U.S. GLOBAL ACCOLADE FUNDS
ADRIAN DAY
GLOBAL OPPORTUNITY FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus. You should read it
in conjunction with the prospectus (the "Prospectus") dated February 20, 1997,
which you may request from U. S. Global Investors, Inc. (the "Advisor"), 7900
Callaghan Road, San Antonio, Texas 78229 or 1-800-US-FUNDS (1-800-873-8637).
The date of this Statement of Additional Information is February 20, 1997, and
amended April 3, 1997.
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TABLE OF CONTENTS
PAGE
GENERAL INFORMATION.........................................................4
INVESTMENT OBJECTIVES AND POLICIES..........................................4
Investment Restrictions............................................5
RISK FACTORS................................................................6
Equity Price Fluctuation...........................................6
Foreign Investments................................................6
Emerging Markets...................................................6
Lower-Rated and Unrated Debt Securities............................8
Zero Coupon Securities.............................................9
Restricted Securities..............................................9
Commodity Linked Securities........................................9
Convertible Securities.............................................9
Other Rights to Acquire Securities................................10
STRATEGIC TRANSACTIONS.....................................................10
Put and Call Options..............................................11
Futures Contracts.................................................12
Foreign Currency Transactions.....................................12
Use of Segregated and Other Special Accounts......................14
PORTFOLIO TURNOVER.........................................................14
MANAGEMENT OF THE FUND.....................................................14
PRINCIPAL HOLDERS OF SECURITIES............................................16
INVESTMENT ADVISORY SERVICES...............................................16
TRANSFER AGENCY AND OTHER SERVICES.........................................17
DISTRIBUTION PLAN..........................................................18
CERTAIN PURCHASES OF SHARES OF THE FUND....................................18
ADDITIONAL INFORMATION ON REDEMPTIONS......................................19
CALCULATION OF PERFORMANCE DATA............................................19
Total Return......................................................19
Nonstandardized Total Return......................................20
TAX STATUS.................................................................20
Taxation of the Fund -- In General................................20
Taxation of the Fund's Investments................................20
Taxation of the Shareholder.......................................21
CUSTODIAN..................................................................21
INDEPENDENT ACCOUNTANTS ...................................................21
FINANCIAL STATEMENTS.......................................................21
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GENERAL INFORMATION
U.S. Global Accolade Funds (the "Trust") is an open-end management investment
company and is a business trust organized under the laws of the Commonwealth of
Massachusetts. There are several series within the Trust, each of which
represents a separate diversified portfolio of securities (a "Portfolio"). This
Statement of Additional Information ("SAI") presents important information
concerning the Adrian Day Global Opportunity Fund (the "Fund") and should be
read in conjunction with the prospectus.
The assets received by the Trust from the issue or sale of shares of the Fund,
and all income, earnings, profits and proceeds thereof, subject only to the
rights of creditors, are separately allocated to such Fund. They constitute the
underlying assets of each fund, are required to be segregated on the books of
accounts, and are to be charged with the expenses with respect to such fund. Any
general expenses of the Trust, not readily identifiable as belonging to a
particular fund, shall be allocated by or under the direction of the Board of
Trustees in such manner as the Board determines to be fair and equitable.
Each share of the Fund represents an equal proportionate interest in the Fund
with each other share and is entitled to such dividends and distributions, out
of the income belonging to that Fund, as are declared by the Board. Upon
liquidation of the Trust, shareholders of each fund are entitled to share pro
rata in the net assets belonging to the fund available for distribution.
As described under "The Trust" in the prospectus, the Trust's Master Trust
Agreement provides that no annual or regular meeting of shareholders is
required. Thus, there will ordinarily be no shareholder meetings unless
otherwise required by the Investment Company Act of 1940. The Trustees serve for
six-year terms.
On any matter submitted to shareholders, the holder of each share is entitled to
one vote per share with proportionate voting for fractional shares. On matters
affecting any individual fund, a separate vote of that fund would be required.
Shareholders of any fund are not entitled to vote on any matter that does not
affect their fund.
Shares do not have cumulative voting rights, which means that in situations in
which shareholders elect Trustees, holders of more than 50% of the shares voting
for the election of Trustees can elect 100% of the Trust's Trustees, and the
holders of less than 50% of the shares voting for the election of Trustees will
not be able to elect any person as a Trustee.
Shares have no preemptive or subscription rights and are fully transferable.
There are no conversion rights.
Under Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or the Trustees. The Master Trust Agreement provides for indemnification out of
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the Fund's investment
objectives and policies discussed in the Fund's prospectus.
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INVESTMENT RESTRICTIONS
If a percentage investment restriction is adhered to at the time of investment,
a later increase or decrease in percentage, resulting from a change in values of
portfolio securities or amount of net assets, will not be considered a violation
of any of the foregoing restrictions.
FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund will not change any of the following investment restrictions, without
the affirmative vote of a majority of the outstanding voting securities of the
Fund, which, as used herein, means the lesser of (1) 67% of that Fund's
outstanding shares present at a meeting at which more than 50% of the
outstanding shares of that Fund are represented either in person or by proxy, or
(2) more than 50% of that Fund's outstanding shares.
The Fund may not:
(1) Issue senior securities.
(2) Borrow money, except that the Fund may borrow not in excess of 5% of
its total assets from banks as a temporary measure for extraordinary
purposes, may borrow up to 33 1/3% of the amount of its total assets
(reduced by the amount of all liabilities and indebtedness other than
such borrowing) when deemed desirable or appropriate to effect
redemptions, provided, however, that the Fund will not purchase
additional securities while borrowings exceed 5% of the total assets of
the Fund.
(3) Underwrite the securities of other issuers.
(4) Invest in real estate.
(5) Engage in the purchase or sale of commodities or commodity futures
contracts, except that the Fund may invest in futures contracts,
forward contracts, options, and other derivative investments in
conformance with policies disclosed in the Fund's then current
prospectus and/or Statement of Additional Information.
(6) Lend its assets, except that the Fund may purchase money market debt
obligations and repurchase agreements secured by money market
obligations, and except for the purchase or acquisition of bonds,
debentures or other debt securities of a type customarily purchased by
institutional investors and except that any Fund may lend portfolio
securities with an aggregate market value of not more than one-third of
such Fund's total net assets. (Accounts receivable for shares purchased
by telephone shall not be deemed loans.)
(7) Purchase any security on margin, except that it may obtain such
short-term credits as are necessary for clearance of securities
transactions.
(8) Sell short more than 5% of its total assets.
(9) Invest more than 25% of its total assets in securities of companies
principally engaged in any one industry. For the purposes of
determining industry concentration, the Fund relies on the Standard
Industrial Classification as complied by Standard & Poor's Compustat
Services, Inc. as in effect from time to time
(10) With respect to 75% of its total assets the Fund will not: (a) Invest
more than 5% of the value of its total assets in securities of any one
issuer, except such limitation shall not apply to obligations issued or
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guaranteed by the United States ("U.S.") Government, its agencies or
instrumentalities, or (b) acquire more than 10% of the voting
securities of any one issuer.
(11) Invest more than 10% of its total net assets in open-end investment
companies. To the extent that the Fund shall invest in open-end
investment companies, the Fund's Advisor and Sub-Advisor shall waive a
proportional amount of their management fee.
RISK FACTORS
The following information supplements the discussion of the Fund's risk factors
discussed in the Fund's prospectus. The following are among the most significant
risks associated with an investment in the Fund.
EQUITY PRICE FLUCTUATION. Equity securities are subject to price fluctuations
depending on a variety of factors, including market, business, and economic
conditions.
FOREIGN INVESTMENTS. Investing in securities issued by companies whose principal
business activities are outside the United States may involve significant risks
not present in domestic investments. For example, there is generally less
publicly available information about foreign companies, particularly those not
subject to the disclosure and reporting requirements of the United States
securities laws. Foreign issuers are generally not bound by uniform accounting,
auditing, and financial reporting requirements and standards of practice
comparable to those applicable to domestic issuers. Investments in foreign
securities also involve the risk of possible adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation, limitation
of the removal of funds or other assets of the Fund, political or financial
instability or diplomatic and other developments that could affect such
investment. In addition, economies of particular countries or areas of the world
may differ favorably or unfavorably from the economy of the United States. It is
anticipated that in most cases the best available market for foreign securities
will be on exchanges or in over-the-counter markets located outside of the
United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers (particularly those in developing
countries) may be less liquid and more volatile than securities of comparable
United States companies. In addition, foreign brokerage commissions are
generally higher than commissions on securities traded in the United States and
may be non-negotiable. In general, there is less overall governmental
supervision and regulation of foreign securities markets, broker-dealers, and
issuers than in the United States.
EMERGING MARKETS. The Fund may invest up to 20% of its total assets in countries
considered by the Sub-Advisor to represent emerging markets. However, the Fund
may not invest more than 5% of its total assets in any single emerging market
country. The Sub-Advisor determines which countries are emerging market
countries by considering various factors, including development of securities
laws and market regulation, total number of issuers, total market
capitalization, and perceptions of the investment community. Generally, emerging
markets are those other than North America, Western Europe, and Japan. For
example, the Sub-Advisor currently considers the following countries to be among
the emerging markets in which it might invest: Argentina, Brazil, China,
Columbia, Czech Republic, Indonesia, Peru, Philippines, Thailand, Turkey and
Zimbabwe.
Investing in emerging markets involves risks and special considerations not
typically associated with investing in other more established economies or
securities markets. Investors should carefully consider their ability to assume
the below listed risks before making an investment in the Fund. Investing in
emerging markets is considered speculative and involves the risk of total loss.
Risks of investing in emerging markets include:
(1) the risk that the Fund's assets may be exposed to nationalization,
expropriation, or confiscatory taxation;
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(2) the fact that emerging market securities markets are substantially
smaller, less liquid and more volatile than the securities markets of
more developed nations The relatively small market capitalization and
trading volume of emerging market securities may cause the Fund's
investments to be comparatively less liquid and subject to greater
price volatility than investments in the securities markets of
developed nations. Many emerging markets are in their infancy and have
yet to be exposed to a major correction. In the event of such an
occurrence, the absence of various market mechanisms that are inherent
in the markets of more developed nations may lead to turmoil in the
market place, as well as the inability of the Fund to liquidate its
investments;
(3) greater social, economic and political uncertainty (including the risk
of war);
(4) greater price volatility, substantially less liquidity and
significantly smaller market capitalization of securities markets;
(5) currency exchange rate fluctuations and the lack of available currency
hedging instruments;
(6) higher rates of inflation;
(7) controls on foreign investment and limitations on repatriation of
invested capital and on the Fund's ability to exchange local currencies
for U.S. dollars;
(8) greater governmental involvement in and control over the economy;
(9) the fact that emerging market companies may be smaller, less seasoned
and newly organized;
(10) the difference in, or lack of, auditing and financial reporting
standards which may result in unavailability of material information
about issuers;
(11) the fact that the securities of many companies may trade at prices
substantially above book value, at high price/earnings ratios, or at
prices that do not reflect traditional measures of value;
(12) the fact that statistical information regarding the economy of many
emerging market countries may be inaccurate or not comparable to
statistical information regarding the United States or other economies;
(13) less extensive regulation of the securities markets;
(14) certain considerations regarding the maintenance of Fund portfolio
securities and cash with foreign subcustodians and securities
depositories;
(15) the risk that it may be more difficult, or impossible, to obtain and/or
enforce a judgment than in other countries;
(16) the risk that the Fund may be subject to income or withholding taxes
imposed by emerging market counties or other foreign governments. The
Fund intends to elect, when eligible, to "pass through" to the Fund's
shareholders the amount of foreign income tax and similar taxes paid by
the Fund. The foreign taxes passed through to a shareholder would be
included in the shareholder's income and may be claimed as a deduction
or credit. Other taxes, such as transfer taxes, may be imposed on the
Fund, but would not give rise to a credit or be eligible to be passed
through to the shareholders;
(17) the fact that the Fund also is permitted to engage in foreign currency
hedging transactions and to enter into stock options on stock index
futures transactions, each of which may involve special risks, although
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these strategies cannot at the present time be used to a significant
extent by the Fund in the markets in which the Fund will principally
invest;
(18) enterprises in which the Fund invests may be or become subject to
unduly burdensome and restrictive regulation affecting the commercial
freedom of the invested company and thereby diminishing the value of
the Fund's investment in it. Restrictive or over regulation may
therefore be a form of indirect nationalization;
(19) businesses in emerging markets only have a very recent history of
operating within a market-oriented economy. Overall, relative to
companies operating in western economies, companies in emerging markets
are characterized by a lack of (i) experienced management, (ii) modern
technology and (iii) a sufficient capital base with which to develop
and expand their operations. It is unclear what will be the effect on
companies in emerging markets, if any, of attempts to move toward a
more market-oriented economy;
(20) investments in equity securities are subject to inherent market risks
and fluctuations in value due to earnings, economic conditions, quality
ratings and other factors beyond the control of the Advisor or
Sub-Advisor. As a result, the return and net asset value of the Fund
will fluctuate;
(21) the Sub-Advisor may engage in hedging transactions in an attempt to
hedge the Fund's foreign securities investments back to the U.S. dollar
when, in its judgment, currency movements affecting particular
investments are likely to harm the performance of the Fund. Possible
losses from changes in currency exchange rates are primarily a risk of
unhedged investing in foreign securities. While a security may perform
well in a foreign market, if the local currency declines against the
U.S. dollar, gains from the investment can disappear or become losses.
Typically, currency fluctuations are more extreme than stock market
fluctuations. Accordingly, the strength or weakness of the U.S. dollar
against foreign currencies may account for part of the Fund's
performance even when the Sub-Advisor attempts to minimize currency
risk through hedging activities. While currency hedging may reduce
portfolio volatility, there are costs associated with such hedging,
including the loss of potential profits, losses on hedging
transactions, and increased transaction expenses; and
(22) disposition of illiquid securities often takes more time than for more
liquid securities, may result in higher selling expenses and may not be
able to be made at desirable prices or at the prices at which such
securities have been valued by the Fund. As a non-fundamental policy
the Fund will not invest more than 15% of its net assets in illiquid
securities.
LOWER-RATED AND UNRATED DEBT SECURITIES. The Fund may invest up to 15% of its
total assets in debt rated less than investment grade (or unrated) by Standard &
Poor's Corporation (Chicago), Moody's Investors Service (New York), Duff &
Phelps (Chicago), Fitch Investors Service (New York), Thomson Bankwatch (New
York), Canadian Bond Rating Service (Montreal), Dominion Bond Rating Service
(Toronto), IBCA (London), The Japan Bond Research Institute (Tokyo), Japan
Credit Rating Agency (Tokyo), Nippon Investors Service (Tokyo), or S&P-ADEF
(Paris). In calculating the 15% limitation, a debt security will be considered
investment grade if any one of the above listed credit rating agencies rates the
security as investment grade.
Overall, the market for lower-rated or unrated bonds may be thinner and less
active, such bonds may be less liquid and their market prices may fluctuate more
than those of higher-rated bonds, particularly in times of economic change and
market stress. In addition, because the market for lower-rated or unrated
corporate debt securities has in recent years experienced a dramatic increase in
the large-scale use of such securities to fund highly leveraged corporate
acquisitions and restructuring, past experience may not provide an accurate
indication of the future performance of that market or of the frequency of
default, especially during periods of economic recession. Reliable objective
pricing data for lower-rated or unrated bonds may tend to be more limited; in
that event,
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valuation of such securities in the Fund's portfolio may be more difficult and
will require greater reliance on judgment.
Since the risk of default is generally higher among lower-rated or unrated
bonds, the Sub-Advisor's research and analysis are especially important in the
selection of such bonds, which are often described as "high yield bonds" because
of their generally higher yields and referred to figuratively as "junk bonds"
because of their greater risks.
In selecting lower-rated bonds for investment by the Fund, the Sub-Advisor does
not rely exclusively on ratings, which in any event evaluate only the safety of
principal and interest, not market value risk, and which, additionally, may not
accurately reflect an issuer's current financial condition. The Fund does not
have any minimum rating criteria for its investments in bonds. Through portfolio
diversification, good credit analysis and attention to current developments and
trends in interest rates and economic conditions, investment risk can be
reduced, although there is no assurance that losses will not occur.
ZERO COUPON SECURITIES. The Fund may invest in zero coupon securities that pay
no cash income and are sold at substantial discounts from their value at
maturity. When held from issuance to maturity, their entire income, consisting
of accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities that make current cash distributions of interest.
RESTRICTED SECURITIES. The Fund may, from time to time, purchase securities that
are subject to restrictions on resale. While such purchases may be made at an
advantageous price and offer attractive opportunities for investment not
otherwise available on the open market, the Fund may not have the same freedom
to dispose of such securities as in the case of the purchase of securities in
the open market or in a public distribution. These securities may often be
resold in a liquid dealer or institutional trading market, but the Fund may
experience delays in its attempts to dispose of such securities. If adverse
market conditions develop, the Fund may not be able to obtain as favorable a
price as that prevailing at the time the decision is made to sell. In any case,
where a thin market exists for a particular security, public knowledge of a
proposed sale of a large block may depress the market price of such securities.
COMMODITY LINKED SECURITIES. The Fund may invest in structured notes and/or
preferred stock, the value of which is linked to the price of a referenced
commodity. Structured notes and/or preferred stock differ from other types of
securities in which the Fund may invest in several respects. For example, not
only the coupon but also the redemption amount at maturity may be increased or
decreased depending on the change in the price of the referenced commodity.
Investment in commodity linked securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the redemption amount may decrease as
a result of changes in the price of the referenced commodity. Further, in
certain cases the coupon and/or dividend may be reduced to zero, and any
additional decline in the value of the security may then reduce the redemption
amount payable on maturity. Finally, commodity linked securities may be more
volatile than the price of the referenced commodity.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities, that is,
bonds, notes, debentures, preferred stocks and other securities that are
convertible into or exchangeable for another security, usually common stock.
Convertible debt securities and convertible preferred stocks, until converted,
have general characteristics similar to both debt and equity securities.
Although to a lesser extent than with debt securities generally, the market
value of convertible securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In addition, because of
the conversion or exchange feature, the market value of convertible securities
typically increases or declines as the market value of the underlying common
stock increases or declines, although usually not to the same extent.
Convertible securities generally offer lower yields than non-convertible fixed
income securities of similar quality because of their conversion or exchange
features. Convertible bonds and
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convertible preferred stock typically have lower credit ratings than similar
non-convertible securities because they are generally subordinated to other
similar but non-convertible fixed income securities of the same issuer.
OTHER RIGHTS TO ACQUIRE SECURITIES. The Fund may also invest in other rights to
acquire securities, such as options and warrants. These securities represent the
right to acquire a fixed or variable amount of a particular issue of securities
at a fixed or formula price either during specified periods or only immediately
before termination. These securities are generally exercisable at premiums above
the value of the underlying securities at the time the right is issued. These
rights are more volatile than the underlying stock and will result in a total
loss of the Fund's investment if they expire without being exercised because the
value of the underlying security does not exceed the exercise price of the
right.
STRATEGIC TRANSACTIONS
The Fund may purchase and sell exchange-listed and over-the-counter put and call
options on securities, equity and fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
and enter into various currency transactions such as currency forward contracts,
currency futures contracts, options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions"). The Fund may
engage in Strategic Transactions for hedging, risk management, or portfolio
management purposes, but not for speculation, and it will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments.
Strategic Transactions may be used to attempt (1) to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, (2) to protect the Fund's unrealized gains in the value of its
portfolio securities, (3) to facilitate the sale of such securities for
investment purposes, (4) to manage the effective maturity or duration of the
Fund's portfolio, or (5) to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. The Fund's
ability to successfully use these Strategic Transactions will depend upon the
Sub-Advisor's ability to predict pertinent market movements, and cannot be
assured. Engaging in Strategic Transactions will increase transaction expenses
and may result in a loss that exceeds the principal invested in the
transactions.
Strategic Transactions have risk associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Sub-Advisor's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund. For example, selling call options may force the sale of portfolio
securities at inopportune times or for lower prices than current market values.
Selling call options may also limit the amount of appreciation the Fund can
realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and option markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction, and substantial losses might be incurred. However, the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of a hedged position. At the same time they
tend to limit any potential gain that might result from an increase in value of
such position. Finally, the daily variation margin requirement for futures
contracts would create a greater on going potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been used.
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The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Internal Revenue Code for qualification as a
regulated investment company.
PUT AND CALL OPTIONS. The Fund may purchase and sell (issue) both put and call
options. The Fund may also enter into transactions to close out its investment
in any put or call options.
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the issuer of the option the obligation to buy the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the issuer the obligation to sell, the underling
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index currency or other instrument might be intended
to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An "American style" put or call option
may be exercised at any time during the option period while a "European style"
put or call option may be exercised only upon expiration or during a fixed
period prior thereto.
The Fund is authorized to purchase and sell both exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ["Counterparty(ies)"] through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option are set by negotiation of the parties. Unless the parties provide for
it, there is no central clearing or guaranty function in an OTC option.
The Fund's ability to close out its position as a purchaser or seller of a put
or call option is dependent, in part, upon the liquidity of the market for that
particular option. Exchange listed options, because they are standardized and
not subject to Counterparty credit risk, are generally more liquid than OTC
options. There can be no guarantee that the Fund will be able to close out an
option position, whether in exchange listed options or OTC options, when
desired. An inability to close out its options positions may reduce the Fund's
anticipated profits or increase its losses.
If the Counterparty to an OTC option fails to make or take delivery of the
security, currency or other instrument underlying an OTC option it has entered
into with the Fund, or fails to make a cash settlement payment due in accordance
with the terms of that option, the Fund may lose any premium it paid for the
option as well as any anticipated benefit of the transaction. Accordingly, the
Sub-Advisor must assess the creditworthiness of each such Counterparty or any
guarantor or credit enhancement of the Counterparty's credit to determine the
likelihood that the terms of the OTC option will be satisfied.
The Fund will realize a loss equal to all or a part of the premium paid for an
option if the price of the underlying security, commodity, index, currency or
other instrument security decreases or does not increase by more than the
premium (in the case of a call option), or if the price of the underlying
security, commodity, index, currency or other instrument increases or does not
decrease by more than the premium (in the case of a put option). The Fund will
not purchase any option if, immediately thereafter, the aggregate market value
of all outstanding options purchased by the Fund would exceed 5% of the Fund's
total assets.
If the Fund sells (i.e., issues) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio, or may increase the Fund's income. If the Fund sells (i.e., issues) a
put option, the premium that it receives may
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serve to reduce the cost of purchasing the underlying security, to the extent of
the option premium, or may increase the Fund's capital gains. All options sold
by the Fund must be "covered" (i.e., the Fund must either be long (when selling
a call option) or short (when selling a put option), the securities or futures
contract subject to the calls or must meet the asset segregation requirements
described below as long as the option is outstanding. Even though the Fund will
receive the option premium to help protect it against loss or reduce its cost
basis, an option sold by the Fund exposes the Fund during the term of the option
to possible loss. When selling a call, the Fund is exposed to the loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument, and the transaction may require the Fund to hold a
security or instrument that it might otherwise have sold. When selling a put,
the Fund is exposed to the possibility of being required to pay greater than
current market value to purchase the underlying security, and the transaction
may require the Fund to maintain a short position in a security or instrument it
might otherwise not have maintained. The Fund will not write any call or put
options if, immediately afterwards, the aggregate value of the Fund's securities
subject to outstanding call or put options would exceed 25% of the value of the
Fund's total assets.
FUTURES CONTRACTS. The Fund may enter into financial futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchange where they are listed with payment of an
initial variation margin as described below. The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the CFTC and will be entered into only for bonafide hedging,
risk management (including duration management) or other portfolio management
purposes. Typically, maintaining a futures contract or selling an option thereon
requires the Fund to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) that
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the marked-to-market
value of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of the purchaser. If the Fund exercises an option on a futures
contract, it will be obligated to post initial margin (and potentially
subsequent variation margin) for the resulting futures position just as it would
for any futures position. Futures contracts and options thereon are generally
settled by entering into an offsetting transaction, but there can be no
assurance that the position can be offset, before settlement, at an advantageous
price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately afterwards, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value). However, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
FOREIGN CURRENCY TRANSACTIONS. The Fund may engage in currency transactions with
Counterparties in an attempt to hedge an investment in an issuer incorporated or
operating in a foreign country or in a security denominated in the currency of a
foreign country against a devaluation of that country's currency. Currency
transactions include forward currency contracts, exchange listed currency
futures, and exchange listed and OTC options on currencies. The Fund's dealing
in forward currency contracts and other currency transactions such as futures,
options, and options on futures generally will be limited to hedging involving
either specific transactions
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or portfolio positions. Transaction hedging is entering into a currency
transaction with respect to specific assets or liabilities of the Fund, which
will generally arise in connection with the purchase or sale of its portfolio
securities or the receipt of income therefrom. Position hedging is entering into
a currency transaction with respect to portfolio security positions denominated
or generally quoted in that currency.
The Fund may cross-hedge currencies by entering into transactions to purchase or
sell one or more currencies that are expected to decline in value relative to
other currencies in which the Fund has (or expects to have) portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings or portfolio securities, the Fund may engage in proxy
hedging. Proxy hedging may be used when the currency to which the Fund's
portfolio is exposed is difficult to hedge. Proxy hedging entails entering into
a forward contract to sell a currency whose changes in value are generally
considered to be linked to a currency in which some or all of the Fund's
portfolio securities are, or are expected to be denominated, and to buy U.S.
dollars.
To hedge against a devaluation of a foreign currency, the Fund may enter into a
forward market contract to sell to banks a set amount of such currency at a
fixed price and at a fixed time in the future. If, in foreign currency
transactions, the foreign currency sold forward by the Fund is devalued below
the price of the forward market contract and more than any devaluation of the
U.S. dollar during the period of the contract, the Fund will realize a gain as a
result of the currency transaction. In this way, the Fund might reduce the
impact of any decline in the market value of its foreign investments
attributable to devaluation of foreign currencies.
The Fund may sell foreign currency forward only as a means of protecting its
foreign investments or to hedge in connection with the purchase and sale of
foreign securities, and may not otherwise trade in the currencies of foreign
countries. Accordingly, the Fund may not sell forward the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated in
that particular foreign currency (or issued by companies incorporated or
operating in that particular foreign country) plus an amount equal to the value
of securities it anticipates purchasing less the value of securities it
anticipates selling, denominated in that particular currency.
As a result of hedging through selling foreign currencies forward, in the event
of a devaluation, it is possible that the value of the Fund's portfolio would
not depreciate as much as the portfolio of a fund holding similar investments
that did not sell foreign currencies forward. Even so, the forward market
contract is not a perfect hedge against devaluation because the value of the
Fund's portfolio securities may decrease more than the amount realized by reason
of the foreign currency transaction. To the extent that the Fund sells forward
currencies that are thereafter revalued upward, the value of the Fund's
portfolio would appreciate to a lesser extent than the comparable portfolio of a
fund that did not sell those foreign currencies forward. If, in anticipation of
a devaluation of a foreign currency, the Fund sells the currency forward at a
price lower than the price of that currency on the expiration date of the
contract, the Fund will suffer a loss on the contract if the currency is not
devalued, during the contract period, below the contract price. Moreover, it
will not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
in the future at a price above the devaluation level it anticipates. It is
possible that, under certain circumstances, the Fund may have to limit its
currency transactions to permit the Fund to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code").
Foreign currency transactions would involve a cost to the Fund, which would vary
with such factors as the currency involved, the length of the contact period and
the market conditions then prevailing.
The Fund will not attempt to hedge all its foreign investments by selling
foreign currencies forward and will do so only to the extent deemed appropriate
by the Sub-Advisor.
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USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid high
grade assets with its custodian to the extent that the Fund's obligations are
not otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation of
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or subject to
any regulatory restrictions, an amount of cash or liquid high grade debt
securities at least equal to the current amount of the obligation must either be
identified as being restricted in the Fund's accounting records or physically
segregated in a separate account at the Fund's custodian. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. For the purpose of
determining the adequacy of the liquid securities that have been restricted, the
securities will be valued at market or fair value. If the market or fair value
of such securities declines, additional cash or liquid securities will be
restricted on a daily basis so that the value of the restricted cash or liquid
securities, when added to the amount deposited with the broker as margin, equals
the amount of such commitments by the Fund.
PORTFOLIO TURNOVER
The Fund's management buys and sell securities for the Fund to accomplish
investment objectives. The Fund's investment policy may lead to frequent changes
in investments, particularly in periods of rapidly changing markets. The Fund's
investments may also be traded to take advantage of perceived short-term
disparities in market values.
A change in the securities held by the Fund is known as "portfolio turnover." A
high portfolio turnover rate may cause the Fund to pay higher transaction
expenses, including more commissions and markups, and also result in quicker
recognition of capital gains, resulting in more capital gain distributions that
may be taxable to shareholders. Any short term gain realized on securities will
be taxed to shareholders as ordinary income. See "Tax Status."
MANAGEMENT OF THE FUND
The Trustees and Officers of the Trust and their principal occupations during
the past five years are set forth below. Except as otherwise indicated, the
business address of each is 7900 Callaghan Road, San Antonio, Texas 78229.
NAME AND ADDRESS TRUST POSITION PRINCIPAL OCCUPATION
- ------------------- --------------- ----------------------------------------
Frank E. Holmes (1) Trustee Chairman of the Board of Directors and
President, Chief Executive Officer of the Advisor.
Chief Executive Since October 1989 Mr. Holmes has served
Officer and continues to serve in various
positions with the Advisor, its
subsidiaries, and the investment
companies it sponsors. Director of
Franc-Or Resource Corp. from November
1994 to November 1996. Director of
Marleau, Lemire Inc. from January 1995
to December 1995.
- -----------------------
(1) This Trustee may be deemed an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
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NAME AND ADDRESS TRUST POSITION PRINCIPAL OCCUPATION
- ------------------- --------------- ----------------------------------------
Richard E. Hughs Trustee Professor at the School of Business of
11 Dennin Drive the State University of New York at
Menands, NY 12204 Albany from 1990 to present; Dean,
School of Business 1990-1994; Director
of the Institute for the Advancement of
Health Care Management, 1994-present.
Corporate Vice President, Sierra Pacific
Resources, Reno, NV, 1985- 1990. Dean
and Professor, College of Business
Administration, University of Nevada,
Reno, 1977- 1985. Associate Dean, Stern
School of Business, New York University,
New York City, 1970-1977.
Clark R. Mandigo Trustee Business consultant since 1991. From
1250 N.E. Loop 410 1985 to 1991, President, Chief Executive
Suite 900 Officer, and Director of Intelogic
San Antonio, Texas Trace, Inc., a nationwide company sells,
78209 leases and maintains computers and
telecommunications systems and
equipment. Before 1985, President BHP
Petroleum (Americas), Ltd., an oil and
gas exploration and development company.
Director of Lone Star Steakhouse &
Saloon, Inc., Physician Corporation of
America and Palmer Wireless, Inc.
Bobby D. Duncan Executive Vice President, Chief Financial Officer, and
President, Chief Operating Officer of the Advisor.
Chief Since January 1985 Mr. Duncan has served
Operating and continues to serve in various
Officer positions with the Advisor, its
subsidiaries, and the investment
companies it sponsors.
Thomas D. Tays Vice President, Vice President and Securities Specialist
Secretary of the Advisor. Since September 1993 Mr.
of the Tays has served and continues to serve
Trust in various positions with the Advisor,
its subsidiaries, and the investment
companies it sponsors. Before September
1993 Mr. Tays was an attorney in private
practice.
Susan B. McGee Vice President, Vice President and Secretary of the
Assistant Advisor. Since September 1992 Ms. McGee
Secretary has served and continues to serve in
of the various positions with the Advisor, its
Trust subsidiaries, and the investment
companies it sponsors. Before September
1992 Ms. McGee was a student at St.
Mary's Law School.
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<PAGE>
NAME AND ADDRESS TRUST POSITION PRINCIPAL OCCUPATION
- ------------------- --------------- ----------------------------------------
Kevin C. White Chief Chief Accounting Officer of the Advisor.
Accounting Since November 1995 Mr. White has served
Officer and continues to serve in various
positions with the Advisor, its
subsidiaries, and the investment
companies it sponsors. Closing Manager
for World Savings and Loan from January
1995 to November 1995. Controller of
Swearingen Aircraft from December 1991
to January 1995. Financial Analyst for
Fox Photo from February 1991 to December
1991.
PRINCIPAL HOLDERS OF SECURITIES
As of February 20, 1997, shares of the Fund had not been offered to the public
and the Sub-Advisor owned 100% of the Fund's outstanding shares.
INVESTMENT ADVISORY SERVICES
The investment adviser to the Fund is U. S. Global Investors, Inc. (the
"Advisor"), a Texas corporation, pursuant to an advisory agreement dated
September 21, 1994. Frank E. Holmes, President and a Director of the Advisor, as
well as a Trustee, President and Chief Executive Officer of the Trust,
beneficially owns more than 25% of the outstanding voting stock of the Advisor
and may be deemed to be a controlling person of the Advisor.
In addition to the services described in the Fund's prospectus, the Advisor will
provide the Trust with office space, facilities and simple business equipment,
and will provide the services of executive and clerical personnel for
administering the affairs of the Trust. It will compensate all personnel,
officers, and trustees of the Trust, if such persons are employees of the
Advisor or its affiliates, except that the Trust will reimburse the Advisor for
part of the compensation of the Advisor's employees who perform certain legal
services for the Trust, including state securities law regulatory compliance
work, based upon the time spent on such matters for the Trust.
In consideration for such services, the Advisor pays the Sub-Advisor a
sub-advisory fee. The Advisor and the Sub-Advisor share the management fee
equally, except that the Sub-Advisor's fee will be subject to downward
adjustments for: (1) the Advisor's incurred costs and expenses of marketing the
Fund that exceed the 0.25% 12b-1 fee charged to the Fund for such marketing
purposes; (2) any monies advanced by the Advisor on behalf of the Sub-Advisor;
(3) the unrecovered costs of organizing the Fund up to $40,000 (the Advisor will
be responsible for bearing costs of organization of the Fund in excess of
$40,000); and (4) if a decision is made with respect to placing a cap on
expenses, to the extent that actual expenses of the Fund exceed the cap, and the
Advisor is required to pay or absorb any of the excess expenses, by the amount
of the excess expenses paid or absorbed by the Advisor through such downward
adjustments. To the extent that the Sub-Advisor has advanced monies to the
Advisor to pay for Fund distribution or organizational expenses, such advances
shall serve to offset the reductions enumerated above. The Fund is not
responsible for paying any part of the Sub-Advisor's fees.
The Trust pays all other expenses for its operations and activities. Each of the
funds of the Trust pays its allocable portion of these expenses. The expenses
borne by the Trust include the charges and expenses of any transfer agents and
dividend disbursing agents, custodian fees, legal and auditing expenses,
bookkeeping and accounting expenses, brokerage commissions for portfolio
transactions, taxes, if any, the advisory fee, extraordinary expenses, expenses
of issuing and redeeming shares, expenses of shareholder and trustee meetings,
expenses of preparing, printing, and mailing proxy statements, reports and other
communications to shareholders, expenses of registering and qualifying shares
for sale, fees of Trustees who are not "interested persons" of the Advisor,
expenses of attendance by officers and trustees at professional meetings of the
Investment Company Institute, the No-Load Mutual Fund Association or similar
organizations, and membership or organization dues
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<PAGE>
of such organizations, expenses of preparing, typesetting and mailing
prospectuses and periodic reports to current shareholders, fidelity bond
premiums, cost of maintaining the books and records of the Trust, and any other
charges and fees not specifically enumerated.
The Trust and the Advisor, in connection with the Fund, have entered into a
sub-advisory agreement with another firm as discussed in the prospectus. The
Sub-Advisor's compensation is discussed in the prospectus and is paid by the
Advisor. The Fund will not be responsible for the Sub-Advisor's fee.
The Advisor may, out of profits derived from its management fee, pay certain
financial institutions (which may include banks, securities dealers, and other
industry professionals) a "servicing fee" for performing certain administrative
servicing functions for Fund shareholders to the extent these institutions are
allowed to do so by applicable statute, rule or regulation. These fees will be
paid periodically and will generally be based on a percentage of the value of
the institutions' client Fund shares. The Glass-Steagall Act prohibits banks
from engaging in the business of underwriting, selling or distributing
securities. However, in the Advisor's opinion, such laws should not preclude a
bank from performing shareholder administrative and servicing functions as
contemplated herein.
The Advisory Agreement was approved by the Board of Trustees of the Trust
(including a majority of the "disinterested Trustees") with respect to the Fund
and will be submitted for approval by shareholders of the Fund at the initial
meeting of shareholders. The Advisory Agreement provides that it will continue
initially for two years, and from year to year thereafter, with respect to each
fund, as long as it is approved at least annually by (i) a vote of a majority of
the outstanding voting securities of such fund [as defined in the Investment
Company Act of 1940 (the "Act")] or the Board of Trustees of the Trust, and (ii)
a vote of a majority of the Trustees who are not parties to the Advisory
Agreement or "interested persons" of any party thereto cast in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated on 60-day written notice by either party and will
terminate automatically if it is assigned.
Both the Advisor and Sub-Advisor provide investment advise to a variety of
clients (the Advisor also provides investment advise to other mutual funds).
Investment decisions for each client are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In some instances, one client
may sell a particular security to another client. It also sometimes happens that
two or more clients simultaneously purchase or sell the same security, in which
event each day's transactions in such security are, as far as possible, averaged
as to price and allocated between such clients in a manner which, in the
Advisor's or Sub-Advisor's opinion, is equitable to each and in accordance with
the amount being purchased or sold by each. There may be circumstances when
purchases or sales of portfolio securities for one or more clients will have an
adverse effect on other clients. The Advisor and Sub-Advisor employ professional
staffs of portfolio managers who draw upon a variety of resources for research
information for the clients.
In addition to advising client accounts, the Advisor invests in securities for
its own account. The Advisor has adopted policies and procedures intended to
minimize or avoid potential conflicts with its clients when trading for its own
account. The Advisor's investment objective and strategies are different from
those of its clients, emphasizing venture capital investing, private placement
arbitrage, and speculative short-term trading. The Advisor uses a diversified
approach to venture capital investing. Investments typically involve early-stage
businesses seeking initial financing as well as more mature businesses in need
of capital for expansion, acquisitions, management buyouts, or recapitalization.
Overall, the Advisor invests in start-up companies in the natural resources or
technology fields.
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TRANSFER AGENCY AND OTHER SERVICES
In addition to the services performed for the Funds and the Trust under the
Advisory Agreement, the Advisor, through its subsidiary USSI, provides transfer
agent and dividend disbursement agent services pursuant to the Transfer Agency
Agreement as described in the Fund's prospectus under "Management of the Fund --
The Investment Advisor." In addition, lockbox and statement printing services
are provided by USSI.
USSI also maintains the books and records of the Trust and of each fund of the
Trust and calculates their daily net asset value as described in the Fund's
prospectus under "Management of the Funds -- The Investment Advisor."
A & B Mailers, Inc., a corporation wholly owned by the Advisor, provides the
Trust with certain mail handling services. The charges for such services have
been negotiated by the Audit Committee of the Trust and A & B Mailers, Inc. Each
service is priced separately.
DISTRIBUTION PLAN
As described under "Service Fee" in the prospectus, the Fund has adopted a
distribution plan pursuant to Rule 12b-1 of the 1940 Act (the "Distribution
Plan"). The distribution plan allows the Fund to pay for or reimburse
expenditures in connection with sales and promotional services related to the
distribution of Fund shares, including personal services provided to prospective
and existing Fund shareholders, and includes the costs of: printing and
distribution of prospectuses and promotional materials, making slides and charts
for presentations, assisting shareholders and prospective investors in
understanding and dealing with the Fund, and travel and out-of-pocket expenses
(e.g., copy and long distance telephone charges) related thereto.
The total amount expended pursuant to the distribution plan may not exceed 0.25%
of the Fund's net assets annually. Distribution expenses paid by the Advisor or
other third parties in prior periods that exceeded 0.25% of net assets may be
paid by the Fund with distribution expenses accrued pursuant to the 12b-1 plan
in the current or future periods, so long as the 0.25% limitation is never
exceeded.
Expenses the Fund incurs pursuant to the distribution plan are reviewed
quarterly by the Board of Trustees. The distribution plan is reviewed annually
by the Board of Trustees as a whole, and the Trustees who are not "interested
persons" as that term is defined in the 1940 Act and who have no direct or
indirect financial interest in the operation of the distribution plan
("Qualified Trustees"). In their review of the distribution plan, the Board as a
whole and the Qualified Trustees separately determine whether, in their
reasonable business judgment and considering their fiduciary duties under state
law and Section 36(a) and (b) of the 1940 Act, there is a reasonable likelihood
that the distribution plan will benefit the Fund and its shareholders. The
distribution plan may be terminated at any time by vote of a majority of the
Qualified Trustees or by vote of a majority of the outstanding voting securities
of the Fund.
The Fund is unaware of any Trustee or any interested person of the Fund who had
a direct or indirect financial interest in the operations of the distribution
plan.
The Fund expects that the distribution plan will be used primarily to pay a
"service fee" to persons who provide personal services to prospective and
existing Fund shareholders. Shareholders of the Fund will benefit from these
personal services, and the Fund expects to benefit from economies of scale as it
attracts more shareholders.
CERTAIN PURCHASES OF SHARES OF THE FUND
Shares of the Fund are continuously offered by the Trust at their net asset
value next determined after an order is accepted. The methods available for
purchasing shares of the Fund are described in the Prospectus. In addition,
shares of the Fund may be purchased using stock, so long as the securities
delivered to the Trust meet the investment objectives and concentration policies
of the Fund, and are otherwise acceptable to the Advisor, which
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<PAGE>
reserves the right to reject all or any part of the securities offered in
exchange for shares of the Fund. On any such "in kind" purchase, the following
conditions will apply:
(1) the securities offered by the investor in exchange for shares of the
Fund must not be in any way restricted as to resale or otherwise be
illiquid;
(2) securities of the same issuer must already exist in the Fund's
portfolio;
(3) the securities must have a value that is readily ascertainable (and not
established only by evaluation procedures) as evidenced by a listing on
the AMEX, the NYSE, or NASDAQ;
(4) any securities so acquired by any fund shall not comprise over 5% of
that fund's net assets at the time of such exchange;
(5) no over-the-counter securities will be accepted unless the principal
over-the-counter market is in the United States; and,
(6) the securities are acquired for investment and not for resale.
The Trust believes that this ability to purchase shares of the Fund using
securities provides a means by which holders of certain securities may obtain
diversification and continuous professional management of their investments
without the expense of selling those securities in the public market.
An investor who wishes to make an "in kind" purchase should furnish a list
(either in writing or by telephone) to the Trust with a full and exact
description of all of the securities he or she proposes to deliver. The Trust
will advise him or her as to those securities it is prepared to accept and will
provide the investor with the necessary forms to be completed and signed by the
investor. The investor should then send the securities, in proper form for
transfer, with the necessary forms to the Trust and certify that there are no
legal or contractual restrictions on the free transfer and sale of the
securities. The securities will be valued as of the close of business on the day
of receipt by the Trust in the same manner as portfolio securities of the Fund
are valued. See the section entitled "How Shares Are Valued" in the prospectus.
The number of shares of the Fund, having a net asset value as of the close of
business on the day of receipt equal to the value of the securities delivered by
the investor, will be issued to the investor, less applicable stock transfer
taxes, if any.
The exchange of securities by the investor pursuant to this offer is a taxable
transaction and may result in a gain or loss for Federal income tax purposes.
Each investor should consult his or her tax adviser to determine the tax
consequences under Federal and state law of making such an "in kind" purchase.
ADDITIONAL INFORMATION ON REDEMPTIONS
SUSPENSION OF REDEMPTION PRIVILEGES. The Trust may suspend redemption privileges
or postpone the date of payment for up to seven days, but cannot do so for more
than seven days after the redemption order is received except during any period
(1) when the NYSE is closed, other than customary weekend and holiday closings,
or trading on the Exchange is restricted as determined by the Securities and
Exchange Commission ("SEC"); (2) when an emergency exists, as defined by the
SEC, which makes it not practicable for the Trust to dispose of securities owned
by it or to determine fairly the value of its assets; or (3) as the SEC may
otherwise permit.
REDEMPTION IN KIND. The Trust reserves the right to redeem shares of the Fund in
cash or in kind. However, the Trust has elected to be governed by Rule 18f-1
under the Investment Company Act of 1940, pursuant to which the Trust is
obligated to redeem shares of the Fund solely in cash up to the lesser of
$250,000 or one percent of the net asset value of the Fund during any 90-day
period for any one shareholder. Any shareholder of the Fund
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<PAGE>
receiving a redemption in kind would then have to pay brokerage fees to convert
his Fund investment into cash. All redemptions in kind will be made in
marketable securities of the Fund.
CALCULATION OF PERFORMANCE DATA
TOTAL RETURN
The Fund may advertise performance in terms of average annual total return for
1-, 5- and 10-year periods, or for such lesser periods as the Fund has been in
existence. Average annual total return is computed by finding the average annual
compounded rates of return over the periods that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
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 year or period.
The calculation assumes that (1) all charges are deducted from the initial
$1,000 payment, (2) all dividends and distributions by the Fund are reinvested
at the price stated in the prospectus on the reinvestment dates during the
period and (3) all recurring fees charged to all shareholder accounts are
included.
NONSTANDARDIZED TOTAL RETURN
The Fund may provide the above described standard total return results for a
period that ends not earlier than the most recent calendar quarter end and
begins either twelve months before or at the time of commencement of the Fund's
operations. In addition, the Fund may provide nonstandardized total return
results for differing periods, such as for the most recent six months. Such
nonstandardized total return is computed as otherwise described under "Total
Return" except that no annualization is made.
TAX STATUS
TAXATION OF THE FUND -- IN GENERAL
As stated in its Prospectus, the Fund intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Accordingly, the Fund will not be liable for Federal
income taxes on its taxable net investment income and capital gain net income
distributed to shareholders if the Fund distributes at least 90% of its net
investment income and net short-term capital gain for the taxable year.
To qualify as a regulated investment company, the Fund must, among other things,
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities or
currencies (the "90% test"); (b) derive in each taxable year less than 30% of
its gross income from the sale or other disposition of stock or securities held
less than three months (the "30% test"); and, (c) satisfy certain
diversification requirements at the close of each quarter of the Fund's taxable
year.
The Code imposes a non-deductible 4% excise tax on a regulated investment
company that fails to distribute during each calendar year an amount equal to
the sum of (1) at least 98% of its ordinary income for the calendar
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year, (2) at least 98% of its capital gain net income for the twelve-month
period ending on October 31 of the calendar year, and (3) any part (not taxable
to the Fund) of the respective balance from the preceding calendar year. The
Fund intends to make such distributions as are necessary to avoid imposition of
this excise tax.
TAXATION OF THE FUND'S INVESTMENTS
The Fund's ability to make certain investments may be limited by provisions of
the Code that require inclusion of certain unrealized gains or losses in the
Fund's income for purposes of the 90% test, the 30% test, and the distribution
requirements of the Code, and by provisions of the Code that characterize
certain income or loss as ordinary income or loss rather than capital gain or
loss. Such recognition, characterization and timing rules generally apply to
investments in certain forward currency contracts, foreign currencies and debt
securities denominated in foreign currencies.
TAXATION OF THE SHAREHOLDER
Taxable distributions generally are included in a shareholder's gross income for
the taxable year in which they are received. However, dividends declared in
October, November or December and paid to shareholders of record in such a
month, will be deemed to have been received on December 31 if a Fund pays the
dividends during the following January.
Distributions by the Fund will result in a reduction in the fair market value of
the Fund's shares. Should a distribution reduce the fair market value below a
shareholder's cost basis, such distribution nevertheless would be taxable to the
shareholder as ordinary income or long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares of the Fund just prior to a distribution. The price of such shares
purchased then includes the amount of any forthcoming distribution. Those
investors purchasing the Fund's shares immediately before a distribution may
receive a return of investment upon distribution, which will nevertheless be
taxable to them.
A shareholder of the Fund should be aware that a redemption of shares (including
any exchange into other funds offered, affiliated or administered by U. S.
Global Investors, Inc.) is a taxable event and, accordingly, a capital gain or
loss may be recognized. If a shareholder of the Fund receives a distribution
taxable as long-term capital gain with respect to shares of the Fund and redeems
or exchanges shares before he has held them for more than six months, any loss
on the redemption or exchange (not otherwise disallowed as attributable to an
exempt-interest dividend) will be treated as long-term capital loss to the
extent of the long-term capital gain recognized.
CUSTODIAN
Bankers Trust Company acts as Custodian for the Fund. Services with respect to
the retirement accounts will be provided by Security Trust and Financial Company
of San Antonio, Texas, a wholly-owned subsidiary of the Advisor.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, One Riverwalk Place, San Antonio, Texas 78205, is the
independent accountant for the Trust.
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FINANCIAL STATEMENTS
The Fund was established as a separate series of the Trust on November 21, 1996,
and does not yet have an operating history. The Advisor will send shareholders
annual and semi-annual reports as they become available.
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