- ---------------------------------------------------------------------------------------------------------
National Financial Services 13,620.054 5.50%
200 Liberty Street
One World Financial Center
New York, NY 10281
- ---------------------------------------------------------------------------------------------------------
Banking - Advisor
- ---------------------------------------------------------------------------------------------------------
Trust Company of America 32,511.000 93.87%
FBO: FPI
7103 S Revere Parkway
Englewood, CO 80112
- ---------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 121,464.465 25.33%
1 Metrotech Center North
Brooklyn, NY 11201 -3859
- ---------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 112,455.133 23.45%
1 Metrotech Center North
Brooklyn, NY 11201 -3859
- ---------------------------------------------------------------------------------------------------------
Trust Company of America 56,505.000 11.78%
FBO: FPI
7103 S Revere Parkway
Englewood, CO 80112
- ---------------------------------------------------------------------------------------------------------
41
<PAGE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS # OF SHARES PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Donaldson Lufkin Jenrette 55,961.512 11.67%
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------
Investec Ernst & Company 53,581.721 11.18%
One Battery Park Plaza
New York, NY 10004
- ---------------------------------------------------------------------------------------------------------
Investec Ernst & Company 27,962.363 5.83%
One Battery Park Plaza
New York, NY 10004
- ---------------------------------------------------------------------------------------------------------
Electronics - Advisor
- ---------------------------------------------------------------------------------------------------------
Centurion Trust Co F/B/O 1,981,419.457 65.15%
Omnibus/Centurion Capital Management
2425 E Camelback Road
Suite 530
- ---------------------------------------------------------------------------------------------------------
Trust Company of America 478,251.500 15.72%
FBO: FPI
7103 S Revere Parkway
Englewood, CO 80112
- ---------------------------------------------------------------------------------------------------------
Salomon Smith Barney 166,670.360 5.48%
388 Greenwich Street
New York, NY 10013
- ---------------------------------------------------------------------------------------------------------
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value of a Fund serves as the basis for the purchase and
redemption price of that Fund's shares. The net asset value per share of a Fund
is calculated by dividing the market value of the Fund's securities plus the
values of its other assets, less all liabilities, 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 Advisor using
methods established or ratified by the Board of Trustees.
Options on securities and indices purchased by a Fund generally are valued at
their last bid price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter ("OTC") market, the average of the last
bid price as obtained from two or more dealers unless there is only one dealer,
in which case that dealer's price is used. The value of a futures contract
equals the unrealized gain or loss on the contract settlement price for a like
contract acquired on the day on which the futures contract is being valued. The
value of options on futures contracts is determined based upon the current
settlement price for a like option acquired on the day on
42
<PAGE>
which the option is being valued. A settlement price may not be used for the
foregoing purposes if the market makes a limit move with respect to a particular
commodity.
On days when the CBOT is closed during its usual business hours, but the shares
of the Bond Fund or Juno Fund have been purchased, redeemed, and/or exchanged,
the portfolio securities held by the Bond Fund or Juno Fund which are traded on
the CBOT are valued at the earlier of (i) the time of the execution of the last
trade of the day for the Bond Fund or Juno Fund in those CBOT-traded portfolio
securities and (ii) the time of the close of the CBOT Evening Session. On days
when the CBOT is closed during its usual business hours and there is no need for
the Bond Fund or Juno Fund to execute trades on the CBOT, the value of the
CBOT-traded portfolio securities held by the Bond Fund or Juno Fund will be the
mean of the bid and asked prices for those CBOT-traded portfolio securities at
the open of the CBOT Evening Session.
OTC securities held by a Fund shall be valued at the last sales price or, if no
sales price is reported, the mean of the last bid and asked price is used. The
portfolio securities of a Fund that are listed on national exchanges are taken
at the last sales price of such securities on such exchange; if no sales price
is reported, the mean of the last bid and asked price is used. For valuation
purposes, all assets and liabilities initially expressed in foreign currency
values will be converted into U.S. dollar values at the mean between the bid and
the offered quotations of such currencies against U.S. dollars as last quoted by
any recognized dealer. If such quotations are not available, the rate of
exchange will be determined in good faith by the Advisor based on guidelines
adopted by the Trustees. Dividend income and other distributions are recorded on
the ex-dividend date, except for certain dividends from foreign securities which
are recorded as soon as the Trust is informed after the ex-dividend date.
Illiquid securities, securities for which reliable quotations or pricing
services are not readily available, and all other assets will be valued at their
respective fair value as determined in good faith by, or under procedures
established by, the Trustees, which procedures may include the delegation of
certain responsibilities regarding valuation to the Advisor or the officers of
the Trust. The officers of the Trust report, as necessary, to the Trustees
regarding portfolio valuation determination. The Trustees, from time to time,
will review these methods of valuation and will recommend changes which may be
necessary to assure that the investments of the Funds are valued at fair value.
The Money Market Fund will utilize the amortized cost method in valuing its
portfolio securities for purposes of determining the net asset value of its
shares even though the portfolio securities may increase or decrease in market
value, generally, in connection with changes in interest rates. The amortized
cost method of valuation involves valuing a security at its cost adjusted by a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument while
this method provides certainty in valuation, this method may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Money Market Fund would receive if this Fund sold the instrument.
During such periods, the yield to investors in the Money Market Fund may differ
somewhat from that obtained in a similar company which uses mark-to-market
values for all its portfolio securities. For example, if the use of amortized
cost resulted in a lower (higher) aggregate portfolio value on a particular day,
a prospective investor in the Money Market Fund would be able to obtain a
somewhat higher (lower) yield than would result from investment in such a
similar company and existing investors would receive less (more) investment
income. The purpose of this method of calculation is to facilitate the
maintenance of a constant net asset value per share of $1.00.
The Money Market Fund's use of the amortized cost method is permitted pursuant
to Rule 2a-7 under the 1940 Act (the "Rule"). The Rule requires that the Money
Market Fund limit its investments to U.S. dollar-denominated instruments that
meet the Rule's quality, maturity and diversification requirements. The Rule
also requires the Money Market Fund to maintain a dollar-weighted average
portfolio maturity of not more than ninety days and precludes the purchase of
any instrument with a remaining maturity of more than thirteen months.
43
<PAGE>
The Money Market Fund may only purchase "Eligible Securities." Eligible
Securities are securities which : (a) have remaining maturities of thirteen
months or less; (b) either (i) are rated in the two highest short-term rating
categories by any two nationally-recognized statistical rating organizations
("NRSROs") that have issued a short-term rating with respect to the security or
class of debt obligations of the issuer, or (ii) if only one NRSRO has issued a
short-term rating with respect to the security, then by that NRSRO; (c) were
long-term securities at the time of issuance whose issuers have outstanding
short-term debt obligations which are comparable in priority and security and
has a ratings as specified in (b) above; or (d) if no rating is assigned by any
NRSRO as provided in (b) and (c) above, the unrated securities are determined by
the Trustees to be of comparable quality to any rated securities.
As permitted by the Rule, the Trustees have delegated to the Advisor, subject to
the Trustees' oversight pursuant to guidelines and procedures adopted by the
Trustees, the authority to determine which securities present minimal credit
risks and which unrated securities are comparable in quality to rated
securities.
If the Trustees determine that it is no longer in the best interests of the
Money Market Fund and its shareholders to maintain a stable price of $1.00 per
share, or if the Trustees believe that maintaining such price no longer reflects
a market-based net asset value per share, the Trustees have the right to change
from an amortized cost basis of valuation to valuation based on market
quotations. The Money Market Fund will notify shareholders of any such change.
PERFORMANCE INFORMATION
From time to time, each of the Funds (other than the Money Market Fund) may
include the Fund's total return in advertisements or reports to shareholders or
prospective shareholders. Quotations of average annual total return for a 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 a Fund is calculated from two factors: the amount of
dividends earned by each Fund share and by the increase or decrease in value of
the Fund's share price. See "Calculation of Return Quotations."
Performance information for each of the Funds 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 Nova Fund, the Ursa Fund, and the Metals Fund
may be compared to various unmanaged indexes, including, but not limited to, the
S&P 500 Index or the Dow Jones Industrial Average. Performance information for
the Metals Fund also may be compared to its current benchmark, the XAU Index.
Performance information for the OTC Fund may be compared to various unmanaged
indexes, including, but not limited to, its current benchmark, the NASDAQ 100
Index-TM-, and the NASDAQ Composite Index-TM-. The OTC Fund has the ability to
invest in securities not included in the NASDAQ 100 Index-TM- or the NASDAQ
Composite Index-TM-, and the OTC Fund's investment portfolio may or may not be
similar in composition to NASDAQ 100 Index-TM- or the NASDAQ Composite
Index-TM-. Performance information for the Bond Fund and the Juno Fund may be
compared to various unmanaged indexes, including, but not limited to, the
Shearson Lehman Government (LT) Index.
Such unmanaged indexes may assume the reinvestment of dividends, but generally
do not reflect deductions for operating costs and expenses. In addition, a
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 published 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.
Performance figures are based on historical results and are not intended to
indicate future performance.
44
<PAGE>
In addition, rankings, ratings, and comparisons of investment performance and/or
assessments of the quality of shareholder service appear in numerous financial
publications such as MONEY, FORBES, KIPLINGER'S MAGAZINE, PERSONAL INVESTOR,
MORNINGSTAR, INC., and similar sources.
CALCULATION OF RETURN QUOTATIONS
For purposes of quoting and comparing the performance of a Fund (other than the
Money Market Fund) to that of other mutual funds and to other relevant market
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:
M
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years (1, 5 or 10); and
ERV = ending redeemable value of a hypothetical
$1,000 payment, made at the beginning of the
1, 5 or 10 year periods, at the end of the
1, 5, or 10 year periods (or fractional
portion thereof).
Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication, and will cover 1, 5, and
10 year periods or a shorter period dating from the effectiveness of the
Registration Statement of the Trust. In calculating the ending redeemable value,
all dividends and distributions by a 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.
For the one-year period, five-year period and period from the respective
commencement of operations of the Funds ended March 31, 1999, the average annual
compounded rate of return of the respective Funds (other than the Money Market
Fund), assuming the reinvestment of all dividends and distributions, was as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FUND CLASS AVERAGE ANNUAL TOTAL RETURN FISCAL YEAR END
------------------------------------------------------------
ONE YEAR THREE FIVE YEARS SINCE SINCE
YEARS INCEPTION INCEPTION
AGGREGATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nova Fund INVESTOR 18.54% 34.05% 32.02% 27.07%
CLASS
- -------------------------------------------------------------------------------------------------------------------
Ursa Fund (12.47)% (17.37)% (15.56)% (14.14)%
- -------------------------------------------------------------------------------------------------------------------
OTC Fund 73.73% 52.70% 41.24% 38.30%
- -------------------------------------------------------------------------------------------------------------------
45
<PAGE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FUND CLASS AVERAGE ANNUAL TOTAL RETURN FISCAL YEAR END
------------------------------------------------------------
ONE YEAR THREE FIVE YEARS SINCE SINCE
YEARS INCEPTION INCEPTION
AGGREGATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Arktos Fund n/a n/a n/a n/a (46.35)%
- -------------------------------------------------------------------------------------------------------------------
Precious Metals (28.01)% (26.33)% (15.87)% (14.92)%
Fund
- -------------------------------------------------------------------------------------------------------------------
U.S. Gov't. Bond 4.24% 8.46% 7.28% 4.71%
Fund
- -------------------------------------------------------------------------------------------------------------------
Juno Fund 0.78% (1.68)% N/A (2.98)%
- -------------------------------------------------------------------------------------------------------------------
U.S. Gov't. 4.55% 4.56% 4.49% 4.31%
Money Market
Fund
- -------------------------------------------------------------------------------------------------------------------
Banking Fund (12.30)% N/A N/A N/A (12.30)%
- -------------------------------------------------------------------------------------------------------------------
Basic Materials (22.50)% N/A N/A N/A (22.50)%
Fund
- -------------------------------------------------------------------------------------------------------------------
Biotechnology 28.10% N/A N/A N/A 28.10%
Fund
- -------------------------------------------------------------------------------------------------------------------
Consumer N/A N/A N/A N/A (2.90)%
Products Fund
- -------------------------------------------------------------------------------------------------------------------
Electronics Fund 40.20% N/A N/A N/A 40.20%
- -------------------------------------------------------------------------------------------------------------------
Energy Fund N/A N/A N/A N/A (10.10)%
- -------------------------------------------------------------------------------------------------------------------
Energy Services (39.80)% N/A N/A N/A (39.80)%
Fund
- -------------------------------------------------------------------------------------------------------------------
Financial Services N/A N/A N/A N/A (0.10)%
Fund
- -------------------------------------------------------------------------------------------------------------------
Health Care N/A N/A N/A N/A 14.50%
Fund
- -------------------------------------------------------------------------------------------------------------------
Leisure Fund 12.10% N/A N/A N/A 12.10%
- -------------------------------------------------------------------------------------------------------------------
Retailing Fund 35.40% N/A N/A N/A 35.40%
- -------------------------------------------------------------------------------------------------------------------
Technology Fund N/A N/A N/A N/A 70.20%
- -------------------------------------------------------------------------------------------------------------------
Telecommuni- 30.30% N/A N/A N/A 30.30%
cations Fund
- -------------------------------------------------------------------------------------------------------------------
46
<PAGE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FUND CLASS AVERAGE ANNUAL TOTAL RETURN FISCAL YEAR END
------------------------------------------------------------
ONE YEAR THREE FIVE YEARS SINCE SINCE
YEARS INCEPTION INCEPTION
AGGREGATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Transportation N/A N/A N/A N/A (20.10)%
Fund
- -------------------------------------------------------------------------------------------------------------------
Banking Fund ADVISOR (12.60)% N/A N/A N/A (12.60)%
CLASS
- -------------------------------------------------------------------------------------------------------------------
Basic Materials N/A N/A N/A N/A (26.89)%
Fund
- -------------------------------------------------------------------------------------------------------------------
Biotechnology 26.60% N/A N/A N/A 26.60%
Fund
- -------------------------------------------------------------------------------------------------------------------
Consumer N/A N/A N/A N/A 11.11%
Products Fund
- -------------------------------------------------------------------------------------------------------------------
Electronics Fund N/A N/A N/A N/A 39.88%
- -------------------------------------------------------------------------------------------------------------------
Energy Fund N/A N/A N/A N/A (10.53)%
- -------------------------------------------------------------------------------------------------------------------
Energy Services N/A N/A N/A N/A (39.05)%
Fund
- -------------------------------------------------------------------------------------------------------------------
Financial Services N/A N/A N/A N/A (4.97)%
Fund
- -------------------------------------------------------------------------------------------------------------------
Health Care Fund N/A N/A N/A N/A 14.50%
- -------------------------------------------------------------------------------------------------------------------
Leisure Fund N/A N/A N/A N/A 19.36%
- -------------------------------------------------------------------------------------------------------------------
Retailing Fund N/A N/A N/A N/A 34.87%
- -------------------------------------------------------------------------------------------------------------------
Technology Fund N/A N/A N/A N/A 55.90%
- -------------------------------------------------------------------------------------------------------------------
Telecommuni- N/A N/A N/A N/A 29.10%
cations Fund
- -------------------------------------------------------------------------------------------------------------------
Transportation N/A N/A N/A N/A (14.15)%
Fund
- -------------------------------------------------------------------------------------------------------------------
U.S. Gov't. 4.02% n/a n/a n/a 4.02%
Money Market
Fund
- -------------------------------------------------------------------------------------------------------------------
Nova Fund n/a n/a n/a n/a 31.03%
- -------------------------------------------------------------------------------------------------------------------
Ursa Fund n/a n/a n/a n/a (15.68)%
- -------------------------------------------------------------------------------------------------------------------
47
<PAGE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FUND CLASS AVERAGE ANNUAL TOTAL RETURN FISCAL YEAR END
------------------------------------------------------------
ONE YEAR THREE FIVE YEARS SINCE SINCE
YEARS INCEPTION INCEPTION
AGGREGATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OTC Fund n/a n/a n/a n/a 57.20%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
INFORMATION ON COMPUTATION OF YIELD
THE BOND FUND
In addition to the total return quotations discussed above, the Bond 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:
A-B 6
YIELD = 2(----- + 1) - 1
cd
Where: a = dividends 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 Bond 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 Bond 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 Bond 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.
The Bond Fund's yield, as of March 31, 1999, based on a thirty-day base period,
was approximately 4.47%.
49
<PAGE>
THE MONEY MARKET FUND
The Money Market Fund's annualized current yield, as may be quoted from time
to time in advertisements and other communications to shareholders and
potential investors, is computed by determining, for a stated seven-day
period, the net change, exclusive of capital changes and including the value
of additional shares purchased with dividends and any dividends declared
therefrom (which reflect deductions of all expenses of the Money Market Fund
such as management fees), in the value of a hypothetical pre-existing account
having a balance of one share at the beginning of the period, and dividing
the difference by the value of the account at the beginning of the base
period to obtain the base period return, and then multiplying the base period
return by 365 divided by 7.
The Money Market Fund's annualized effective yield, as may be quoted from time
to time in advertisements and other communications to shareholders and potential
investors, is computed by determining (for the same stated seven-day period as
the current yield) the net change, exclusive of capital changes and including
the value of additional shares purchased with dividends and any dividends
declared therefrom (which reflect deductions of all expenses of the Money Market
Fund such as management fees), in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period, and
dividing the difference by the value of the account at the beginning of the base
period to obtain the base period return, and then compounding the base period
return by adding 1, raising the sum to a power equal to 365 divided by 7, and
subtracting 1 from the result.
The Money Market Fund's annualized effective yield and annualized current yield,
for the seven-day period ended March 31, 1999, were 4.13% and 4.05%,
respectively, for Investor Class shares and 3.62% and 3.54%, respectively, for
Advisor Class shares.
The yields quoted in any advertisement or other communication should not be
considered a representation of the yields of the Money Market Fund in the future
since the yield is not fixed. Actual yields will depend not only on the type,
quality, and maturities of the investments held by the Money Market Fund and
changes in interest rates on such investments, but also on changes in the Money
Market Fund's expenses during the period.
Yield information may be useful in reviewing the performance of the Money Market
Fund and for providing a basis for comparison with other investment
alternatives. However, unlike bank deposits or other investments which typically
pay a fixed yield for a stated period of time, the Money Market Fund's yield
fluctuates.
PURCHASE AND REDEMPTION OF SHARES
MINIMUM INVESTMENT REQUIREMENTS
Shareholders will be informed of any increase in the minimum investment
requirements by a new prospectus or a prospectus supplement, in which the new
minimum is disclosed. Any request for a redemption (including pursuant to check
writing privileges) 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 of a
complete redemption of that account. In addition, the Trust may redeem an
account whose balance (due in whole or in part to redemptions since the time of
last purchase) has fallen below the minimum investment amount applicable at the
time of the shareholder's most recent purchase of Fund shares (unless the
shareholder brings his or her account value up to the currently applicable
minimum investment).
TAX CONSEQUENCES
Note that in the case of tax-qualified retirement plans, a redemption from such
a plan may have adverse tax consequences. A shareholder contemplating such a
redemption should consult his or her own tax advisor. Other shareholders should
consider the tax consequences of any redemption.
50
<PAGE>
SUSPENSION OF THE RIGHT OF REDEMPTION
The Funds may suspend the right of redemption or the date of payment: (i) for
any period during which the NYSE, the Federal Reserve Bank of New York, the
NASDAQ, the Chicago Mercantile Exchange ("CME"), the CBOT, or any other
exchange, as appropriate, is closed (other than customary weekend or holiday
closings), or trading on the NYSE, the NASDAQ, the CME, the CBOT, or any other
exchange, as appropriate, is restricted; (ii) for any period during which an
emergency exists so that sales of a Fund's investments or the determination of
its NAV is not reasonably practicable; or (iii) for such other periods as the
SEC may permit for the protection of a Fund's investors.
HOLIDAYS
The NYSE, the Federal Reserve Bank of New York, the NASDAQ, the CME, the CBOT,
and other U.S. exchanges are closed on weekends and on the following holidays:
(i) New Year's Day, Martin Luther King Jr.'s Birthday, President's Day, Good
Friday, Memorial Day, July Fourth, Labor Day, Columbus Day, Thanksgiving Day,
and Christmas Day; and (ii) the preceding Friday if any of these holidays falls
on a Saturday, or the subsequent Monday if any of these holidays falls on a
Sunday. Although the Trust expects the same holiday schedules to be observed in
the future, each of the aforementioned exchanges may modify its holiday schedule
at any time.
REDEMPTIONS IN-KIND
The Trust intends to pay your redemption proceeds in cash. However, under
unusual conditions that make the payment in cash unwise (and for the protection
of the remaining shareholders of the Fund) the Trust reserves the right to pay
all, or part, of your redemption proceeds in liquid securities with a market
value equal to the redemption price (redemption in-kind). The Trust has elected
to be governed by Rule 18f-1 of the 1940 Act under which the Trust is obligated
to redeem shares for any one shareholder in cash only up to the lesser of
$250,000 or 1% of a Fund's net asset value during any 90-day period. Although it
is highly unlikely that your shares would ever actually be redeemed in kind, you
would probably have to pay brokerage costs to sell the securities distributed to
you.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income and any distributions of net realized
capital gains from each of the Funds will be distributed as described in the
Trust's Prospectus under "Dividends and Distributions." All such distributions
of a Fund normally automatically will be reinvested without charge in additional
shares of the same Fund.
The Money Market Fund intends to declare dividends daily from net investment
income (and net short-term capital gains, if any) and distribute such dividends
monthly. Net income, for dividend purposes, includes accrued interest and
accretion of original issue and market discount, plus or minus any short-term
gains or losses realized on sales of portfolio securities, less the amortization
of market premium and the estimated expenses of the Money Market Fund. Net
income will be calculated immediately prior to the determination of net asset
value per share of the Money Market Fund.
The Trustees may revise the dividend policy, or postpone the payment of
dividends, if the Money Market Fund should have or anticipate any large
unexpected expense, loss, or fluctuation in net assets which, in the opinion of
the Trustees, might have a significant adverse effect on shareholders of the
Money Market Fund. On occasion, in order to maintain a constant $1.00 per share
net asset value for the Money Market Fund, the Trustees may direct that the
number of outstanding shares of the Money Market Fund be reduced in each
shareholder's account. Such reduction may result in taxable income to a
shareholder of the Money Market Fund in excess of the net increase (I.E.,
dividends, less such reduction), if any, in the shareholder's account for a
period of time. Furthermore, such reduction may be realized as a capital loss
when the shares are liquidated.
51
<PAGE>
With respect to the investment by the Bond Fund in U.S. Treasury zero coupon
bonds, a portion of the difference between the issue price of zero coupon
securities and the face value of such securities (the "original issue discount")
is considered to be income to the Bond Fund each year, even though the Bond Fund
will not receive cash interest payments from these securities. This original
issue discount (imputed income) will comprise a part of the investment company
taxable income of the Bond Fund which must be distributed to shareholders of the
Bond Fund in order to maintain the qualification of the Bond Fund as a regulated
investment company (a "RIC") under Subchapter M of the U.S. Internal Revenue
Code of 1986, as amended (the "Code"), as described immediately below under
"Regulated Investment Company Status," and to avoid Federal income tax at the
level of the Bond Fund. Shareholders of the Bond Fund will be subject to income
tax on such original issue discount, whether or not such shareholders elect to
receive their distributions in cash.
REGULATED INVESTMENT COMPANY STATUS
As a RIC, a 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 of whether the shareholder elects to
receive these distributions 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.
Shareholders of the Money Market Fund will be subject to Federal income tax on
dividends paid from interest income derived from taxable securities and on
distributions of realized net short-term capital gains. Interest and realized
net short-term capital gains distributions are taxable to a shareholder of the
Money Market Fund as ordinary dividend income regardless of whether the
shareholder receives such distributions in additional shares of the Money Market
Fund or in cash. Since the Money Market Fund's income is expected to be derived
entirely from interest rather than dividends, none of such distributions will be
eligible for the Federal dividends received deduction available to corporations.
Each of the Funds will seek to qualify for treatment as a RIC under the Code.
Provided that a 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
long- and short-term capital gains, if any, are distributed to the Fund's
shareholders. To avoid an excise tax on its undistributed income, each Fund
generally must distribute at least 98% of its income, including its net
long-term capital gains. 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"). Income from investments in precious metals
and in precious minerals will not qualify as gross income from "securities" for
purposes of the 90% Test. The Metals Fund, therefore, intends to restrict its
investment in precious metals and in precious minerals to avoid a violation of
the 90% Test.
In the event of a failure by a Fund to quality as an 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 an RIC.
If a Fund were to fail to qualify as an RIC for one or more taxable years, the
Fund could then qualify (or requalify) as an 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
52
<PAGE>
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
an RIC and should thereafter seek to requalify as an 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 an RIC.
If a Fund determines that it will not qualify as an 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.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO THE METALS FUND AND THE SECTOR FUNDS
In general, with respect to the Metals Fund and the Sector Funds, gains from
"foreign currencies" and from foreign currency options, foreign currency
futures, and forward foreign exchange contracts ("forward contracts") relating
to investments in stock, securities, or foreign currencies will be qualifying
income for purposes of determining whether the Fund qualifies as a RIC. It is
currently unclear, however, who will be treated as the issuer of a foreign
currency instrument or how foreign currency options, futures, or forward
contracts will be valued for purposes of the RIC diversification requirements
applicable to a Fund.
Under the Code, special rules are provided for certain transactions in a foreign
currency other than the taxpayer's functional currency (I.E., unless certain
special rules apply, currencies other than the U.S. dollar). In general, foreign
currency gains or losses from forward contracts, from futures contracts that are
not "regulated futures contracts," and from unlisted options will be treated as
ordinary income or loss under the Code. Also, certain foreign exchange gains
derived with respect to foreign fixed-income securities are also subject to
special treatment. In general, any such gains or losses will increase or
decrease the amount of the a Fund's investment company taxable income available
to be distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of a Fund's net capital gain. Additionally, if such losses
exceed other investment company taxable income during a taxable year, a Fund
would not be able to make any ordinary dividend distributions.
The Metals Fund or Sector Funds may incur a liability for dividend withholding
tax as a result of investment in stock or securities of foreign corporations.
If, at any year end, more than 50% of the assets of a Fund are comprised of
stock or securities of foreign corporations, the Fund may elect to "pass
through" to shareholders the amount of foreign taxes paid by that Fund. The Fund
will make such an election only if that Fund deems this to be in the best
interests of its shareholders. If the Fund does not qualify to make this
election or does qualify, but does not choose to do so, the imposition of such
taxes would directly reduce the return to an investor from an investment in that
Fund.
OPTIONS TRANSACTIONS BY THE FUNDS
If a call option written by a Fund expires, the amount of the premium received
by the Fund for the option will be short-term capital gain to the Fund. If such
an option is closed by a Fund, any gain or loss realized by the Fund as a result
of the closing purchase transaction will be short-term capital gain or loss. 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 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 a 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 stock or futures contract so acquired.
53
<PAGE>
Each of the Nova Fund, the Ursa Fund, the OTC Fund, the Arktos Fund, the Metals
Fund and the Sector Funds in its operations also will utilize options on stock
indexes. Options on "broad based" stock 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 a 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 each of the Nova Fund, the Ursa Fund, the OTC Fund,
the Arktos Fund, the Metals Fund and the Sector Funds involving nonequity
options on stock 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. Each of these
Funds will also have available to the Fund a number of elections under the Code
concerning the treatment of option transactions for tax purposes. Each such 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.
A 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 each 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
Each 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 to report fully dividend or interest income, or
who fails to certify to the Trust that the shareholder has provided a correct
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
Each 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 a Fund 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.
54
<PAGE>
OTHER INFORMATION
VOTING RIGHTS
You receive one vote for every full Fund share owned. Each Fund or class of a
Fund will vote separately on matters relating solely to that Fund or class. All
shares of the Funds are freely transferable.
As a Delaware business trust, the Trust is not required to hold annual
Shareholder meetings unless otherwise required by the 1940 Act. However, a
meeting may be called by Shareholders owning at least 10% of the outstanding
shares of the Trust. If a meeting is requested by Shareholders, the Trust will
provide appropriate assistance and information to the Shareholders who requested
the meeting. Shareholder inquiries can be made by calling 1-800-820-0888 or
301-468-8520, or by writing to the Trust at 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
REPORTING
You will receive the Trust's unaudited financial information and audited
financial statements. In addition, the Trust will send you proxy statements and
other reports. If you are a customer of a financial institution that has
purchased shares of a Fund for your account, you may, depending upon the nature
of your account, receive all or a portion of this information directly from your
financial institution.
SHAREHOLDER INQUIRIES
You may call 1-800-820-0888 or 301-468-8520 to obtain information on account
statements, procedures, and other related information.
COUNSEL
Morgan, Lewis & Bockius LLP, 1800 M Street, N.W., Washington, D.C. 20036, serves
as counsel to the Trust.
AUDITORS AND CUSTODIAN
Deloitte & Touche LLP, University Square, 117 Campus Drive, Princeton, New
Jersey 08540, are the auditors and the independent certified public accountants
of the Trust and each of the Funds. Firstar (the "Custodian"), Star Bank Center,
425 Walnut Street, Cincinnati, Ohio 45202, serves as custodian for the Trust and
the Funds under a custody agreement between the Trust and the Custodian. Under
the custody agreement, the Custodian holds the portfolio securities of each Fund
and keeps all necessary related accounts and records.
FINANCIAL STATEMENTS
The Trust's financial statements for the fiscal year ended March 31, 1999,
including notes thereto and the report of Deloitte & Touche LLP are incorporated
by reference into this SAI. A copy of the Trust's Annual Report to Shareholders
(the "Annual Report") must accompany the delivery of this Statement of
Additional Information.
55
<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.
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, financial, 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 payments 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 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 rate "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to a "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 rate "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.
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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
elements 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.
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.
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