U.S. GLOBAL ACCOLADE FUNDS
BONNEL GROWTH FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the current prospectus (Prospectus) dated March 1, 2000. The
financial statements for the Bonnel Growth Fund for the year ended October 31,
1999, and the Report of Independent Auditors thereon, are incorporated by
reference from the fund's Annual Report dated October 31, 1999. Copies of the
Prospectus and the fund's financial statements may be requested from U.S. Global
Investors, Inc. (Adviser), 7900 Callaghan Road, San Antonio, Texas 78229, or
1-800-US-FUNDS (1-800-873-8637). In addition, copies of the Prospectus are
available online at www.usfunds.com.
The date of this Statement of Additional Information is March 1, 2000, as
amended September 1, 2000.
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TABLE OF CONTENTS
PAGE
GENERAL INFORMATION........................................................3
FUND POLICIES..............................................................3
INVESTMENT STRATEGIES AND RISKS............................................4
PORTFOLIO TURNOVER........................................................10
PORTFOLIO TRANSACTIONS....................................................11
MANAGEMENT OF THE FUND....................................................11
PRINCIPAL HOLDERS OF SECURITIES...........................................13
INVESTMENT ADVISORY SERVICES..............................................13
DISTRIBUTION, TRANSFER AGENCY AND OTHER SERVICES..........................15
DISTRIBUTION PLAN.........................................................16
CERTAIN PURCHASES OF SHARES OF THE FUND...................................17
ADDITIONAL INFORMATION ON REDEMPTIONS.....................................18
CALCULATION OF PERFORMANCE DATA...........................................18
TAX STATUS................................................................19
CUSTODIAN, FUND ACCOUNTANT AND ADMINISTRATOR..............................20
INDEPENDENT AUDITORS......................................................20
FUND COUNSEL..............................................................20
COUNSEL TO INDEPENDENT TRUSTEES...........................................21
FINANCIAL STATEMENTS......................................................21
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GENERAL INFORMATION
U.S. Global Accolade Funds (Trust) is an open-end management investment company
and a business trust organized April 16, 1993 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. This Statement of
Additional Information (SAI) presents important information concerning the
Bonnel Growth Fund (fund) and should be read in conjunction with the prospectus.
The fund commenced operations on October 17, 1994.
The assets received by the Trust from the issuance 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 the fund. They constitute
the underlying assets of the fund, are required to be segregated on the books of
accounts, and are to be charged with the expenses with respect to the fund. Any
general expenses of the Trust, not readily identifiable as belonging to a
particular series of the Trust, 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 the fund, as are declared by the Board. Upon
liquidation of the Trust or the fund, shareholders of the fund are entitled to
share pro rata in the net assets belonging to the fund available for
distribution.
The Trust's master trust agreement provides that no annual or regular meeting of
shareholders is required. The Trustees serve for six-year terms. Thus, there
will ordinarily be no shareholder meetings unless otherwise required by the
Investment Company Act of 1940.
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 series, a separate vote of that series would be
required. Shareholders of any series are not entitled to vote on any matter that
does not affect their series.
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 Trustss.L/F 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 Trustss.L/F 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.
FUND POLICIES
The following information supplements the discussion of the fund's policies
discussed in the fund's prospectus.
Investment Restrictions. If a percentage 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.
Unless designated as such, none of the fund's policies are fundamental.
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 the fund's
outstanding shares present at a meeting at which more than 50% of the
outstanding shares of the fund are represented either in person or by proxy, or
(2) more than 50% of the fund's outstanding shares.
The fund may not:
1. Issue senior securities, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
2. Borrow money, except as permitted under the 1940 Act, as amended, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
3. Engage in the business of underwriting securities, except to the extent
that the fund may be deemed to be an underwriter in connection with the
disposition of portfolio securities.
4. Purchase or sell real estate, which term does not include securities of
companies which deal in real estate and/or mortgages or investments secured
by real estate, or interests therein, except that the fund reserves freedom
of action to hold and to sell real estate acquired as a result of the
fund's ownership of securities.
5. Purchase physical commodities or contracts related to physical commodities.
6. Make loan, except as permitted under the 1940 Act, as amended, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
7. Concentrate its investments in a particular industry (other than securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities), as that term is used in the 1940 Act, as amended, and
as interpreted or modified by regulatory authority having jurisdiction,
from time to time.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions may be changed by the Board of Trustees
without a shareholder vote.
The fund may not:
1. Purchase securities on margin or make short sales, except (i) short sales
against the box, (ii) the fund may obtain such short-term credits as are
necessary for the clearance of transactions, and (iii) provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on margin or selling
securities short.
2. Borrow money, except that a fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 33 1/3% of a fund's total assets (including the amount borrowed)
less liabilities (other than borrowings).
3. Invest more than 15% of its net assets in securities that are illiquid.
INVESTMENT STRATEGIES AND RISKS
The following information supplements the discussion of the fund's investment
strategies and risks in the fund's prospectus.
Market Risk. Investments in equity and debt securities are subject to inherent
market risks and fluctuations in value due to earnings, economic conditions,
quality ratings and other factors beyond the fund's control. The return and net
asset value of the fund will fluctuate.
Real Estate Investment Trusts (REITs). The fund may invest in real estate
investment trusts (REITs), which may subject the fund to many of the same risks
related to the direct ownership of real estate. These risks may include declines
in the value of real estate, risks related to economic factors, changes in
demand for real estate, change in property taxes and property operating
expenses, casualty losses, and changes to zoning laws. REITs are also dependent
to some degree on the capabilities of the REIT manager. In addition, the failure
of a REIT to continue to qualify as a REIT for tax purposes would have an
adverse effect upon the value of a portfolio's investment in that REIT.
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.
AMERICAN DEPOSITORY RECEIPTS. American Depository Receipts (ADRs) represent
shares of foreign issuers. ADRs are typically issued by a U.S. bank or trust
company and evidence ownership of underlying securities issued by a foreign
corporation. Generally, ADRs in registered form are intended for use in the U.S.
securities market, and ADRs in bearer form are intended for use in securities
markets outside the United States. ADRs may not necessarily be denominated in
the same currency as the underlying securities into which they may be converted.
In addition, the issuers of the securities underlying unsponsored ADRs are not
obligated to disclose material information in the United States; therefore,
there may be less information available regarding such issuers. There may not be
a correlation between such information and the market value of the ADRs. For
purposes of the fund's investment policies, the fund's investment in ADRs will
be deemed to be investments in the underlying securities.
EMERGING MARKETS. The fund may invest up to 5% of its total assets in countries
considered by the Sub-Adviser to represent emerging markets. The Sub-Adviser
decides 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. Currently, the Sub-Adviser considers
the following countries to be among the emerging markets: Malaysia, Mexico, Hong
Kong, Greece, Portugal, Turkey, Argentina, Brazil, Indonesia, Philippines,
Singapore, Thailand, and China.
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 following 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;
(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 marketplace, 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 sub-custodians 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 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 that company. 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 towards a more market-oriented economy;
(20) the Sub-Adviser 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-Adviser 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
(21) 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.
SECURITIES LENDING. The fund may lend its portfolio securities to qualified
dealers or other institutional investors. When lending securities, the fund will
receive cash or high-quality liquid securities as collateral for the loan. The
fund may invest cash collateral in repurchase agreements, including repurchase
agreements collateralized with non-governmental securities. Under the terms of
the fund's current securities lending agreement, the fund's lending agent has
guaranteed performance of the obligation of each borrower and each counterparty
to each repurchase agreement in which cash collateral is invested.
Lending portfolio securities exposes the fund to the risk that the borrower may
fail to return the loaned securities or may not be able to provide additional
collateral or that the fund may experience delays in recovery of the loaned
securities or loss of rights in the collateral if the borrower fails
financially. To minimize these risks, the borrower must agree to maintain
collateral marked to market daily, in the form of cash or high-quality
securities, with the fund's custodian in an amount at least equal to the market
value of the loaned securities. In the event of a bankruptcy or breach of
agreement by the borrower of the securities, the fund could experience delays
and costs in recovering the securities loaned.
BORROWING. The fund may have to deal with unpredictable cashflows as
shareholders purchase and redeem shares. Under adverse conditions, the fund
might have to sell portfolio securities to raise cash to pay for redemptions at
a time when investment considerations would not favor such sales. In addition,
frequent purchases and sales of portfolio securities tend to decrease fund
performance by increasing transaction expenses.
The fund may deal with unpredictable cashflows by borrowing money. Through such
borrowings the fund may avoid selling portfolio securities to raise cash to pay
for redemptions at a time when investment considerations would not favor such
sales. In addition, the fund's performance may be improved due to a decrease in
the number of portfolio transactions. After borrowing money, if subsequent
shareholder purchases do not provide sufficient cash to repay the borrowed
monies, the fund will liquidate portfolio securities in an orderly manner to
repay the borrowed monies.
To the extent that the fund borrows money prior to selling securities, the fund
would be leveraged such that the fund's net assets may appreciate or depreciate
in value more than an unleveraged portfolio of similar securities. Since
substantially all of the fund's assets will fluctuate in value and 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 which the fund earns on portfolio securities. Under adverse
conditions, the fund might be forced to sell portfolio securities to meet
interest or principal payments at a time when market conditions would not be
conducive to favorable selling prices for the securities.
TEMPORARY DEFENSIVE INVESTMENT. For temporary defensive purposes during periods
that, in the Sub-Adviser's opinion, present the fund with adverse changes in the
economic, political or securities markets, the fund may seek to protect the
capital value of its assets by temporarily investing up to 100% of its assets
in: U.S. Government securities, short-term indebtedness, money market
instruments, or other high grade cash equivalents, each denominated in U.S.
dollars or any other freely convertible currency; or repurchase agreements. When
the fund is in a defensive investment position, it may not achieve its
investment objective.
REPURCHASE AGREEMENTS. The fund may invest part of its assets in repurchase
agreements with domestic broker-dealers, banks and other financial institutions,
provided the fund's custodian always has possession of securities serving as
collateral or has evidence of book entry receipt of such securities. In a
repurchase agreement, the fund purchases securities subject to the seller's
agreement to repurchase such securities at a specified time (normally one day)
and price. The repurchase price reflects an agreed-upon interest rate during the
time of investment. All repurchase agreements may be collateralized by United
States Government or government agency securities, the market values of which
equal or exceed 102% of the principal amount of the repurchase obligation. If an
institution enters an insolvency proceeding, the resulting delay in liquidation
of securities serving as collateral could cause the fund some loss if the value
of the securities declined before liquidation. To reduce the risk of loss, the
fund will enter into repurchase agreements only with institutions and dealers
which the Adviser (or Sub-Adviser) considers creditworthy.
COMMERCIAL PAPER AND OTHER MONEY MARKET INSTRUMENTS. Commercial paper consists
of short-term (usually from one to two hundred-seventy days) unsecured
promissory notes issued by corporations in order to finance their current
operations. The fund will only invest in commercial paper rated A-1 by Standard
& Poor's Ratings Group or Prime-1 by Moody's Investors Service, Inc. or unrated
paper of issuers who have outstanding unsecured debt rated AA or better by
Standard & Poor's or Aa or better by Moody's. Certain notes may have floating or
variable rates. Variable and floating rate notes with a demand notice period
exceeding seven days will be subject to the fund's restriction on illiquid
investments unless, in the judgment of the Sub-Adviser, such note is liquid.
The fund may invest in short-term bank debt instruments such as certificates of
deposit, bankers' acceptances and time deposits issued by national banks and
state banks, trust companies and mutual savings banks, or by banks or
institutions the accounts of which are insured by the Federal Deposit Insurance
Corporation or the Federal Savings and Loan Insurance Corporation. The fund will
only invest in bankers' acceptances of banks having a short-term rating of A-1
by Standard & Poor's Ratings Group or Prime-1 by Moody's Investors Service, Inc.
The fund will not invest in time deposits maturing in more than seven days if,
as a result thereof, more than 15% of the value of its net assets would be
invested in such securities and other illiquid securities.
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 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.
RESTRICTED AND ILLIQUID SECURITIES. The fund may invest up to 15% of its total
net assets in illiquid securities. Securities may be illiquid because they are
unlisted, subject to legal restrictions on resale or due to other factors which,
in the Sub-Adviser's opinion, raise questions concerning the fund's ability to
liquidate the securities in a timely and orderly way without substantial loss.
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.
PUT AND CALL OPTIONS.
SELLING (OR WRITING) COVERED CALL OPTIONS. The fund may sell (or write) covered
call options on portfolio securities to hedge against adverse movements in the
prices of these securities. A call option gives the buyer of the option, upon
payment of a premium, the right to call upon the writer to deliver a security on
or before a fixed date at a predetermined price, called the strike price. If the
price of the hedged security falls or remains below the strike price, the fund
will not be asked to deliver the security; and the fund will retain the premium
received for the option as additional income, offsetting all or part of any
decline in the value of the security. The hedge provided by writing covered call
options is limited to a price decline in the security of no more than the option
premium received by the fund for writing the option. If the security owned by
the fund appreciates above the options strike price, the fund will generally be
called upon to deliver the security, which will prevent the fund from receiving
the benefit of any price appreciation above the strike price.
BUYING CALL OPTIONS. The fund may establish an anticipatory hedge by purchasing
call options on securities that the fund intends to purchase to take advantage
of anticipated positive movements in the prices of these securities. When
establishing an anticipatory hedge, the fund will deposit cash or cash
equivalents into a segregated account equal to the call option's exercise price.
The fund will realize a gain from the exercise of a call option if, during the
option period, the price of the underlying security to be purchased increases by
more than the amount of the premium paid. A fund will realize a loss equal to
all or a part of the premium paid for the option if the price of the underlying
security decreases or does not increase by more than the premium.
PUT OPTIONS. The fund may purchase put options on portfolio securities to hedge
against adverse movements in the prices of these securities. A put option gives
the buyer of the option, upon payment of a premium, the right to sell a security
to the writer of the option on or before a fixed date at a predetermined price.
The fund will realize a gain from the exercise of a put option if, during the
option period, the price of the security declines by an amount greater than the
premium paid. The fund will realize a loss equal to all or a part of the premium
paid for the option if the price of the security increases or does not decrease
by more than the premium.
CLOSING TRANSACTIONS. The fund may dispose of an option written by the fund by
entering into a "closing purchase transaction" for an identical option and may
dispose of an option purchased by the fund by entering into a "closing sale
transaction" for an identical option. In each case, the closing transaction will
terminate the rights of the option holder and the obligations of the option
purchaser and will result in a gain or loss to the fund based upon the relative
amount of the premiums paid or received for the original option and the closing
transaction. The fund may sell (or write) put options solely for the purpose of
entering into closing sale transactions.
INDEX OPTIONS. The fund may purchase and sell call options and purchase put
options on stock indices to manage cash flow, reduce equity exposure, or to
remain fully invested in equity securities. Options on securities indices are
similar to options on a security except that, upon the exercise of an option on
a securities index, settlement is made in cash rather than in specific
securities.
LIMITATIONS. The fund will purchase and sell only options listed on a securities
exchange. The fund will not purchase any option if, immediately afterwards, the
aggregate market value of all outstanding options purchased and written by the
fund would exceed 5% of the fund's total assets. The fund will not write any
call options if, immediately afterwards, the aggregate value of the fund's
securities subject to outstanding call options would exceed 25% of the value of
the fund's total assets.
PORTFOLIO TURNOVER
The fund's management buys and sell securities for the fund to accomplish the
fund's investment objective. 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.
PORTFOLIO TURNOVER
For the fiscal periods shown below, the fund's portfolio turnover rate was:
FISCAL PERIOD PORTFOLIO TURNOVER
--------------------------- ------------------
Year ended October 31, 1999 197%
Year ended October 31, 1998 190%
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PORTFOLIO TRANSACTIONS
For the fiscal periods shown below, the fund paid brokerage fees as follows:
FISCAL PERIOD BROKERAGE FEES
------------- --------------
Year ended October 31, 1999 $570,957
Year ended October 31, 1998 $651,369
October 1 through October 31, 1997 $169,743
Year ended September 30, 1997 $778,403
During the year ended October 31, 1999, 100% of the brokerage fees were paid to
brokers or dealers who provided research services to the Sub-Adviser.
In executing portfolio transactions and selecting brokers or dealers, the
Adviser and the Sub-Adviser seek the best overall terms available. In assessing
the terms of a transaction, consideration may be given to various factors,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer (for a
specified transaction and on a continuing basis), the reasonableness of the
commission, if any, and the brokerage and research services provided. Under the
Advisory and Sub-Advisory agreements, the Adviser and Sub-Adviser are permitted,
in certain circumstances, to pay a higher commission than might otherwise be
paid in order to acquire brokerage and research services. The Adviser and
Sub-Adviser must determine in good faith, however, that such commission is
reasonable in relation to the value of the brokerage and research services
provided -- viewed in terms of that particular transaction or in terms of all
the accounts over which investment discretion is exercised. The advisory fee of
the Adviser would not be reduced because of its receipt of such brokerage and
research services. To the extent that any research services of value are
provided by broker dealers through or with whom the fund places portfolio
transactions, the Adviser or Sub-Adviser may be relieved of expenses which they
might otherwise bear.
The Adviser or Sub-Adviser executed most of the fund's transactions through a
small group of broker-dealers selected for their ability to provide brokerage
and research services. The Adviser or Sub-Adviser may occasionally purchase
securities that are not listed on a national securities exchange or quoted on
Nasdaq-AMEX, but are instead traded in the over-the-counter market. With respect
to transactions executed in the over-the-counter market, the Adviser or
Sub-Adviser will usually deal through its selected broker-dealers and pay a
commission on such transactions. The Adviser or Sub-Adviser believe that the
execution and brokerage services received justify use of broker-dealers in these
over-the-counter transactions.
MANAGEMENT OF THE FUND
The Trust's Board of Trustees manages the business affairs of the Trust. The
Trustees establish policies and review and approve contracts and their
continuance. Trustees also elect the officers and select the Trustees to serve
as executive and audit committee members. 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.
TRUST
NAME AND ADDRESS POSITION AGE PRINCIPAL OCCUPATION
---------------- -------- --- ----------------------------------------
J. Michael Belz Trustee 47 President and Chief Executive Officer of
1635 NE Loop 410 Catholic Life Insurance 1984 to present.
San Antonio, TX
78209
Richard E. Hughs Trustee 63 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, Clark R. Mandigo Trustee 56
Business consultant since 1991. From
1985 to 1991, President, 1977-1985.
Associate Dean, Stern School of
Business, New York 1250 NE Loop 410
Chief Executive Officer, and Director of
Intelogic Trace, Inc., a University, New
York City, 1970-1977. Suite 900
nationwide company which sells, leases
and maintains computers San Antonio, TX
and telecommunications systems and
equipment. Prior to 1985, 78209
President of BHP Petroleum (Americas),
Ltd., an oil and gas exploration and
development company. Director of Palmer
Wireless, Inc., Lone Star Steakhouse &
Saloon, Inc. and Physician Corporation
of America. Formerly a Director of
Datapoint Corporation. Trustee for
Pauze'/Swanson United Services Funds
from November 1993 to February 1996.
Frank E. Holmes * Trustee, 44 Chairman of the Board of Directors and
President, Chief Executive Officer of the Adviser.
Chief Since October 1989, Mr. Holmes has
Executive served and continues to serve in various
Officer positions with the Adviser, its
subsidiaries and the investment
companies it sponsors. Director of
Franc-Or Resource Corp. from November
1994 to November 1996. Director of
Adventure Capital Limited from January
1996 to July 1997 and Director of Vedron
Gold, Inc. from August 1996 to March
1997. Director of 71316 Ontario, Inc.
since April 1987 and of F. E. Holmes
Organization, Inc. since July 1978.
Director of Marleau, Lemire Inc. from
January 1995 to January 1996. Director
of United Services Canada, Inc. from
February 1995 to November 1997 and Chief
Executive Officer from February to
August 1995.
Susan B. McGee Executive 40 Executive Vice President, Corporate
Vice Secretary and General Counsel of the
President, Adviser. Since September 1992, Ms. McGee
Secretary, has served and continues to serve in
General various positions with the Adviser, its
Counsel subsidiaries, and the investment
companies it sponsors.
<PAGE>
TRUST
NAME AND ADDRESS POSITION AGE PRINCIPAL OCCUPATION
---------------- -------- --- ----------------------------------------
David J. Clark Treasurer 38 Chief Financial Officer, Chief Operating
Officer of the Adviser. Chief Financial
Officer of U.S. Global Brokerage, Inc.,
the principal underwriter. Since May
1997, Mr. Clark has served and continues
to serve in various positions with the
Adviser and the investment companies it
sponsors. Foreign Service Officer with
U.S. Agency for International
Development in the U.S. Embassy, Bonn,
West Germany from May 1992 to May 1997.
Audit Supervisor for University of Texas
Health Science Center from April 1991 to
April 1992. Auditor-in-Charge for
Texaco, Inc. from August 1987 to June
1990.
Elias Suarez Vice 38 Vice President of the Adviser. Since
President March of 1992, Mr. Suarez served and
continues to serve in various positions
with the Adviser and United Shareholder
Services, Inc.
------------------------------------
* This Trustee is an "interested person" of the Trust as defined in the
Investment Company Act of 1940.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM U.S. GLOBAL TOTAL COMPENSATION FROM U.S. GLOBAL
NAME ACCOLADE FUNDS(1) TO BOARD MEMBERS FUND COMPLEX(2) TO BOARD MEMBERS
---- ----------------------------------- -----------------------------------
<S> <C> <C>
J. Michael Belz $19,433(3) $19,433
Frank E. Holmes $ 0 $ 0
Richard Hughs $23,100 $23,100
Clark R. Mandigo $18,100 $45,325
---------------------------
(1) Includes compensation related to three fund portfolios.
(2) Total compensation paid by the U.S. Global Fund complex for the period
ended October 31, 1999. As of this date, there were fourteen fund
portfolios in the complex. Mr. Holmes and Mr. Mandigo serve on all
fourteen funds; Mr. Belz and Dr. Hughs serve on three fund portfolios.
(3) This Trustee commenced service on November 1, 1998.
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES
As of February 14, 2000, the officers and Trustees of the Trust, as a group,
owned less than 1% of the outstanding shares of the fund. The fund is aware of
the following entities owning of record, or beneficially, more than 5% of the
outstanding shares of the fund as of February 14, 2000.
NAME & ADDRESS OF OWNER % OWNED TYPE OF OWNERSHIP
----------------------- ------- -----------------
Charles Schwab & Co., Inc. 20.79% Record(1)
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 6.50% Record(2)
Church Street Station
New York, NY 10008-3908
(1) Charles Schwab, broker-dealer, has advised that no
individual client owns more than 5% of the fund.
(2) National Financial Services Corp., broker-dealer, has
advised that no individual client owns more than 5% of the
fund.
--------------------------------------------------------------------------------
Statement of Additional Information - Bonnel Growth Fund
Page 12 of 20
INVESTMENT ADVISORY SERVICES
The fund's investment adviser is U.S. Global Investors, Inc., a Texas
corporation, pursuant to an advisory agreement dated September 21, 1994, as
amended from time to time. Frank E. Holmes, Chief Executive Officer and a
Director of the Adviser, and Trustee, President and Chief Executive Officer of
the Trust, beneficially owns more than 25% of the outstanding voting stock of
the Adviser and may be deemed to be a controlling person of the Adviser.
In addition to the services described in the fund's prospectus, the Adviser 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
Adviser or its affiliates, except that the Trust will reimburse the Adviser for
a part of the compensation of the Adviser'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.
<PAGE>
MANAGEMENT FEES
For the fiscal periods shown below, the fund paid the Adviser the following
advisory fees:
FISCAL PERIOD MANAGEMENT FEE
---------------------------------------------- --------------
Year ended October 31, 1999 $1,112,866
Year ended October 31, 1998 $1,017,148
Period from October 1 through October 31, 1997 $ 95,210
Year ended September 30, 1997 $ 972,364
The Trust pays all other expenses for its operations and activities. The fund
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 Adviser, 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 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 specified.
The Trust and the Adviser, in connection with the fund, have entered into a
sub-advisory agreement with Bonnel, Inc. (Sub-Adviser). In connection with such
services, the Adviser pays the Sub-Adviser a minimum sub-advisory fee of
$150,000 per year. When the fund's assets exceed $30 million, the Adviser and
the Sub-Adviser will share the management fee equally; except that the
Sub-Adviser's fee will be subject to downward adjustments for: 1) the Adviser'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) for any monies
previously received as a result of the minimum sub-advisory fee set forth above
and paid by the Adviser or the Trust before the Securities and Exchange
Commission (SEC) declared the fund's registration statement effective; 3) the
unrecovered costs of organizing the fund up to $40,000 (the Adviser will be
responsible for bearing costs of organization of the fund greater than $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 Adviser is
required to pay or absorb any of the excess expenses, by the amount of the
excess expenses paid or absorbed by the Adviser through such downward
adjustments. The fund is not responsible for the Sub-Adviser's fee. The
management fee paid to the Sub-Adviser is paid by the Adviser out of its
management fee and does not increase the expenses of the fund.
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 was 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 the
fund, as long as it is approved at least annually by (i) a vote of a majority of
the outstanding voting securities of the fund (as defined in the Investment
Company Act of 1940 [Act]) or by 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.
In addition to advising client accounts, the Adviser invests in securities for
its own account. The Adviser has adopted policies and procedures intended to
minimize or avoid potential conflicts with its clients when trading for its own
account. The Adviser'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 Adviser 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
recapitalizations. In general, the Adviser invests in start-up companies in the
natural resources or technology fields.
DISTRIBUTION, TRANSFER AGENCY AND OTHER SERVICES
U.S. Global Brokerage, Inc., 7900 Callaghan Road, San Antonio, Texas 78229, a
subsidiary of the Adviser (U.S. Global Brokerage), is the principal underwriter
and agent for distribution of the fund's shares. U.S. Global Brokerage is
obligated to use all reasonable efforts, consistent with its other business, to
secure purchasers for the fund's shares, which are offered on a continuous
basis.
Beginning September 3, 1998, U.S. Global Brokerage commenced marketing the fund
and distributing the fund's shares pursuant to a Distribution Agreement between
the Trust and U.S. Global Brokerage (Distribution Agreement). Under the
Distribution Agreement, U.S. Global Brokerage may enter into agreements with
selling brokers, financial planners and other financial representatives for the
sale of the fund's shares. Following such sales, the fund will receive the net
asset value per share and U.S. Global Brokerage will retain the applicable sales
charge, if any, subject to any reallowance obligations of U.S. Global Brokerage
in its selling agreements and/or as set forth in the Prospectus and/or herein
with respect to the fund's shares.
Pursuant to the Distribution Agreement, the annual fee for distribution and
distribution support services on behalf of the Trust is $24,000, payable $2,000
per month. The fee is allocated among the portfolios of the Trust, including the
fund, in equal amounts. In addition, the Trust is responsible for the payment of
all fees and expenses (i) in connection with the preparation, setting in type
and filing of any registration statement under the 1933 Act, and any amendments
thereto, for the issuance of the fund's shares; (ii) in connection with the
registration and qualification of the fund's shares for sale in states in which
the Board of Trustees shall determine it advisable to qualify such shares for
sale; (iii) of preparing, setting in type, printing and mailing any report or
other communication to holders of the fund's shares in their capacity as such;
and (iv) of preparing, setting in type, printing and mailing Prospectuses, SAIs,
and any supplements thereto, sent to existing holders of the fund's shares. To
the extent not covered by any Distribution Plan of the Trust pursuant to Rule
12b-1 of the 1940 Act (Distribution Plan) and/or agreements between the Trust
and investment advisers providing services to the Trust, U.S. Global Brokerage
is responsible for paying the cost of (i) printing and distributing
Prospectuses, SAIs and reports prepared for its use in connection with the
offering of the fund's shares for sale to the public; (ii) any other literature
used in connection with such offering; (iii) advertising in connection with such
offering; and (iv) any additional out-of-pocket expenses incurred in connection
with these costs. Notwithstanding the above, and subject to and calculated in
accordance with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (NASD), if during the annual period the total of (i)
the compensation payable to U.S. Global Brokerage and (ii) amounts payable under
the Distribution Plan exceeds 0.25% of the fund's average daily net assets, U.S.
Global Brokerage will rebate that portion of its fee necessary to result in the
total of (i) and (ii) above not exceeding 0.25% of the fund's average daily net
assets. The payment of compensation and reimbursement of expenditures is
authorized pursuant to the Distribution Plan and is contingent upon the
continued effectiveness of the Distribution Plan.
The Distribution Agreement continues in effect from year to year, provided
continuance is approved at least annually by either (i) the vote of a majority
of the Trustees of the Trust, or by the vote of a majority of the outstanding
voting securities of the Trust, and (ii) the vote of a majority of the Trustees
of the Trust who are not interested persons of the Trust and who are not parties
to the Distribution Agreement or interested persons of any party to the
Distribution Agreement; however, the Distribution Agreement may be terminated at
any time by vote of a majority of the Trustees of the Trust who are not
interested persons of the Trust, or by vote of a majority of the outstanding
voting securities of the Trust, on not more than sixty (60) days' written notice
by the Trust. For these purposes, the term "vote of a majority of the
outstanding voting securities" is deemed to have the meaning specified in the
1940 Act and the rules enacted thereunder.
<PAGE>
The Transfer Agency Agreement with the Trust provides for the fund to pay United
Shareholder Services, Inc. (USSI) an annual fee of $23.00 per account (1/12 of
$23.00 monthly). In connection with obtaining and/or providing administrative
services to the beneficial owners of Trust shares through broker-dealers, banks,
trust companies and similar institutions which provide such services and
maintain an omnibus account with the Transfer Agent, the fund pays to the
Transfer Agent a monthly fee equal to one-twelfth (1/12) of 12.5 basis points
(.00125) of the value of the shares of the fund held in accounts at the
institutions (including institutions affiliated with the Transfer Agent), which
payment shall not exceed $1.92 multiplied by the average daily number of
accounts holding Trust shares at the institution. These fees, in lieu of the
annual fee of $23.00 per account, are paid to such institutions by the Transfer
Agent for their services. In addition, the fund bears certain other Transfer
Agent expenses such as the costs of record retention and postage, internet
services, and the telephone and line charges (including the toll-free 800
service) used by shareholders to contact the Transfer Agent. For the fiscal year
ended October 31, 1999, the fund paid a total of $223,212 for transfer agency
fees and expenses.
USSI maintained the books and records of the Trust and of each fund of the Trust
until November 1, 1997, at which time Brown Brothers Harriman & Co. assumed such
responsibility.
FUND ACCOUNTING EXPENSES
For the fiscal periods shown below, the fund paid the following amounts for
portfolio accounting services:
FISCAL PERIOD FEES TO USSI BROWN BROTHERS
----------------------------- ------------ --------------
Year ended October 31, 1999 $ 0 $51,751
Year ended October 31, 1998 $ 0 $61,827
Period from October 1 through
October 31, 1997 $ 6,011 $ 0
Year ended September 30, 1997 $59,632 $ 0
A&B Mailers, Inc., a corporation wholly owned by the Adviser, provides the Trust
with certain mail handling services. The charges for such services have been
negotiated by the Audit Committee and A&B Mailers, Inc. Each service is priced
separately. For the fiscal year ended October 31, 1999, the fund paid A&B
Mailers, Inc. $32,061 for mail handling services.
DISTRIBUTION PLAN
In September 1994, the fund adopted a Distribution Plan pursuant to Rule 12b-1
of the 1940 Act (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, which 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. For the fiscal year ended October 31, 1999,
the fund paid a total of $243,526 in distribution fees. Distribution expenses
paid by the Adviser 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 Distribution Plan in the current or future periods if the 0.25%
limitation is never exceeded.
<TABLE>
<CAPTION>
ADVERTISING PROSPECTUS DISTRIBUTION COMPENSATION TO TRAVEL & PROMOTION POSTAGE &
& LITERATURE PRINTING FEES BROKER/DEALERS EXPENSES MAILING
------------ -------- ---- -------------- -------- -------
<S> <C> <C> <C> <C> <C>
$52,938 $9,480 $19,059 $42,686 $13,028 $7,108
</TABLE>
The amount of any unreimbursed expenses incurred under the Plan during the
fiscal year ended October 31, 1999, which will be carried over to future years
is $30,224 or 0.02% of net assets. The fund is not obligated to pay any
unreimbursed expenses if the Distribution Plan is terminated or not renewed.
U.S. Global Brokerage, Inc., the principal underwriter for distribution of the
fund's shares, and its affiliated persons, including Frank Holmes, David J.
Clark, and Elias Suarez have a direct or indirect financial interest in the
operation of the fund's distribution Plan and related Distribution Agreement.
Expenses that 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 of Trustees, as a
whole, and the Qualified Trustees determine whether, in their reasonable
business judgment and considering their fiduciary duties, there is reasonable
likelihood that the Distribution Plan will benefit the fund and its
shareholders. The Distribution Plan may be terminated anytime by a majority vote
of the Qualified Trustees, or by a majority vote of the outstanding voting
securities of the fund.
CERTAIN PURCHASES OF SHARES OF THE FUND
The following information supplements the discussion of how to buy fund shares
as discussed in the fund's prospectus.
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 policies of the fund
and are otherwise acceptable to the Adviser, which 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 restricted in any way as to resale or be otherwise 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
NYSE, or Nasdaq-AMEX;
4. any securities so acquired by the fund will not comprise more than 5% of
the 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 (either in
writing or by telephone) a list 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 titled Net Asset Value 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
The following information supplements the discussion of how to redeem fund
shares as discussed in the fund's prospectus.
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 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 receiving a
redemption in kind would then have to pay brokerage fees in order to convert his
fund investment into cash. All redemptions in kind will be made in marketable
securities of the fund.
CALCULATION OF PERFORMANCE DATA
The performance quotations described below are based on historical earnings and
are not intended to indicate future performance.
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) SUP 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 (a) all charges are deducted from the initial
$1,000 payment, (b) all dividends and distributions by the fund are reinvested
at the price stated in the prospectus on the reinvestment dates during the
period and (c) all recurring fees charged to all shareholder accounts are
included.
<PAGE>
The annual total return for the fund follows:
CALCULATION OF PERFORMANCE DATA
The average annual total return for the fund for the periods ended October 31,
1999, are as follows:
1 Year..................................................81.45%
5 Years................................................36.44%
Since Inception (October 17, 1994)......................34.92%
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.
EFFECT OF FEE WAIVER AND EXPENSE REIMBURSEMENT. From time to time, the Adviser
has limited expenses and without such limit the fund's returns would have been
less.
TAX STATUS
TAXATION OF THE FUND - IN GENERAL. The fund intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (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 (90% test); (b) satisfy certain diversification requirements at the
close of each quarter of the fund's taxable year; and (c) distribute at least
90% of its net investment income and net short-term taxable gains for the fiscal
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 year, (2) at
least 98% of its capital gain net income for the twelve-month period ending
October 31 of the calendar year, and (3) any portion (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 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
December 31, if the 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 before a distribution. The price of shares
purchased then includes the amount of any forthcoming distribution. Investors
purchasing the fund's shares immediately before a distribution may receive a
return of investment upon distribution that 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.
FOREIGN TAXES. Income received by the fund from sources within any countries
outside the United States in which the issuers of securities purchased by the
fund are located may be subject to withholding and other taxes imposed by such
countries.
If the fund is liable for foreign income and withholding taxes that can be
treated as income taxes under U.S. Federal income tax principles, the fund
expects to meet the requirements of the Code for "passing-through" to its
shareholders such foreign taxes paid, but there can be no assurance that the
fund will be able to do so. Under the Code, if more than 50% of the value of the
fund's total assets at the close of its taxable year consists of stocks or
securities of foreign corporations, the fund will be eligible for, and intends
to file, an election with the Internal Revenue Service to "pass-through" to the
fund's shareholders the amount of such foreign income and withholding taxes paid
by the fund. Pursuant to this election a shareholder will be required to: (1)
include in gross income (in addition to taxable dividends actually received) his
pro rata share of such foreign taxes paid by the fund; (2) treat his pro rata
share of such foreign taxes as having been paid by him; and (3) either deduct
his pro rata share of such foreign taxes in computing his taxable income or use
it as a foreign tax credit against his U.S. Federal income taxes. No deduction
for such foreign taxes may be claimed by a shareholder who does not itemize
deductions. Each shareholder will be notified within 60 days after the close of
the fund's taxable year whether the foreign taxes paid by the fund will
"pass-through" for that year and, if so, such notification will designate (a)
the shareholder's portion of the foreign taxes paid to each such country; and
(b) the portion of dividends that represents income derived from sources within
each such country.
The amount of foreign taxes for which a shareholder may claim a credit in any
year will be subject to an overall limitation which is applied separately to
"passive income," which includes, among other types of income, dividends and
interest.
The foregoing is only a general description of the foreign tax credit under
current law. Because applicability of the credit depends on the particular
circumstances of each shareholder, shareholders are advised to consult their own
tax advisors.
The foregoing discussion relates only to generally applicable federal income tax
provisions in effect as of the date of the prospectus and Statement of
Additional Information. Shareholders should consult their tax advisors about the
status of distributions from the fund in their own states and localities.
CUSTODIAN, FUND ACCOUNTANT AND ADMINISTRATOR
Beginning November 1997 Brown Brothers Harriman & Co. began serving as
custodian, fund accountant and administrator for all funds of the Trust. With
respect to the funds owning foreign securities, Brown Brothers Harriman & Co.
may hold securities outside the United States pursuant to sub-custody
arrangements separately approved by the Trust. Prior to November 1997, Bankers
Trust Company provided custody services and USSI provided fund accounting and
administrative services.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, audit and
report on the fund's annual financial statements, review certain regulatory
reports and the fund's federal income tax returns, and perform other
professional accounting, auditing, tax, and advisory services when engaged to do
so by the Trust. Prior to October 31, 1999, another accounting firm was engaged
to provide these services.
FUND COUNSEL
General Counsel to the Adviser, also serves as General Counsel to the Trust. The
Adviser is reimbursed for time spent by the Adviser's staff attorneys on matters
pertaining to the Trust. Pursuant to this arrangement, the fund reimbursed the
Adviser $29,877 during the fiscal year ended October 31, 1999.
COUNSEL TO INDEPENDENT TRUSTEES
Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street, Chicago, Illinois
60601, is counsel to the independent Trustees of the Trust.
FINANCIAL STATEMENTS
The financial statements for the fiscal year ended October 31, 1999 are hereby
incorporated by reference from the U.S. Global Accolade Funds 1999 Annual Report
to Shareholders of that date that accompanies this Statement of Additional
Information. The Trust will promptly provide a copy of the financial statements,
free of charge, upon request to: U.S. Global Investors, Inc., P.O. Box 29467,
San Antonio, Texas 78229-0467, 1-800-873-8637 or (210) 308-1234.
62
<PAGE>
U.S. GLOBAL ACCOLADE FUNDS
MEGATRENDS FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the current prospectus (Prospectus) dated March 1, 2000. The
financial statements for the MegaTrends Fund for the year ended October 31,
1999, and the Report of Independent Auditors thereon, are incorporated by
reference from the fundss.s Annual Report dated October 31, 1999. Copies of the
Prospectus and the fund's financial statements may be requested from U.S. Global
Investors, Inc. (Adviser), 7900 Callaghan Road, San Antonio, Texas 78229 or
1-800-US-FUNDS (1-800-873-8637). In addition, copies of the Prospectus are
available online at www.usfunds.com.
The date of this Statement of Additional Information is March 1, 2000, as
amended September 1, 2000.
<PAGE>
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION...........................................................3
FUND POLICIES.................................................................3
INVESTMENT STRATEGIES AND RISKS...............................................4
PORTFOLIO TURNOVER............................................................9
PORTFOLIO TRANSACTIONS........................................................9
MANAGEMENT OF THE FUND.......................................................11
PRINCIPAL HOLDERS OF SECURITIES..............................................12
INVESTMENT ADVISORY SERVICES.................................................12
DISTRIBUTION, TRANSFER AGENCY AND OTHER SERVICES.............................14
DISTRIBUTION PLAN............................................................15
CERTAIN PURCHASES OF SHARES OF THE FUND......................................16
ADDITIONAL INFORMATION ON REDEMPTIONS........................................17
CALCULATION OF PERFORMANCE DATA..............................................17
TAX STATUS...................................................................18
CUSTODIAN, FUND ACCOUNTANT AND ADMINISTRATOR.................................20
INDEPENDENT AUDITORS.........................................................20
FUND COUNSEL.................................................................20
COUNSEL TO INDEPENDENT TRUSTEES..............................................20
FINANCIAL STATEMENTS.........................................................20
<PAGE>
GENERAL INFORMATION
U.S. Global Accolade Funds (Trust) is an open-end management investment company
and a business trust organized April 16, 1993, under the laws of the
Commonwealth of Massachusetts. The MegaTrends Fund (fund) is a series of the
Trust and represents a separate, diversified portfolio of securities. The fund
commenced operations on October 21, 1991, and became a series of the Trust on
November 16, 1996, pursuant to a plan of reorganization.
The assets received by the Trust from the issuance 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 the fund. They constitute
the underlying assets of the fund, are required to be segregated on the books of
accounts, and are to be charged with the expenses with respect to the fund. Any
general expenses of the Trust, not readily identifiable as belonging to a
particular series of the Trust, 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 the fund, as are declared by the Board. Upon
liquidation of the Trust or the fund, shareholders of the fund are entitled to
share pro rata in the net assets belonging to the fund available for
distribution.
The Trust's master trust agreement provides that no annual or regular meeting of
shareholders is required. The Trustees serve for six-year terms. Thus, there
will ordinarily be no shareholder meetings unless otherwise required by the
Investment Company Act of 1940.
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 series, a separate vote of that series would be
required. Shareholders of any series are not entitled to vote on any matter that
does not affect their series.
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.
FUND POLICIES
The following information supplements the discussion of the fund's policies
discussed in the fund's prospectus.
INVESTMENT RESTRICTIONS. If a percentage 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.
Unless designated as such, none of the fund's policies are fundamental.
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 the fundss.s outstanding shares present at a meeting at
which more than 50% of the outstanding shares of the fund are represented either
in person or by proxy or (2) more than 50% of the fund's outstanding shares.
The fund may not:
1. Concentrate its investments in a particular industry (other than securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities), as that term is used in the 1940 Act, as amended, and
as interpreted or modified by regulatory authority having jurisdiction from
time to time.
2. Purchase or sell real estate, which term does not include securities of
companies which deal in real estate and/or mortgages or investments secured
by real estate, or interests therein, except that the fund reserves freedom
of action to hold and to sell real estate acquired as a result of the
fund's ownership of securities.
3. Make loans except as permitted under the 1940 Act, as amended, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
4. Borrow money, except as permitted under the 1940 Act, as amended, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
5. Issue senior securities, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
6. Engage in the business of underwriting securities, except to the extent
that the fund may be deemed to be an underwriter in connection with the
disposition of portfolio securities.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions may be changed by the Board of Trustees
without a shareholder vote.
The fund may not:
1. Pledge, mortgage, or hypothecate the assets of the fund.
2. Purchase securities on margin or make short sales, except (i) short sales
against the box, (ii) the fund may obtain such short term credits as are
necessary for the clearance of transactions, and (iii) provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on margin or selling
securities short.
3. Borrow money, except that a fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 33 1/3% of a fund's total assets (including the amount borrowed)
less liabilities (other than borrowings).
4. Invest more that 15% of its net assets in securities that are illiquid.
INVESTMENT STRATEGIES AND RISKS
The following information supplements the discussion of the fund's investment
strategies and risks in the fund's prospectus.
MARKET RISK. Investments in equity and debt securities are subject to inherent
market risks and fluctuations in value due to earnings, economic conditions,
quality ratings and other factors beyond the fund's control. The return and net
asset value of the fund will fluctuate.
REAL ESTATE INVESTMENT TRUSTS. The fund may invest in real estate investment
trusts (REITs), which may subject the fund to many of the same risks related to
the direct ownership of real estate. These risks may include declines in the
value of real estate, risks related to economic factors, changes in demand for
real estate, change in property taxes and property operating expenses, casualty
losses, and changes to zoning laws. REITs are also dependent to some degree on
the capabilities of the REIT manager. In addition, the failure of a REIT to
continue to qualify as a REIT for tax purposes would have an adverse effect upon
the value of a portfolio's investment in that REIT.
FOREIGN INVESTMENTS. Investing in securities issued 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 the 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 located 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.
AMERICAN DEPOSITORY RECEIPTS. American Depository Receipts (ADRs) represent
shares of foreign issuers. ADRs are typically issued by a U.S. bank or trust
company and evidence ownership of underlying securities issued by a foreign
corporation. Generally, ADRs in registered form are intended for use in the U.S.
securities market, and ADRs in bearer form are intended for use in securities
markets outside the United States. ADRs may not necessarily be denominated in
the same currency as the underlying securities into which they may be converted.
In addition, the issuers of the securities underlying unsponsored ADRs are not
obligated to disclose material information in the United States; therefore,
there may be less information available regarding such issuers. There may not be
a correlation between such information and the market value of the ADRs. For
purposes of the fund's investment policies, the fund's investment in ADRs will
be deemed to be investments in the underlying securities.
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 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.
WARRANTS AND RIGHTS. Warrants are options to purchase equity securities at a
specified price and are valid for a specific time period. Rights are similar to
warrants, but normally have a short duration and are distributed by the issuer
to its shareholders. The fund may realize a loss equal to all or a portion of
the price paid for the warrants or rights if the price of the underlying
security decreases or does not increase by more than the amount paid for the
warrants or rights.
GOVERNMENT AND CORPORATE DEBT. U.S. Government obligations include securities
which are issued or guaranteed by the United States Treasury, by various
agencies of the United States Government, and by various instrumentalities which
have been established or sponsored by the United States Government. U.S.
Treasury obligations are backed by the "full faith and credit" of the U.S.
Government. U.S. Treasury obligations include Treasury bills, Treasury notes and
Treasury bonds. Agencies or instrumentalities established by the United States
Government include the Federal Home Loan Bank, the Federal Land Bank, the
Government National Mortgage Association, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, and the Student Loan
Marketing Association.
Also included are the Bank for Cooperatives, the Federal Intermediate Credit
Bank, the Federal Financing Bank, the Federal Farm Credit Bank, the Federal
Agricultural Mortgage Corporation, the Resolution Funding Corporation, the
Financing Corporation of America and the Tennessee Valley Authority. Some of
these securities are supported by the full faith and credit of the United States
Government while others are supported only by the credit of the agency or
instrumentality, which may include the right of the issuer to borrow from the
United States Treasury.
Quality Ratings of Corporate Bonds. The ratings of Moody's Investors Service,
Inc. and Standard & Poor's Ratings Group for corporate bonds in which the fund
may invest are as follows:
Moody's Investors Service, Inc. Aaa: Bonds which are rated Aaa are judged
to be of the best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge." Interest payments are
protected by a large or an exceptionally stable margin, and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what is generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are 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 which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Standard & Poor's Ratings Group. AAA: Bonds rated AAA have the highest
rating assigned by Standard & Poor's to a debt obligation. Capacity to pay
interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay principal
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 capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in
higher rated categories.
BB and B: Bonds rated BB and B are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree
of speculation and B the higher degree of speculation. While such bonds
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
RISK FACTORS OF LOWER-RATED SECURITIES. Lower-rated debt securities (commonly
called "junk bonds") may be subject to certain risk factors to which other
securities are not subject to the same degree. An economic downturn tends to
disrupt the market for lower-rated bonds and adversely affect their values. Such
an economic downturn may be expected to result in increased price volatility of
lower-rated bonds and of the value of the fund's shares, and an increase in
issuers' defaults on such bonds.
Also, many issuers of lower-rated bonds are substantially leveraged, which may
impair their ability to meet their obligations. In some cases, the securities in
which the fund invests are subordinated to the prior payment of senior
indebtedness, thus potentially limiting the fund's ability to recover full
principal or to receive payments when senior securities are in default.
The credit rating of a security does not necessarily address its market value
risk. Also, ratings may, from time to time, be changed to reflect developments
in the issuer's financial condition. Lower-rated securities held by the fund
have speculative characteristics which are apt to increase in number and
significance with each lower rating category.
When the secondary market for lower-rated bonds becomes increasingly illiquid,
or in the absence of readily available market quotations for lower-rated bonds,
the relative lack of reliable, objective data makes the responsibility of the
Trustees to value such securities more difficult, and judgment plays a greater
role in the valuation of portfolio securities. Also, increased illiquidity of
the market for lower-rated bonds may affect the fund's ability to dispose of
portfolio securities at a desirable price.
In addition, if the fund experiences unexpected net redemptions, it could be
forced to sell all or a portion of its lower-rated bonds without regard to their
investment merits, thereby decreasing the asset base upon which the fund's
expenses can be spread and possibly reducing the fund's rate of return. Also,
prices of lower-rated bonds have been found to be less sensitive to interest
rate changes and more sensitive to adverse economic changes and individual
corporate developments than more highly rated investments. Certain laws or
regulations may have a material effect on the fund's investments in lower-rated
bonds.
COMMERCIAL PAPER AND OTHER MONEY MARKET INSTRUMENTS. Commercial paper consists
of short-term (usually from one to two hundred-seventy days) unsecured
promissory notes issued by corporations in order to finance their current
operations. The fund will only invest in commercial paper rated A-1 by Standard
& Poor's Ratings Group or Prime-1 by Moody's Investors Service, Inc. or unrated
paper of issuers who have outstanding unsecured debt rated AA or better by
Standard & Poor's or Aa or better by Moody's. Certain notes may have floating or
variable rates. Variable and floating rate notes with a demand notice period
exceeding seven days will be subject to the fund's restriction on illiquid
investments unless, in the judgment of the Sub-Adviser or Adviser, such note is
liquid.
The fund may invest in short-term bank debt instruments such as certificates of
deposit, bankers' acceptances and time deposits issued by national banks and
state banks, trust companies and mutual savings banks, or by banks or
institutions the accounts of which are insured by the Federal Deposit Insurance
Corporation or the Federal Savings and Loan Insurance Corporation. The fund will
only invest in bankers' acceptances of banks having a short-term rating of A-1
by Standard & Poor's Ratings Group or Prime-1 by Moody's Investors Service, Inc.
The fund will not invest in time deposits maturing in more than seven days if,
as a result thereof, more than 10% of the value of its net assets would be
invested in such securities and other illiquid securities.
REPURCHASE AGREEMENTS. The fund may invest part of its assets in repurchase
agreements with domestic broker-dealers, banks and other financial institutions,
provided the fund's custodian always has possession of securities serving as
collateral or has evidence of book entry receipt of such securities. In a
repurchase agreement, the fund purchases securities subject to the seller's
agreement to repurchase such securities at a specified time (normally one day)
and price. The repurchase price reflects an agreed-upon interest rate during the
time of investment. All repurchase agreements may be collateralized by United
States Government or government agency securities, the market values of which
equal or exceed 102% of the principal amount of the repurchase obligation. If an
institution enters an insolvency proceeding, the resulting delay in liquidation
of securities serving as collateral could cause the fund some loss if the value
of the securities declined before liquidation. To reduce the risk of loss, the
fund will enter into repurchase agreements only with institutions and dealers
that the Adviser (or Sub-Adviser) considers creditworthy.
TEMPORARY DEFENSIVE INVESTMENT. For temporary defensive purposes during periods
that, in the Sub-Adviser's opinion, present the fund with adverse changes in the
economic, political or securities markets, the fund may seek to protect the
capital value of its assets by temporarily investing up to 100% of its assets
in: U.S. Government securities, short-term indebtedness, money market
instruments, or other high grade cash equivalents, each denominated in U.S.
dollars or any other freely convertible currency; or repurchase agreements. When
the fund is in a defensive investment position, it may not achieve its
investment objectives.
WHEN-ISSUED OR DELAYED DELIVERY SECURITIES. The fund may purchase securities on
a when-issued or delayed delivery basis. Securities purchased on a when-issued
or delayed delivery basis are purchased for delivery beyond the normal
settlement date at a stated price and yield. No income accrues to the purchaser
of a security on a when-issued or delayed delivery basis prior to delivery. Such
securities are recorded as an asset and are subject to changes in value based on
changes in the general level of interest rates. Purchasing a security on a
when-issued or delayed delivery basis can involve a risk that the market price
at the time of delivery may be lower than the agreed upon purchase price, in
which case there could be an unrealized loss at the time of delivery. The fund
will only make commitments to purchase securities on a when-issued or delayed
delivery basis with the intention of actually acquiring the securities, but may
sell them before the settlement date if it is deemed advisable. The fund will
segregate liquid securities in an amount at least equal in value to the fund's
commitments to purchase securities on a when-issued or delayed delivery basis.
If the value of these segregated assets declines, the fund will place additional
liquid assets in the account on a daily basis so that the value of the assets in
the account is equal to the amount of such commitments.
RESTRICTED AND ILLIQUID SECURITIES. The fund may invest up to 15% of its total
net assets in illiquid securities. Securities may be illiquid because they are
unlisted, subject to legal restrictions on resale or due to other factors which,
in the Sub-Adviser's opinion, raise questions concerning the fund's ability to
liquidate the securities in a timely and orderly way without substantial loss.
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.
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.
SECURITIES LENDING. The fund may lend its portfolio securities to qualified
dealers or other institutional investors. When lending securities, the fund will
receive cash or U.S. Government obligations as collateral for the loan. The fund
may invest cash collateral in repurchase agreements, including repurchase
agreements collateralized with non-governmental securities. Under the terms of
the fund's current securities lending agreement, the fund's lending agent has
guaranteed performance of the obligation of each borrower and each counterparty
to each repurchase agreement in which cash collateral is invested.
Lending portfolio securities exposes the fund to the risk that the borrower may
fail to return the loaned securities or may not be able to provide additional
collateral or that the fund may experience delays in recovery of the loaned
securities or loss of rights in the collateral if the borrower fails
financially. To minimize these risks, the borrower must agree to maintain
collateral marked to market daily, in the form of cash or high-quality
securities, with the fund's custodian in an amount at least equal to the market
value of the loaned securities. In the event of a bankruptcy or breach of
agreement by the borrower of the securities, the fund could experience delays
and costs in recovering the securities loaned.
BORROWING. The fund may have to deal with unpredictable cashflows as
shareholders purchase and redeem shares. Under adverse conditions, the fund
might have to sell portfolio securities to raise cash to pay for redemptions at
a time when investment considerations would not favor such sales. In addition,
frequent purchases and sales of portfolio securities tend to decrease fund
performance by increasing transaction expenses.
The fund may deal with unpredictable cashflows by borrowing money. Through such
borrowings the fund may avoid selling portfolio securities to raise cash to pay
for redemptions at a time when investment considerations would not favor such
sales. In addition, the fund's performance may be improved due to a decrease in
the number of portfolio transactions. After borrowing money, if subsequent
shareholder purchases do not provide sufficient cash to repay the borrowed
monies, the fund will liquidate portfolio securities in an orderly manner to
repay the borrowed monies.
To the extent that the fund borrows money prior to selling securities, the fund
would be leveraged such that the fund's net assets may appreciate or depreciate
in value more than an unleveraged portfolio of similar securities. Since
substantially all of the fund's assets will fluctuate in value and 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 which the fund earns on portfolio securities. Under adverse
conditions, the fund might be forced to sell portfolio securities to meet
interest or principal payments at a time when market conditions would not be
conducive to favorable selling prices for the securities.
PORTFOLIO TURNOVER
The fund does not intend to use short-term trading as a primary means of
achieving its investment objectives. However, the fund's rate of portfolio
turnover will depend on market and other conditions, and it will not be a
limiting factor when portfolio changes are deemed necessary or appropriate by
the Sub-Adviser. Although the annual portfolio turnover rate of the fund cannot
be accurately predicted, it will likely be between 75% and 150%, but may be
either higher or lower. High turnover involves correspondingly greater
commission expenses and transaction costs and increases the possibility that the
fund would not qualify as a regulated investment company under Subchapter M of
the Internal Revenue Code. High turnover may result in the fund recognizing
greater amounts of income and capital gains, which would increase the amount of
income and capital gains that the fund must distribute to its shareholders in
order to maintain its status as a regulated investment company and to avoid the
imposition of federal income and excise taxes (see "Taxes").
PORTFOLIO TURNOVER
For the fiscal periods shown below, the fund's portfolio turnover rate was:
FISCAL PERIOD PORTFOLIO TURNOVER
--------------------------- ------------------
Year ended October 31, 1999 76%
Year ended October 31, 1998 51%
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the fund and the placing of the fund's
securities transactions and negotiation of commission rates, where applicable,
are made by Money Growth Institute, Inc. (Sub-Adviser) and are subject to review
by the fund's Adviser and Board of Trustees of the fund. In the purchase and
sale of portfolio securities, the Sub-Adviser seeks best execution for the fund,
taking into account such factors as price (including the applicable brokerage
commission or dealer spread), the execution capability, financial responsibility
and responsiveness of the broker or dealer and the brokerage and research
services provided by the broker or dealer. The Sub-Adviser generally seeks
favorable prices and commission rates that are reasonable in relation to the
benefits received.
For the fiscal periods shown below, the fund paid brokerage fees as follows:
FISCAL PERIOD BROKERAGE FEES
------------- --------------
Year ended October 31, 1999 $60,391
Year ended October 31, 1998 $31,943
July 1 through October 31, 1997 $18,872
Year ended June 30, 1997 $97,945
The fund has no obligation to deal with any broker or dealer in the execution of
securities transactions. Affiliates of the fund or of the Sub-Adviser may effect
securities transactions which are executed on a national securities exchange or
transactions in the over-the-counter market conducted on an agency basis. Until
November 1999, the Sub-Adviser owned a limited partnership interest in Brimberg
& Co., L.P. (Brimberg), a registered broker-dealer.
The Sub-Adviser may use research services provided by and place securities
transactions with Leeb Brokerage Services, L.L.C., an affiliated broker-dealer
of the Sub-Adviser, if the commissions are fair, reasonable and comparable to
commissions charged by non-affiliated, qualified brokerage firms for similar
services. Leeb Brokerage Services was established in April 1999.
During the fiscal periods shown below, the fund paid Brimberg Brokerage and Leeb
Brokerage Services the following commissions:
<TABLE>
<CAPTION>
FISCAL PERIOD BRIMBERG PERCENTAGE LEEB BROKERAGE PERCENTAGE
------------- -------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Year ended October 31, 1999 $ 180 .30% $21,067 35%
Year ended October 31, 1998 $ 4,910 15% $ 0 0 %
July 1 through October 31, 1997 $16,152 85% $ 0 0 %
Year ended June 30, 1997 $97,945 100% $ 0 0 %
</TABLE>
During the year ended October 31, 1999, 100% of the brokerage fees were paid to
brokers or dealers who provided research services to the Sub-Adviser
The fund will not effect any brokerage transactions in its portfolio securities
with an affiliated broker if such transactions would be unfair or unreasonable
to its shareholders. In order for an affiliated broker to effect such
transactions for the fund, the commissions, fees, or other remuneration received
by such affiliated broker must be reasonable and fair, compared with the
commissions, fees, or other remuneration paid to other brokers in comparable
transactions involving similar securities being purchased or sold on an exchange
during a comparable period. This standard would allow the affiliated broker to
receive no more than the remuneration that an unaffiliated broker would receive
in a commensurate arm's-length transaction. Furthermore, the Board of Trustees,
including a majority of the Trustees who are not "interested" Trustees, has
adopted procedures that are reasonably designed to provide that any commissions,
fees, or other remuneration paid to an affiliated broker are consistent with
this standard. In addition, the Sub-Adviser has represented that commissions
received by either Brimberg or Leeb Brokerage from the fund are excluded when
calculating the profit of the Sub-Adviser and/or Dr. Leeb, as a Brimberg limited
partner or as a member of Leeb Brokerage Services, L.L.C.
Generally, the fund attempts to deal directly with the dealers who make a market
in the securities involved unless better prices and execution are available
elsewhere. Such dealers usually act as principals for their own account. On
occasion, portfolio securities for the fund may be purchased directly from the
issuer.
The Adviser and Sub-Adviser are specifically authorized to select brokers who
also provide brokerage and research services to the fund and/or other accounts
over which the Adviser or Sub-Adviser exercises investment discretion and to pay
such brokers a commission in excess of the commission another broker would
charge if the Adviser or Sub-Adviser determines in good faith that the
commission is reasonable in relation to the value of the brokerage and research
services provided. The determination may be viewed in terms of a particular
transaction or the Adviser's or Sub-Adviser's overall responsibilities with
respect to the fund and to accounts over which they exercise investment
discretion.
The Adviser or Sub-Adviser may occasionally purchase securities that are not
listed on a national securities exchange or quoted on Nasdaq-AMEX, but are
instead traded in the over-the-counter market. With respect to transactions
executed in the over-the-counter market, the Adviser or Sub-Adviser will usually
deal through its selected broker-dealers and pay a commission on such
transactions. The Adviser or Sub-Adviser believe that the execution and
brokerage services received justify use of broker-dealers in these
over-the-counter transactions.
Research services include securities and economic analysis, reports on issuers'
financial conditions and future business prospects, newsletters and opinions
relating to interest trends, general advice on the relative merits of possible
investment securities for the fund and statistical services and information with
respect to the availability of securities or purchasers or sellers of
securities. Although this information is useful to the fund and the Adviser or
Sub-Adviser, it is not possible to place a dollar value on it. Research services
furnished by brokers through whom the fund effects securities transactions may
be used by the Adviser or Sub-Adviser in servicing all of its accounts and not
all such services may be used by the Adviser or Sub-Adviser in connection with
the fund.
MANAGEMENT OF THE FUND
The Trust's Board of Trustees manages the business affairs of the Trust. The
Trustees establish policies and review and approve contracts and their
continuance. Trustees also elect the officers and select the Trustees to serve
as executive and audit committee members. 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.
TRUST
NAME AND ADDRESS POSITION AGE PRINCIPAL OCCUPATION
---------------- -------- --- ----------------------------------------
J. Michael Belz Trustee 47 President and Chief Executive Officer of
1635 NE Loop 410 Catholic Life Insurance 1984 to present.
San Antonio, TX
78209
<PAGE>
TRUST
NAME AND ADDRESS POSITION AGE PRINCIPAL OCCUPATION
---------------- -------- --- ----------------------------------------
Richard E. Hughs Trustee 63 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, Clark R. Mandigo Trustee 56
Business consultant since 1991. From
1985 to 1991, President, 1977-1985.
Associate Dean, Stern School of
Business, New York 1250 NE Loop 410
Chief Executive Officer, and Director of
Intelogic Trace, Inc., a University, New
York City, 1970-1977. Suite 900
nationwide company which sells, leases
and maintains computers San Antonio, TX
and telecommunications systems and
equipment. Prior to 1985, 78209
President of BHP Petroleum (Americas),
Ltd., an oil and gas exploration and
development company. Director of Palmer
Wireless, Inc., Lone Star Steakhouse &
Saloon, Inc. and Physician Corporation
of America. Formerly a Director of
Datapoint Corporation. Trustee for
Pauze'/Swanson United Services Funds
from November 1993 to February 1996.
Frank E. Holmes * Trustee, 44 Chairman of the Board of Directors and
President, Chief Executive Officer of the Adviser.
Chief Since October 1989, Mr. Holmes has
Executive served and continues to serve in various
Officer positions with the Adviser, its
subsidiaries and the investment
companies it sponsors. Director of
Franc-Or Resource Corp. from November
1994 to November 1996. Director of
Adventure Capital Limited from January
1996 to July 1997 and Director of Vedron
Gold, Inc. from August 1996 to March
1997. Director of 71316 Ontario, Inc.
since April 1987 and of F. E. Holmes
Organization, Inc. since July 1978.
Director of Marleau, Lemire Inc. from
January 1995 to January 1996. Director
of United Services Canada, Inc. from
February 1995 to November 1997 and Chief
Executive Officer from February to
August 1995.
Susan B. McGee Executive 40 Executive Vice President, Corporate
Vice Secretary and General Counsel of the
President, Adviser. Since September 1992, Ms. McGee
Secretary, has served and continues to serve in
General various positions with the Adviser, its
Counsel subsidiaries, and the investment
companies it sponsors.
David J. Clark Treasurer 38 Chief Financial Officer, Chief Operating
Officer of the Adviser. Chief Financial
Officer of U.S. Global Brokerage, Inc.,
the principal underwriter. Since May
1997, Mr. Clark has served and continues
to serve in various positions with the
Adviser and the investment companies it
sponsors. Foreign Service Officer with
U.S. Agency for International
Development in the U.S. Embassy, Bonn,
West Germany from May 1992 to May 1997.
Audit Supervisor for University of Texas
Health Science Center from April 1991 to
April 1992. Auditor-in-Charge for
Texaco, Inc. from August 1987 to June
1990.
Elias Suarez Vice 38 Vice President of the Adviser. Since
President March of 1992, Mr. Suarez served and
continues to serve in various positions
with the Adviser and United Shareholder
Services, Inc.
------------------------------------
* This Trustee is an "interested person" of the Trust as defined in the
Investment Company Act of 1940.
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM U.S. GLOBAL TOTAL COMPENSATION FROM U.S. GLOBAL
NAME ACCOLADE FUNDS(1) TO BOARD MEMBERS FUND COMPLEX(2) TO BOARD MEMBERS
---- ----------------------------------- -----------------------------------
<S> <C> <C>
J. Michael Belz $19,433(3) $19,433
Frank E. Holmes $ 0 $ 0
Richard Hughs $23,100 $23,100
Clark R. Mandigo $18,100 $45,325
---------------------------
(1) Includes compensation related to three fund portfolios.
(2) Total compensation paid by the U.S. Global Fund complex for the period
ended October 31, 1999. As of this date, there were fourteen fund
portfolios in the complex. Mr. Holmes and Mr. Mandigo serve on all
fourteen funds; Mr. Belz and Dr. Hughs serve on three fund portfolios.
(3) This Trustee commenced service on November 1, 1998.
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES
As of February 14, 2000, the officers and Trustees of the Trust, as a group,
owned less than 1% of the outstanding shares of the fund. As of February 14,
2000, no person owned of record, or beneficially, more than 5% of the
outstanding shares of the fund.
<PAGE>
INVESTMENT ADVISORY SERVICES
The fund's investment advisor is U.S. Global Investors, Inc., a Texas
corporation, pursuant to an advisory agreement dated September 21, 1994, and
amended November 15, 1996. Frank E. Holmes, Chief Executive Officer and a
Director of the Adviser, and Trustee, President and Chief Executive Officer of
the Trust, beneficially owns more than 25% of the outstanding voting stock of
the Adviser and may be deemed to be a controlling person of the Adviser.
In addition to the services described in the fund's prospectus, the Adviser 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
Adviser or its affiliates, except that the Trust will reimburse the Adviser for
a part of the compensation of the Adviser'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.
MANAGEMENT FEES
For the fiscal periods shown below, the fund paid the Adviser the following
advisory fees (net of expenses paid by the Adviser or voluntary fee
reimbursements):
FISCAL PERIOD MANAGEMENT FEE FEES WAIVED
------------- -------------- -----------
Year ended October 31, 1999 $194,271 $ 0
Year ended October 31, 1998 $240,829 $ 0
July 1 through October 31, 1997 $ 88,031 $ 0
Year ended June 30, 1997 $232,398 ($20,988)
The Trust pays all other expenses for its operations and activities. The fund
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 Adviser, 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 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 specified.
The Trust and the Adviser, in connection with the fund, have entered into a
sub-advisory agreement with Money Growth Institute, Inc. (Sub-Adviser). In
connection with such services, the Adviser pays the Sub-Adviser; therefore, the
fund is not responsible for the Sub-Adviser's fee. The management fee paid to
the Sub-Adviser is paid by the Adviser out of its management fee and does not
increase the expenses of the fund. The Advisor pays the Sub-Advisor 50 percent
of the of the one percent management fee received from the fund net of any all
mutually agreed upon fee waivers, expense caps and reimbursements, if any. In
addition, the Advisor and the Sub-Advisor will share expenses associated with
marketing the fund's shares equally to the extent such marketing expenses exceed
the 12b-1 plan expenditures by the fund.
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 was 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 the
fund, as long as it is approved at least annually by (i) a vote of a majority of
the outstanding voting securities of the fund (as defined in the Investment
Company Act of 1940 [Act]) or by 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.
In addition to advising client accounts, the Adviser invests in securities for
its own account. The Adviser has adopted policies and procedures intended to
minimize or avoid potential conflicts with its clients when trading for its own
account. The Adviser'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 Adviser 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
recapitalizations. In general, the Adviser invests in start-up companies in the
natural resources or technology fields.
SUB-ADVISER DISCIPLINARY HISTORY. Dr. Leeb and the Sub-Adviser have consented
to, without admitting or denying any of the charges, two SEC orders. The order
dated January 16, 1996, related to certain advertisements for a newsletter
edited by Dr. Leeb. Dr. Leeb was neither the owner nor the publisher of the
newsletter. The order dated July 4, 1995, related to certain record keeping
requirements and requirements governing client solicitations. Considered
jointly, the orders allege that Dr. Leeb and other respondents willfully
violated, or aided and abetted violations of various provisions of the
Securities Act of 1933, the Securities Exchange Act of 1934, the Investment
Company Act of 1940, and the Advisers Act of 1940. Dr. Leeb and the other
respondents agreed to certain remedial sanctions including censure, cease and
desist orders, payment of civil money penalties, and the implementation of
certain procedures to ensure their compliance with the federal securities laws.
Neither the MegaTrends Fund nor the predecessor fund was a party to either
proceeding.
Three states issued orders against the Sub-Adviser for conducting advisory
business in their states without prior registration as an investment adviser.
The Sub-Adviser agreed to cease and desist such practice, paid fines, and
registered in each state.
DISTRIBUTION, TRANSFER AGENCY AND OTHER SERVICES
U.S. Global Brokerage, Inc., 7900 Callaghan Road, San Antonio, Texas 78229, a
subsidiary of the Adviser (U.S. Global Brokerage), is the principal underwriter
and agent for distribution of the fund's shares. U.S. Global Brokerage is
obligated to use all reasonable efforts, consistent with its other business, to
secure purchasers for the fund's shares, which are offered on a continuous
basis.
Beginning September 3, 1998, U.S. Global Brokerage commenced marketing the fund
and distributing the fund's shares pursuant to a Distribution Agreement between
the Trust and U.S. Global Brokerage (Distribution Agreement). Under the
Distribution Agreement, U.S. Global Brokerage may enter into agreements with
selling brokers, financial planners and other financial representatives for the
sale of the fund's shares. Following such sales, the fund will receive the net
asset value per share and U.S. Global Brokerage will retain the applicable sales
charge, if any, subject to any reallowance obligations of U.S. Global Brokerage
in its selling agreements and/or as set forth in the Prospectus and/or herein
with respect to the fund's shares.
Pursuant to the Distribution Agreement, the annual fee for distribution and
distribution support services on behalf of the Trust is $24,000, payable $2,000
per month. The fee is allocated among the portfolios of the Trust, including the
fund, in equal amounts. In addition, the Trust is responsible for the payment of
all fees and expenses (i) in connection with the preparation, setting in type
and filing of any registration statement under the 1933 Act, and any amendments
thereto, for the issuance of the fund's shares; (ii) in connection with the
registration and qualification of the fund's shares for sale in states in which
the Board of Trustees shall determine it advisable to qualify such shares for
sale; (iii) of preparing, setting in type, printing and mailing any report or
other communication to holders of the fund's shares in their capacity as such;
and (iv) of preparing, setting in type, printing and mailing Prospectuses, SAIs,
and any supplements thereto, sent to existing holders of the fund's shares. To
the extent not covered by any Distribution Plan of the Trust pursuant to Rule
12b-1 of the 1940 Act (Distribution Plan) and/or agreements between the Trust
and investment advisers providing services to the Trust, U.S. Global Brokerage
is responsible for paying the cost of (i) printing and distributing
Prospectuses, SAIs and reports prepared for its use in connection with the
offering of the fund's shares for sale to the public; (ii) any other literature
used in connection with such offering; (iii) advertising in connection with such
offering; and (iv) any additional out-of-pocket expenses incurred in connection
with these costs. Notwithstanding the above, and subject to and calculated in
accordance with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (NASD), if during the annual period the total of (i)
the compensation payable to U.S. Global Brokerage and (ii) amounts payable under
the Distribution Plan exceeds 0.25% of the fund's average daily net assets, U.S.
Global Brokerage will rebate that portion of its fee necessary to result in the
total of (i) and (ii) above not exceeding 0.25% of the fund's average daily net
assets. The payment of compensation and reimbursement of expenditures is
authorized pursuant to the Distribution Plan and is contingent upon the
continued effectiveness of the Distribution Plan.
The Distribution Agreement continues in effect from year to year, provided
continuance is approved at least annually by either (i) the vote of a majority
of the Trustees of the Trust, or by the vote of a majority of the outstanding
voting securities of the Trust, and (ii) the vote of a majority of the Trustees
of the Trust who are not interested persons of the Trust and who are not parties
to the Distribution Agreement or interested persons of any party to the
Distribution Agreement; however, the Distribution Agreement may be terminated at
any time by vote of a majority of the Trustees of the Trust who are not
interested persons of the Trust, or by vote of a majority of the outstanding
voting securities of the Trust, on not more than sixty (60) days' written notice
by the Trust. For these purposes, the term "vote of a majority of the
outstanding voting securities" is deemed to have the meaning specified in the
1940 Act and the rules enacted thereunder.
The Transfer Agency Agreement with the Trust provides for the fund to pay United
Shareholder Services, Inc. (USSI) an annual fee of $23.00 per account (1/12 of
$23.00 monthly). In connection with obtaining and/or providing administrative
services to the beneficial owners of Trust shares through broker-dealers, banks,
trust companies and similar institutions which provide such services and
maintain an omnibus account with the Transfer Agent, the fund pays to the
Transfer Agent a monthly fee equal to one-twelfth (1/12) of 12.5 basis points
(.00125) of the value of the shares of the fund held in accounts at the
institutions (including institutions affiliated with the Transfer Agent), which
payment shall not exceed $1.92 multiplied by the average daily number of
accounts holding Trust shares at the institution. These fees, in lieu of the
annual fee of $23.00 per account, are paid to such institutions by the Transfer
Agent for their services. In addition, the fund bears certain other Transfer
Agent expenses such as the costs of record retention and postage, internet
services, and the telephone and line charges (including the toll-free 800
service) used by shareholders to contact the Transfer Agent. For the fiscal year
ended October 31, 1999, the fund paid a total of $43,224 for transfer agency
fees and expenses.
An outsider provider maintained the books and records of the Trust and of the
fund until November 17, 1996. USSI maintained the books and records of the Trust
and of each fund of the Trust from November 18, 1996 until November 1, 1997, at
which time Brown Brothers Harriman & Co. assumed such responsibility.
FUND ACCOUNTING EXPENSES
For the fiscal periods shown below, the fund paid the following amounts for
portfolio accounting services:
FEES TO OUTSIDE FEES TO BROWN
FISCAL PERIOD FEES TO USSI PROVIDER BROTHERS
------------- ------------ ---------------- -------------
Year Ended October 31, 1999 $ 0 $ 0 $42,159
Year Ended October 31, 1998 $ 0 $ 0 $42,004
July 1 Through October 31, 1997 $12,225 $ 0 $ 0
Year Ended June 30, 1997 $18,567 $16,419 $ 0
A&B Mailers, Inc., a corporation wholly owned by the Adviser, provides the Trust
with certain mail handling services. The charges for such services have been
negotiated by the Audit Committee and A&B Mailers, Inc. Each service is priced
separately. For the fiscal year ending October 31, 1999, the fund paid A&B
Mailers, Inc. $7,889 for mail handling services.
DISTRIBUTION PLAN
In 1996, the fund adopted a Distribution Plan pursuant to Rule 12b-1 of the 1940
Act (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, which 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. For the fiscal year ended October 31, 1999,
the fund paid a total of $20,971 in distribution fees. Distribution expenses
paid by the Adviser 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 Distribution Plan in the current or future periods if the 0.25%
limitation is never exceeded.
Expenses of the fund in connection with the Distribtution Plan are set forth in
the table below.
<TABLE>
<CAPTION>
ADVERTISING PROSPECTUS DISTRIBUTION COMPENSATION TO TRAVEL & PROMOTION POSTAGE &
& LITERATURE PRINTING FEES BROKER/DEALERS EXPENSES MAILING
------------ -------- ---- -------------- -------- -------
<S> <C> <C> <C> <C> <C>
$3,124 $2,019 $4,926 $5,110 $0 $1,198
</TABLE>
The amount of any unreimbursed expenses incurred under the Distribution Plan
during the fiscal year ended October 31, 1999, which will be carried over to
future years is $2,740 or 0.02% of net assets. The fund is not legally obligated
to pay any unreimbursed expenses if the Distribution Plan is terminated.
U.S. Global Brokerage, Inc., the principal underwriter for distribution of the
fund's shares, and its affiliated persons, including Frank Holmes, David J.
Clark, and Elias Suarez have a direct or indirect financial interest in the
operation of the fund's distribution Plan and related Distribution Agreement.
Expenses that 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 of Trustees, as a
whole, and the Qualified Trustees determine whether, in their reasonable
business judgment and considering their fiduciary duties, there is reasonable
likelihood that the Distribution Plan will benefit the fund and its
shareholders. The Distribution Plan may be terminated anytime by a majority vote
of the Qualified Trustees, or by a majority vote of the outstanding voting
securities of the fund.
CERTAIN PURCHASES OF SHARES OF THE FUND
The following information supplements the discussion of how to buy fund shares
as discussed in the fund's prospectus.
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 policies of the fund
and are otherwise acceptable to the Adviser, which 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 restricted in any way as to resale or be otherwise 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
New York Stock Exchange ( NYSE), or Nasdaq-American Stock Exchange
(Nasdaq-AMEX);
4. any securities so acquired by the fund will not comprise more than 5% of
the 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 (either in
writing or by telephone) a list 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 titled Net Asset Value 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
The following information supplements the discussion of how to redeem fund
shares as discussed in the fund's prospectus.
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 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 receiving a
redemption in kind would then have to pay brokerage fees in order to convert his
fund investment into cash. All redemptions in kind will be made in marketable
securities of the fund.
CALCULATION OF PERFORMANCE DATA
The performance quotations described below are based on historical earnings and
are not intended to indicate future performance.
<PAGE>
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) SUP 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 (a) all charges are deducted from the initial
$1,000 payment, (b) all dividends and distributions by the fund are reinvested
at the price stated in the prospectus on the reinvestment dates during the
period and (c) all recurring fees charged to all shareholder accounts are
included.
The annual total return for the fund follows:
CALCULATION OF PERFORMANCE DATA
The average annual total return for the fund for the periods ended October 31,
1999, are as follows:
1 Year..................................................17.24%
5 Year..................................................14.72%
Since Inception (October 21, 1991)......................10.05%
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.
EFFECT OF FEE WAIVER AND EXPENSE REIMBURSEMENT. From time to time, the Adviser
has limited expenses and without such limit the fund's returns would have been
less.
TAX STATUS
TAXATION OF THE FUND - IN GENERAL. The fund intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (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 (90% test); and (b) 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 year, (2) at
least 98% of its capital gain net income for the twelve-month period ending
October 31 of the calendar year, and (3) any portion (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 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
December 31, if the 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 before a distribution. The price of shares
purchased then includes the amount of any forthcoming distribution. Investors
purchasing the fund's shares immediately before a distribution may receive a
return of investment upon distribution that 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.
FOREIGN TAXES. Income received by the fund from sources within any countries
outside the United States in which the issuers of securities purchased by the
fund are located may be subject to withholding and other taxes imposed by such
countries.
If the fund is liable for foreign income and withholding taxes that can be
treated as income taxes under U.S. Federal income tax principles, the fund
expects to meet the requirements of the Code for "passing-through" to its
shareholders such foreign taxes paid, but there can be no assurance that the
fund will be able to do so. Under the Code, if more than 50% of the value of the
fund's total assets at the close of its taxable year consists of stocks or
securities of foreign corporations, the fund will be eligible for, and intends
to file, an election with the Internal Revenue Service to "pass-through" to the
fund's shareholders the amount of such foreign income and withholding taxes paid
by the fund. Pursuant to this election a shareholder will be required to: (1)
include in gross income (in addition to taxable dividends actually received) his
pro rata share of such foreign taxes paid by the fund; (2) treat his pro rata
share of such foreign taxes as having been paid by him; and (3) either deduct
his pro rata share of such foreign taxes in computing his taxable income or use
it as a foreign tax credit against his U.S. Federal income taxes. No deduction
for such foreign taxes may be claimed by a shareholder who does not itemize
deductions. Each shareholder will be notified within 60 days after the close of
the fund's taxable year whether the foreign taxes paid by the fund will
"pass-through" for that year and, if so, such notification will designate (a)
the shareholder's portion of the foreign taxes paid to each such country; and
(b) the portion of dividends that represents income derived from sources within
each such country.
The amount of foreign taxes for which a shareholder may claim a credit in any
year will be subject to an overall limitation which is applied separately to
"passive income," which includes, among other types of income, dividends and
interest.
The foregoing is only a general description of the foreign tax credit under
current law. Because applicability of the credit depends on the particular
circumstances of each shareholder, shareholders are advised to consult their own
tax advisors.
The foregoing discussion relates only to generally applicable federal income tax
provisions in effect as of the date of the prospectus and Statement of
Additional Information. Shareholders should consult their tax advisors about the
status of distributions from the fund in their own states and localities.
CUSTODIAN, FUND ACCOUNTANT AND ADMINISTRATOR
Beginning November 1997 Brown Brothers Harriman & Co. began serving as
custodian, fund accountant and administrator for all funds of the Trust. With
respect to the funds owning foreign securities, Brown Brothers Harriman & Co.
may hold securities outside the United States pursuant to sub-custody
arrangements separately approved by the Trust. Prior to November 1997, Bankers
Trust Company provided custody services and USSI provided fund accounting and
administrative services.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, audit and
report on the fund's annual financial statements, review certain regulatory
reports and the fund's federal income tax returns, and perform other
professional accounting, auditing, tax, and advisory services when engaged to do
so by the Trust. Prior to October 31, 1999, other accounting firms were engaged
to provide these services.
FUND COUNSEL
General Counsel to the Adviser, also serves as General Counsel to the Trust. The
Adviser is reimbursed for time spent by the Adviser's staff attorneys on matters
pertaining to the Trust. Pursuant to this arrangement, the fund reimbursed the
Adviser $4,308 during the fiscal year ended October 31, 1999.
COUNSEL TO INDEPENDENT TRUSTEES
Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street, Chicago, Illinois
60601, is counsel to the independent Trustees of the Trust.
FINANCIAL STATEMENTS
The financial statements for the fiscal year ended October 31, 1999, are hereby
incorporated by reference from the U.S. Global Accolade Funds 1999 Annual Report
to Shareholders of that date that accompanies this Statement of Additional
Information. The Trust will promptly provide a copy of the financial statements,
free of charge, upon request to: U.S. Global Investors, Inc., P.O. Box 29467,
San Antonio, Texas 78229-0467, 1-800-873-8637 or (210) 308-1234.
<PAGE>
U.S. GLOBAL ACCOLADE FUNDS
REGENT EASTERN EUROPEAN FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the current prospectus (Prospectus) dated March 1, 2000. The
financial statements for the Regent Eastern European Fund for the year ended
October 31, 1999, and the Report of Independent Auditors thereon, are
incorporated by reference from the fundss.s Annual Report dated October 31,
1999. Copies of the Prospectus and the fund's financial statements may be
requested from U.S. Global Investors, Inc. (Adviser), 7900 Callaghan Road, San
Antonio, Texas 78229, or 1-800-US-FUNDS (1-800-873-8637). In addition, copies of
the Prospectus are available online at www.usfunds.com.
The date of this Statement of Additional Information is March 1, 2000, as
amended September 1, 2000.
<PAGE>
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION..........................................................3
FUND POLICIES................................................................3
INVESTMENT STRATEGIES AND RISKS..............................................4
PORTFOLIO TURNOVER..........................................................17
PORTFOLIO TRANSACTIONS......................................................17
MANAGEMENT OF THE FUND......................................................18
PRINCIPAL HOLDERS OF SECURITIES.............................................19
INVESTMENT ADVISORY SERVICES................................................20
DISTRIBUTION, TRANSFER AGENCY AND OTHER SERVICES............................21
DISTRIBUTION PLAN...........................................................23
CERTAIN PURCHASES OF SHARES OF THE FUND.....................................23
ADDITIONAL INFORMATION ON REDEMPTIONS.......................................24
CALCULATION OF PERFORMANCE DATA.............................................25
TAX STATUS..................................................................25
CUSTODIAN, FUND ACCOUNTANT AND ADMINISTRATOR................................27
INDEPENDENT AUDITORS........................................................27
FUND COUNSEL................................................................27
COUNSEL TO INDEPENDENT TRUSTEES.............................................27
FINANCIAL STATEMENTS........................................................27
<PAGE>
GENERAL INFORMATION
U.S. Global Accolade Funds (Trust) is an open-end management investment company
and is a business trust organized April 16, 1993 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. This
Statement of Additional Information (SAI) presents important information
concerning the Regent Eastern European Fund (fund) and should be read in
conjunction with the Prospectus. The fund commenced operations on March 31,
1997.
The assets received by the Trust from the issuance 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 the fund. They constitute
the underlying assets of the fund, are required to be segregated on the books of
accounts, and are to be charged with the expenses with respect to the fund. Any
general expenses of the Trust, not readily identifiable as belonging to a
particular series of the Trust, 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 the fund, as are declared by the Board. Upon
liquidation of the Trust or the fund, shareholders of the fund are entitled to
share pro rata in the net assets belonging to the fund available for
distribution.
The Trust's master trust agreement provides that no annual or regular meeting of
shareholders is required. The Trustees serve for six-year terms. Thus, there
will ordinarily be no shareholder meetings unless otherwise required by the
Investment Company Act of 1940.
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 series, a separate vote of that series would be
required. Shareholders of any series are not entitled to vote on any matter that
does not affect their series.
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 Trustss.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.
FUND POLICIES
The following information supplements the discussion of the fund's policies
discussed in the fund's prospectus.
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 following restrictions.
Unless designated as such, none of the fund's policies are fundamental.
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 the fund's
outstanding shares present at a meeting at which more than 50% of the
outstanding shares of the fund are represented either in person or by proxy, or
(2) more than 50% of the fund's outstanding shares.
The fund may not:
1. Issue senior securities, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
2. Borrow money, except as permitted under the 1940 Act, as amended, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
3. Engage in the business of underwriting securities, except to the extent
that the fund may be deemed to be an underwriter in connection with the
disposition of portfolio securities.
4. Purchase or sell real estate, which term does not include securities
of companies which deal in real estate and/or mortgages or investments
secured by real estate, or interests therein, except that the fund reserves
freedom of action to hold and to sell real estate acquired as a result of
the fund's ownership of securities.
5. Purchase physical commodities or contracts related to physical commodities.
6. Make loans except as permitted under the 1940 Act, as amended, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
7. Concentrate its investments in a particular industry (other than
securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities), as that term is used in the 1940 Act, as
amended, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions may be changed by the Board of Trustees
without a shareholder vote.
The fund may not:
1. Purchase securities on margin or make short sales, except (i) short sales
against the box, (ii) the fund may obtain such short-term credits as are
necessary for the clearance of transactions, and (iii) provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on margin or selling
securities short.
2. Borrow money, except that a fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 33 1/3% of a fund's total assets (including the amount borrowed)
less liabilities (other than borrowings).
3. Invest more than 15% of its total net assets in illiquid securities.
4. Invest more than 5% of its total net assets in options.
INVESTMENT STRATEGIES AND RISKS
The following information supplements the discussion of the fund's investment
strategies and risks in the fund's Prospectus.
MARKET RISK. Investments in equity and debt securities are subject to inherent
market risks and fluctuations in value due to earnings, economic conditions,
quality ratings and other factors beyond the fund's control. The return and net
asset value of the fund will fluctuate.
SECURITIES LENDING. The fund may lend its portfolio securities to qualified
dealers or other institutional investors. When lending securities, the fund will
receive cash, U.S. Government obligations or irrevocable letters of credit as
collateral for the loan. The fund may invest cash collateral in repurchase
agreements, including repurchase agreements collateralized with non-governmental
securities. Under the terms of the fund's current securities lending agreement,
the fund's lending agent has guaranteed performance of the obligation of each
borrower and each counter party to each repurchase agreement in which cash
collateral is invested.
Lending portfolio securities exposes the fund to the risk that the borrower may
fail to return the loaned securities or may not be able to provide additional
collateral or that the fund may experience delays in recovery of the loaned
securities or loss of rights in the collateral if the borrower fails
financially. To minimize these risks, the borrower must agree to maintain
collateral marked to market daily, in the form of cash or high-quality
securities, with the fund's custodian in an amount at least equal to the market
value of the loaned securities. In the event of a bankruptcy or breach of
agreement by the borrower of the securities, the fund could experience delays
and costs in recovering the securities loaned.
BORROWING. The fund may have to deal with unpredictable cashflows as
shareholders purchase and redeem shares. Under adverse conditions, the fund
might have to sell portfolio securities to raise cash to pay for redemptions at
a time when investment considerations would not favor such sales. In addition,
frequent purchases and sales of portfolio securities tend to decrease fund
performance by increasing transaction expenses.
The fund may deal with unpredictable cashflows by borrowing money. Through such
borrowings the fund may avoid selling portfolio securities to raise cash to pay
for redemptions at a time when investment considerations would not favor such
sales. In addition, the fund's performance may be improved due to a decrease in
the number of portfolio transactions. After borrowing money, if subsequent
shareholder purchases do not provide sufficient cash to repay the borrowed
monies, the fund will liquidate portfolio securities in an orderly manner to
repay the borrowed monies.
To the extent that the fund borrows money prior to selling securities, the fund
would be leveraged such that the fund's net assets may appreciate or depreciate
in value more than an unleveraged portfolio of similar securities. Since
substantially all of the fund's assets will fluctuate in value and 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 that the fund earns on portfolio securities. Under adverse
conditions, the fund might be forced to sell portfolio securities to meet
interest or principal payments at a time when market conditions would not be
conducive to favorable selling prices for the securities.
TEMPORARY DEFENSIVE INVESTMENT. For temporary defensive purposes during periods
that, in the Sub-Adviser's opinion, present the fund with adverse changes in the
economic, political or securities markets, the fund may seek to protect the
capital value of its assets by temporarily investing up to 100% of its assets
in: U.S. Government securities, short-term indebtedness, money market
instruments, or other high grade cash equivalents, each denominated in U.S.
dollars or any other freely convertible currency; or repurchase agreements. When
the fund is in a defensive investment position, it may not achieve its
investment objective.
COMMERCIAL PAPER AND OTHER MONEY MARKET INSTRUMENTS. Commercial paper consists
of short-term (usually from one to two hundred-seventy days) unsecured
promissory notes issued by corporations in order to finance their current
operations. Certain notes may have floating or variable rates. Variable and
floating rate notes with a demand notice period exceeding seven days will be
subject to the fund's restriction on illiquid investments unless, in the
judgment of the Sub-Adviser, such note is liquid.
The fund may invest in short-term bank debt instruments such as certificates of
deposit, bankers' acceptances and time deposits issued by national banks and
state banks, trust companies and mutual savings banks, or by banks or
institutions the accounts of which are insured by the Federal Deposit Insurance
Corporation or the Federal Savings and Loan Insurance Corporation. The fund will
not invest in time deposits maturing in more than seven days if, as a result
thereof, more than 15% of the value of its net assets would be invested in such
securities and other illiquid securities.
<PAGE>
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, foreign exchange rates, 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 located 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.
AMERICAN DEPOSITORY RECEIPTS AND GLOBAL DEPOSITORY RECEIPTS. ADRs are depository
receipts typically issued by a U.S. bank or trust company that evidence
ownership of underlying securities issued by a foreign corporation. GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a United States corporation. Generally,
depository receipts in registered form are designed for use in the U.S.
securities market, and depository receipts in bearer form are designed for use
in securities markets outside the United States. Depository receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. In addition, the issuers of the securities
underlying unsponsored depository receipts are not obligated to disclose
material information in the United States; and, therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the depository receipts. For
purposes of the fund's investment policies, the fund's investments in depository
receipts will be deemed to be investments in the underlying securities.
EMERGING MARKETS. 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 risks listed below before making an investment in the
fund. Investing in emerging markets is considered speculative and involves the
risk of total loss. Because the fund's investments will be subject to the market
fluctuations and risks inherent in all investments, there can be no assurance
that the fund's stated objective will be realized. The fund's Adviser and
Sub-Adviser will seek to minimize these risks through professional management
and investment diversification. As with any long-term investment, the value of
shares when sold may be higher or lower than when purchased.
Risks of investing in emerging markets include:
1. the risk that the fund's assets may be exposed to nationalization,
expropriation, or confiscatory taxation;
2. thefact 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, which are inherent in the markets of more developed
nations, may lead to turmoil in the marketplace, 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
that 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 sub-custodians 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, capital gains or
withholding taxes imposed by emerging market countries 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;
18. the risk that 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 that company. Restrictive or over
regulation may therefore be a form of indirect nationalization;
19. the risk that businesses in emerging markets have only a very recent
history of operating within a market-oriented economy. In general, 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) 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 towards a more
market-oriented economy;
20. the fact that the Sub-Adviser 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-Adviser 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
21. 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.
In addition to the emerging markets risks described above, each individual
Eastern European country also necessarily involves special risks which may be
unique to that country. Following is a brief description of special risks which
may be incurred when the fund invests in the Czech Republic, Hungary, Poland,
Russia and the Slovak Republic.
THE CZECH REPUBLIC. The Prague Stock Exchange opened in April 1993 with 12
monetary institutions and five brokerage firms as its founding shareholders. The
trading and information systems are based on a central automated trading system.
The market price of securities is set in this automated system once a day,
although a number of the largest stocks on the market now trade through a
continuous system. Direct trades are concluded between members, recorded in the
automated trading system and settled through the Exchange Register of
Securities. Only members of the Prague Stock Exchange can be participants in
automated trades in blocks of securities.
Another method of trading is the over-the-counter market which operates by
directly accessing the Securities Centre. The Securities Act allows for
off-exchange trading, which primarily benefits the millions of local
shareholders who hold shares as a result of the original privatization of Czech
industry.
Concluded exchange deals are cleared by Securities Register Ltd., an offshoot of
the Prague Stock Exchange. All exchange deals between members are guaranteed
clearing; a guarantee fund covers the risks and liabilities inherent in exchange
trading.
HUNGARY. In 1995, the Hungarian government implemented a new stabilization
program that would privatize state enterprises and state owned banks.
Significant privatization in recent years include oil and gas companies, gas and
electricity distribution companies and partial privatization of
telecommunications, commercial banking and television companies. The private
sector now accounts for approximately 70% of GDP, compared with only 10% at the
end of 1990. It is unclear whether a consolidation of ownership has occurred or
will occur as a result of privatization.
Hungry submitted its application for European Union membership in March 1994
and, as a result of its having met the bulk of its obligations under the Europe
Agreement, the Commission has agreed to commence negotiations with them for
membership.
The Budapest Commodity and Stock Exchange opened in 1864 and became one of the
largest markets in Central Europe. After the Second World War, the exchange was
closed down by the Communists and reopened 42 years later in June 1990. The
Budapest Stock Exchange is a two tier market consisting of listed and traded
stocks. The over-the-counter market is not regulated and any public company's
shares can be traded on it.
POLAND. The Act establishing the Warsaw Stock Exchange (1991) provided the basic
legal framework for securities activities. The Law on Public Trading in
Securities and trust funds (1991) regulates the public offerings of securities,
the establishment of open-ended investment funds and the operations of
securities brokers. Polish equities are held on a paperless book-entry system,
based on a computerized central depository. For listed securities it is a
requirement that trades take place through the market for the change of
ownership to take place.
RUSSIA. Russia does not have a centralized stock exchange, although exchange
activity has developed regionally and shares are now traded on exchanges located
throughout the country. The majority of stocks in Russia are traded on the
over-the-counter market. It is through the over-the-counter market that foreign
investors typically participate in the Russian equity market.
The largest problem in the equity market continues to be shareholders' property
rights. In Russia, the only proof of ownership of shares is an entry in the
shareholders' register. Despite a presidential decree requiring companies with
over 1,000 shareholders to have an independent body to act as its registrar, in
practice a company's register is still susceptible to manipulation by
management. To solve this and related problems, the Federal Securities
Commission was created. Also, Russian law requires banks and market
professionals to acquire a license before handling securities.
THE SLOVAK REPUBLIC. The Bratislava Stock Exchange and the RM-system (an
over-the-counter exchange) began operations during the first half of 1993. The
RM-system trades in all companies distributed under the voucher privatization
scheme as well as newly established companies. Foreigners are free to
participate in the market for shares; profit repatriation is subject to payment
of income taxes on capital gains.
From the beginning, the Slovak Republic's markets were fragmented and have
lacked liquidity. Over 80 percent of all trades were executed outside of the
Bratislava Stock Exchange and RM-system. With the adoption of the new capital
markets legislation, more than 70 percent of all trades have been executed on
the Bratislava Stock Exchange or the RM-system. Parliament has adopted
amendments to the Securities Law which provide for the establishment of an
independent regulatory body to protect investors' rights; it centralizes trading
on the official market with the requirement that all trades be registered,
published and completed at prices posted on the Bratislava Stock Exchange, thus
promoting greater transparency. The revised law also increases the minimum
capital requirements for brokers.
WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. The fund may purchase securities on
a when-issued or delayed-delivery basis. Securities purchased on a when-issued
or delayed-delivery basis are purchased for delivery beyond the normal
settlement date at a stated price and yield. No income accrues to the purchaser
of a security on a when-issued or delayed-delivery basis prior to delivery. Such
securities are recorded as an asset and are subject to changes in value based on
changes in the general level of interest rates. Purchasing a security on a
when-issued or delayed-delivery basis can involve a risk that the market price
at the time of delivery may be lower than the agreed upon purchase price, in
which case there could be an unrealized loss at the time of delivery. The fund
will only make commitments to purchase securities on a when-issued or
delayed-delivery basis with the intention of actually acquiring the securities,
but may sell them before the settlement date if it is deemed advisable. The fund
will segregate liquid securities in an amount at least equal in value to the
fund's commitments to purchase securities on a when-issued or delayed delivery
basis. If the value of these segregated assets declines, the fund will place
additional liquid assets in the account on a daily basis so that the value of
the assets in the account is equal to the amount of such commitments.
LOWER-RATED AND UNRATED DEBT SECURITIES. The fund may invest up to 5% 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 5% 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, 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-Adviser'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-Adviser does
not rely exclusively on ratings, which in any event evaluate only the safety of
principal and interest, not market value risk, and which furthermore, 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.
RESTRICTED AND ILLIQUID SECURITIES. The fund may invest up to 15% of its total
net assets in illiquid 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 have the effect of depressing the market
price of such securities.
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 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.
REPURCHASE AGREEMENTS. The fund may invest a portion of its assets in repurchase
agreements with United States broker-dealers, banks and other financial
institutions, provided the fund's custodian always has possession of securities
serving as collateral or has evidence of book entry receipt of such securities.
In a repurchase agreement, the fund purchases securities subject to the seller's
agreement to repurchase such securities at a specified time (normally one day)
and price. The repurchase price reflects an agreed upon interest rate during the
time of investment. All repurchase agreements may be collateralized by United
States Government or government agency securities, the market values of which
equal or exceed 102% of the principal amount of the repurchase obligation. If an
institution enters an insolvency proceeding, the resulting delay in liquidation
of securities serving as collateral could cause the fund some loss if the value
of the securities declined prior to liquidation. To minimize the risk of loss,
the fund will enter into repurchase agreements only with institutions and
dealers that the Adviser (or Sub-Adviser) considers creditworthy.
GOVERNMENT AND CORPORATE DEBT. U.S. Government obligations include securities
which are issued or guaranteed by the United States Treasury, by various
agencies of the United States Government, and by various instrumentalities which
have been established or sponsored by the United States Government. U.S.
Treasury obligations are backed by the "full faith and credit" of the U.S.
Government. U.S. Treasury obligations include Treasury bills, Treasury notes and
Treasury bonds. Agencies or instrumentalities established by the United States
Government include the Federal Home Loan Bank, the Federal Land Bank, the
Government National Mortgage Association, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, and the Student Loan
Marketing Association.
Also included are the Bank for Cooperatives, the Federal Intermediate Credit
Bank, the Federal Financing Bank, the Federal Farm Credit Bank, the Federal
Agricultural Mortgage Corporation, the Resolution Funding Corporation, the
Financing Corporation of America and the Tennessee Valley Authority. Some of
these securities are supported by the full faith and credit of the United States
Government while others are supported only by the credit of the agency or
instrumentality, which may include the right of the issuer to borrow from the
United States Treasury.
QUALITY RATINGS OF CORPORATE BONDS. The ratings of Moody's Investors Service,
Inc. and Standard & Poor's Ratings Group for corporate bonds in which the fund
may invest are as follows:
Moody's Investors Service, Inc. Aaa: Bonds which are rated Aaa are judged
to be of the best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge." Interest payments are
protected by a large or an exceptionally stable margin, and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what is generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are 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 which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Standard & Poor's Ratings Group. AAA: Bonds rated AAA have the highest
rating assigned by Standard & Poor's to a debt obligation. Capacity to pay
interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay principal
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 capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in
higher rated categories.
BB and B: Bonds rated BB and B are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree
of speculation and B the higher degree of speculation. While such bonds
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
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.
DERIVATIVE SECURITIES. 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. The fund may invest in derivative securities 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.
Derivative securities 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 derivative securities will depend upon the
Sub-Adviser's ability to predict pertinent market movements, and cannot be
assured. Engaging in derivative securities will increase transaction expenses
and may result in a loss that exceeds the principal invested in the
transactions.
Derivative securities have risk associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Sub-Adviser's view as to certain market movements is incorrect, the risk that
the use of such derivative securities 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 ongoing 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 derivative securities would reduce net
asset value, and possibly income, and such losses can be greater than if the
derivative securities had not been used.
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.
FUTURES CONTRACTS. The fund may sell futures contracts to hedge against a
decline in the market price of securities it owns or to defend the portfolio
against currency fluctuations. When the fund establishes a short position by
selling a futures contract, the fund will be required to deposit with the broker
an amount of cash or U.S. Treasury bills equal to approximately 5% of the
contract amount (initial margin). The nature of initial margin in futures
transactions is different from that of margin in securities transactions in that
futures contract margin does not involve the borrowing of funds by the customer
to finance the transactions. Rather, initial margin is in the nature of a
performance bond or good faith deposit on the contract and is returned to the
fund upon termination of the futures contract assuming all the fund's
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker will be made on a daily basis as the
price of the underlying currency or stock index fluctuates making a short
position in the futures contract more or less valuable, a process known as
"marking-to-market." For example, when the fund has sold a currency futures
contract and the prices of the stocks included in the underlying currency have
fallen, that position will have increased in value and the fund will receive
from the broker a variation margin payment equal to that increase in value.
Conversely, when the fund has sold a currency futures contract and the prices of
the underlying currency have risen, the position would be less valuable and the
fund would be required to make a variation margin payment to the broker. At any
time before expiration of the futures contract, the fund may elect to close the
position by taking an opposite position, which will operate to terminate the
fund's position in the futures contract. A final determination of variation
margin is then made, additional cash is required to be paid by or released to
the fund, and it realizes a loss or a gain.
There is a risk that futures contract price movements will not correlate
perfectly with movements in the value of the underlying stock index. For a
number of reasons the price of the stock index future may move more than or less
than the price of the securities that make up the index. First, all participants
in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions that could
distort the normal relationship between the index and futures markets. Secondly,
from the point of view of speculators, the deposit requirements in the futures
market are less onerous than margin requirements in the stock market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions.
There is an additional risk that a liquid secondary trading market may not exist
at all times for these futures contracts, in which event the fund might be
unable to terminate a futures position at a desired time. Positions in stock
index futures may be closed out only on an exchange or board of trade that
provides a secondary market for such futures. Although the fund intends to
purchase futures only on exchanges or boards of trade where there appears to be
an active secondary market, there is no assurance that a liquid secondary market
on an exchange or board of trade will exist for any particular contract or at
any particular time. If there is not a liquid secondary market at a particular
time, it may not be possible to close a futures position at such time, and in
the event of adverse price movements, the fund would continue to be required to
make daily cash payments of variation margin.
OPTIONS. The fund may sell call options or purchase put options on futures
contracts to hedge against a decline in the market price of securities that it
owns or to defend the portfolio against currency fluctuations. Options on
futures contracts differ from options on individual securities in that the
exercise of an option on a futures contract does not involve delivery of an
actual underlying security. Options on futures contracts are settled in cash
only. The purchaser of an option receives a cash settlement amount and the
writer of an option is required, in return for the premium received, to make
delivery of a certain amount if the option is exercised. A position in an option
on a futures contract may be offset by either the purchaser or writer by
entering into a closing transaction, or the purchaser may terminate the option
by exercising it or allowing it to expire.
The risks associated with the purchase and sale of options on futures contracts
are generally the same as those relating to options on individual securities.
However, the value of an option on a futures contract depends primarily on
movements in the value of the currency or the stock index underlying the futures
contract rather than in the price of a single security. Accordingly, the fund
will realize a gain or loss from purchasing or writing an option on a futures
contract as a result of movements in the related currency or in the stock market
generally rather than changes in the price for a particular security. Therefore,
successful use of options on futures contracts by the fund will depend on the
Adviser's ability to predict movements in the direction of the currency or stock
market underlying the futures contract. The ability to predict these movements
requires different skills and techniques than predicting changes in the value of
individual securities.
Because index options are settled in cash, the fund cannot be assured of
covering its potential settlement obligations under call options it writes on
futures contracts by acquiring and holding the underlying securities. Unless the
fund has cash on hand that is sufficient to cover the cash settlement amount, it
would be required to sell securities owned in order to satisfy the exercise of
the option.
SEGREGATED ASSETS AND COVERED POSITIONS. When purchasing a stock index futures
contract, selling an uncovered call option, or purchasing securities on a
when-issued or delayed-delivery basis, the fund will restrict cash that may be
invested in repurchase obligations or liquid securities. When purchasing a stock
index futures contract, the amount of restricted cash or liquid securities, when
added to the amount deposited with the broker as margin, will be at least equal
to the market value of the futures contract and not less than the market price
at which the futures contract was established. When selling an uncovered call
option, the amount of restricted cash or liquid securities, when added to the
amount deposited with the broker as margin, will be at least equal to the value
of securities underlying the call option and not less than the strike price of
the call option. When purchasing securities on a when-issued or delayed-delivery
basis, the amount of restricted cash or liquid securities will be at least equal
to the fund's when-issued or delayed-delivery commitments.
The restricted cash or liquid securities will either be identified as being
restricted in the fund's accounting records or physically segregated in a
separate account at Brown Brothers Harriman & Co., the fund's custodian. 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.
Many derivative securities, such as futures contracts and options, in addition
to other requirements, require that the fund segregate with its custodian cash
or liquid securities (regardless of type) having an aggregate value, measured on
a daily basis, at least equal to the amount of the obligations requiring
segregation to the extent that the obligations are not otherwise covered through
ownership of the underlying security, financial instrument or currency. In
general, the full amount of any obligation of the fund to pay or deliver
securities or assets must be covered at all times by (1) the securities,
instruments or currency required to be delivered, or (2) subject to any
regulatory restrictions, an amount of cash or liquid securities at least equal
to the current amount of the obligation must either be identified as restricted
in the fund's accounting records or be 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 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.
The fund could cover a call option that it has sold by holding the same currency
or security (or, in the case of a stock index, a portfolio of stock
substantially replicating the movement of the index) underlying the call option.
The fund may also cover a call option by holding a separate call option of the
same security or stock index with a strike price no higher than the strike price
of the call option sold by the fund. The fund could cover a call option that it
has sold on a futures contract by entering into a long position in the same
futures contract at a price no higher than the strike price of the call option
or by owning the securities or currency underlying the futures contract. The
fund could also cover a call option that it has sold by holding a separate call
option permitting it to purchase the same futures contract at a price no higher
than the strike price of the call option sold by the fund.
FOREIGN CURRENCY TRANSACTIONS. Investments in foreign companies usually involve
use of currencies of foreign countries. The fund also may hold cash and
cash-equivalent investments in foreign currencies. The value of the fund's
assets as measured in U.S. dollars will be affected by changes in currency
exchange rates and exchange control regulations. The fund may, as appropriate
markets are developed, but is not required to, engage in currency transactions
including cash market purchases at the spot rates, forward currency contracts,
exchange listed currency futures, exchange listed and over-the-counter options
on currencies, and currency swaps for two purposes. One purpose is to settle
investment transactions. The other purpose is to try to minimize currency risks.
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. The Sub-Adviser may utilize
forward foreign currency transactions in an attempt to hedge the fund's
investments in foreign securities back to the U.S. dollar when, in the
Sub-Adviser's judgment, currency movements affecting particular investments are
likely to harm the performance of the fund. 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-Adviser attempts to minimize currency
risk through hedging activities
All currency transactions involve a cost. Although foreign exchange dealers
generally do not charge a fee, they do realize a profit based on the difference
(spread) between the prices at which they are buying and selling various
currencies. Commissions are paid on futures options and swaps transactions, and
options require the payment of a premium to the seller.
A forward contract involves a privately negotiated obligation to purchase or
sell at a price set at the time of the contract with delivery of the currency
generally required at an established future date. A futures contract is a
standardized contract for delivery of foreign currency traded on an organized
exchange that is generally settled in cash. An option gives the right to enter
into a contract. A swap is an agreement based on a nominal amount of money to
exchange the differences between currencies.
The fund will generally use spot rates or forward contracts to settle a security
transaction or handle dividend and interest collection. When the fund enters
into a contract for the purchase or sale of a security denominated in a foreign
currency or has been notified of a dividend or interest payment, it may desire
to lock in the price of the security or the amount of the payment in dollars. By
entering into a spot rate or forward contract, the fund will be able to protect
itself against a possible loss resulting from an adverse change in the
relationship between different currencies from the date the security is
purchased or sold to the date on which payment is made or received or when the
dividend or interest is actually received.
The fund may use forward or futures contracts, options, or swaps when the
investment manager believes the currency of a particular foreign country may
suffer a substantial decline against another currency. For example, it may enter
into a currency transaction to sell, for a fixed amount of dollars, the amount
of foreign currency approximating the value of some or all of the fund's
portfolio securities denominated in such foreign currency. The precise matching
of the securities transactions and the value of securities involved generally
will not be possible. The projection of short-term currency market movements is
extremely difficult and successful execution of a short-term strategy is highly
uncertain.
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.
The fund may engage in proxy hedging. Proxy hedging is often used when the
currency to which a 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 or
currencies in which some or all of the fund's portfolio securities are or are
expected to be denominated, and simultaneously buy U.S. dollars. The amount of
the contract would not exceed the value of the fund's securities denominated in
linked securities.
The fund will not enter into a currency transaction or maintain an exposure as a
result of the transaction when it would obligate the fund to deliver an amount
of foreign currency in excess of the value of the fund's portfolio securities or
other assets denominated in that currency. The fund will designate cash or
securities in an amount equal to the value of the fund's total assets committed
to consummating the transaction. If the value of the securities declines,
additional cash or securities will be designated on a daily basis so that the
value of the cash or securities will equal the amount of the fund's commitment.
On the settlement date of the currency transaction, the fund may either sell
portfolio securities and make delivery of the foreign currency or retain the
securities and terminate its contractual obligation to deliver the foreign
currency by purchasing an offsetting position. It is impossible to forecast what
the market value of portfolio securities will be on the settlement date of a
currency transaction. Accordingly, it may be necessary for the fund to buy
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the securities are less than the amount of
foreign currency the fund is obligated to deliver and a decision is made to sell
the securities and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received on
the sale of the portfolio securities if its market value exceeds the amount of
foreign currency the fund is obligated to deliver. The fund will realize gains
or losses on currency transactions.
The fund may also buy put options and write covered call options on foreign
currencies to try to minimize currency risks. The risk of buying an option is
the loss of premium. The risk of selling (writing) an option is that the
currency option will minimize the currency risk only up to the amount of the
premium, and then only if rates move in the expected direction. If this does not
occur, the option may be exercised and the fund would be required to buy the
underlying currency at the loss that may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the fund may also
be required to forego all or part of the benefits that might otherwise have been
obtained from favorable movements on exchange rates. All options written on
foreign currencies will be covered; that is, the fund will own securities
denominated in the foreign currency, hold cash equal to its obligations or have
contracts that offset the options.
The fund may construct a synthetic foreign currency investment, sometimes called
a structured note, by (a) purchasing a money market instrument that is a note
denominated in one currency, generally U.S. dollars, and (b) concurrently
entering into a forward contract to deliver a corresponding amount of that
currency in exchange for a different currency on a future date and at a
specified rate of exchange. Because the availability of a variety of highly
liquid short-term U.S. dollar market instruments, or notes, a synthetic money
market position utilizing such U.S. dollar instruments may offer greater
liquidity than direct investment in foreign currency.
CURRENCY FLUCTUATIONS - "SECTION 988" GAINS OR LOSSES. Under the Code, gains or
losses attributable to fluctuations in exchange rates which occur between the
time the fund accrues interest or other receivables, or accrues expenses or
other liabilities denominated in a foreign currency and the time the fund
actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses from the
disposition of foreign currencies or from the disposition of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the currency or security
and the date of disposition also are treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "section 988" gains or losses,
increase or decrease the amount of the fund's net investment income (which
includes, among other things, dividends, interest and net short-term capital
gains in excess of net long-term capital losses, net of expenses) available to
be distributed to its shareholders as ordinary income, rather than increasing or
decreasing the amount of the fund's net capital gain. If section 988 losses
exceed such other net investment income during a taxable year, any distributions
made by the fund could be recharacterized as a return of capital to
shareholders, rather than as an ordinary dividend, reducing each shareholder's
basis in his fund shares. To the extent that such distributions exceed such
shareholder's basis, they will be treated as a gain from the sale of shares. As
discussed below, certain gains or losses with respect to forward foreign
currency contracts, over-the-counter options or foreign currencies and certain
options graded on foreign exchanges will also be treated as section 988 gains or
losses.
Forward currency contracts and certain options entered into by the fund may
create "straddles" for U.S. Federal income tax purposes and this may affect the
character of gains or losses realized by the fund on forward currency contracts
or on the underlying securities and cause losses to be deferred. The fund may
also be required to "mark-to-market" certain positions in its portfolio (i.e.,
treat them as if they were sold at year end). This could cause the fund to
recognize income without having the cash to meet the distribution requirements.
PORTFOLIO TURNOVER
The fund's management buys and sells securities for the fund to accomplish the
fund's investment objective. 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."
PORTFOLIO TURNOVER
For the fiscal periods shown below, the fund's portfolio turnover rate was:
FISCAL PERIOD PORTFOLIO TURNOVER
--------------------------- ------------------
Year ended October 31, 1999 29%
Year ended October 31, 1998 97%
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.
PORTFOLIO TRANSACTIONS
The Sub-Adviser may use research services provided by and place agency
transactions with Regent European Securities, an affiliated broker-dealer of the
Sub-Adviser, if the commissions are fair, reasonable and comparable to
commissions charged by non-affiliated, qualified brokerage firms for similar
services. Regent European Securities was established in 1995 as a specialist
broker-dealer in the Russian securities market and has since developed into a
significant participant in the growing Russian market. For the period from March
31, 1997, commencement of operations, through October 31, 1997, the fund paid no
commissions to Regent European Securities out of total commissions of $22,365.
For the fiscal year ended October 31, 1998, the fund paid no commissions to
Regent European Securities out of total commissions of $13,661. For the fiscal
year ended October 31, 1999, the fund paid no commissions to Regent European
Securities out of total commissions of $6,432.
In executing portfolio transactions and selecting brokers or dealers, the
Adviser and the Sub-Adviser seek the best overall terms available. In assessing
the terms of a transaction, consideration may be given to various factors,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer (for a
specified transaction and on a continuing basis), the reasonableness of the
commission, if any, and the brokerage and research services provided. Under the
Advisory and Sub-Advisory agreements, the Adviser and Sub-Adviser are permitted,
in certain circumstances, to pay a higher commission than might otherwise be
paid in order to acquire brokerage and research services. The Adviser and
Sub-Adviser must determine in good faith, however, that such commission is
reasonable in relation to the value of the brokerage and research services
provided -- viewed in terms of that particular transaction or in terms of all
the accounts over which investment discretion is exercised. The advisory fee of
the Adviser would not be reduced because of its receipt of such brokerage and
research services. To the extent that any research services of value are
provided by broker dealers through or with whom the fund places portfolio
transactions, the Adviser or Sub-Adviser may be relieved of expenses which they
might otherwise bear.
During the year ended October 31, 1999, 100% of the brokerage commissions were
paid to brokers or dealers who provided research services to the Sub-Adviser.
The Adviser or Sub-Adviser execute most of the fund's transactions through a
small group of broker-dealers selected for their ability to provide brokerage
and research services. The Adviser or Sub-Adviser may occasionally purchase
securities that are not listed on a national securities exchange, but are
instead traded in the over-the-counter market. With respect to transactions
executed in the over-the-counter market, the Adviser or Sub-Adviser will usually
deal through its selected broker-dealers and pay a commission on such
transactions. The Adviser or Sub-Adviser believe that the execution and
brokerage services received justify use of broker-dealers in these
over-the-counter transactions.
MANAGEMENT OF THE FUND
The Trust's Board of Trustees manages the business affairs of the Trust. The
Trustees establish policies and review and approve contracts and their
continuance. Trustees also elect the officers and select the Trustees to serve
as executive and audit committee members. 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.
TRUST
NAME AND ADDRESS POSITION AGE PRINCIPAL OCCUPATION
---------------- -------- --- ----------------------------------------
J. Michael Belz Trustee 47 President and Chief Executive Officer of
1635 NE Loop 410 Catholic Life Insurance 1984 to present.
San Antonio, TX
78209
<PAGE>
TRUST
NAME AND ADDRESS POSITION AGE PRINCIPAL OCCUPATION
---------------- -------- --- ----------------------------------------
Richard E. Hughs Trustee 63 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, Clark R. Mandigo Trustee 56
Business consultant since 1991. From
1985 to 1991, President, 1977-1985.
Associate Dean, Stern School of
Business, New York 1250 NE Loop 410
Chief Executive Officer, and Director of
Intelogic Trace, Inc., a University, New
York City, 1970-1977. Suite 900
nationwide company which sells, leases
and maintains computers San Antonio, TX
and telecommunications systems and
equipment. Prior to 1985, 78209
President of BHP Petroleum (Americas),
Ltd., an oil and gas exploration and
development company. Director of Palmer
Wireless, Inc., Lone Star Steakhouse &
Saloon, Inc. and Physician Corporation
of America. Formerly a Director of
Datapoint Corporation. Trustee for
Pauze'/Swanson United Services Funds
from November 1993 to February 1996.
Frank E. Holmes * Trustee, 44 Chairman of the Board of Directors and
President, Chief Executive Officer of the Adviser.
Chief Since October 1989, Mr. Holmes has
Executive served and continues to serve in various
Officer positions with the Adviser, its
subsidiaries and the investment
companies it sponsors. Director of
Franc-Or Resource Corp. from November
1994 to November 1996. Director of
Adventure Capital Limited from January
1996 to July 1997 and Director of Vedron
Gold, Inc. from August 1996 to March
1997. Director of 71316 Ontario, Inc.
since April 1987 and of F. E. Holmes
Organization, Inc. since July 1978.
Director of Marleau, Lemire Inc. from
January 1995 to January 1996. Director
of United Services Canada, Inc. from
February 1995 to November 1997 and Chief
Executive Officer from February to
August 1995.
Susan B. McGee Executive 40 Executive Vice President, Corporate
Vice Secretary and General Counsel of the
President, Adviser. Since September 1992, Ms. McGee
Secretary, has served and continues to serve in
General various positions with the Adviser, its
Counsel subsidiaries, and the investment
companies it sponsors.
David J. Clark Treasurer 38 Chief Financial Officer, Chief Operating
Officer of the Adviser. Chief Financial
Officer of U.S. Global Brokerage, Inc.,
the principal underwriter. Since May
1997, Mr. Clark has served and continues
to serve in various positions with the
Adviser and the investment companies it
sponsors. Foreign Service Officer with
U.S. Agency for International
Development in the U.S. Embassy, Bonn,
West Germany from May 1992 to May 1997.
Audit Supervisor for University of Texas
Health Science Center from April 1991 to
April 1992. Auditor-in-Charge for
Texaco, Inc. from August 1987 to June
1990.
Elias Suarez Vice 38 Vice President of the Adviser. Since
President March of 1992, Mr. Suarez served and
continues to serve in various positions
with the Adviser and United Shareholder
Services, Inc.
------------------------------------
* This Trustee is an "interested person" of the Trust as defined in the
Investment Company Act of 1940.
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM U.S. GLOBAL TOTAL COMPENSATION FROM U.S. GLOBAL
NAME ACCOLADE FUNDS(1) TO BOARD MEMBERS FUND COMPLEX(2) TO BOARD MEMBERS
---- ----------------------------------- -----------------------------------
<S> <C> <C>
J. Michael Belz $19,433(3) $19,433
Frank E. Holmes $ 0 $ 0
Richard Hughs $23,100 $23,100
Clark R. Mandigo $18,100 $45,325
---------------------------
(1) Includes compensation related to three fund portfolios.
(2) Total compensation paid by the U.S. Global Fund complex for the period
ended October 31, 1999. As of this date, there were fourteen fund
portfolios in the complex. Mr. Holmes and Mr. Mandigo serve on all
fourteen funds; Mr. Belz and Dr. Hughs serve on three fund portfolios.
(3) This Trustee commenced service on November 1, 1998.
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES
As of February 14, 2000, the officers and Trustees of the fund, as a group,
owned less than 1% of the outstanding shares of the fund. The fund is aware of
the following entity and person who owned of record, or beneficially, more than
5% of the outstanding shares of the fund at February 14, 2000:
NAME & ADDRESS OF OWNER % OWNED TYPE OF OWNERSHIP
---------------------------- ------- -----------------
Charles Schwab & Co. 15% Record(1)
101 Montgomery Street
San Francisco, CA 94104-4122
John A. Swanson 7% Beneficial
113 Waters Edge Lane
Moneta, VA 24121-2938
(1) Charles Schwab, broker-dealer, had advised that no
individual client owns more than 5% of the fund.
INVESTMENT ADVISORY SERVICES
The fund's investment adviser is U. S. Global Investors, Inc., a Texas
corporation, pursuant to an advisory agreement dated September 21, 1994, as
amended from time to time. Frank E. Holmes, Chief Executive Officer and a
Director of the Adviser, 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 Adviser and may be deemed to be a controlling person of the
Adviser.
In addition to the services described in the fund's Prospectus, the Adviser 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
Adviser or its affiliates, except that the Trust will reimburse the Adviser for
part of the compensation of the Adviser'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.
MANAGEMENT FEES
For the fiscal periods shown below, the fund paid the Adviser the following
advisory fees (net of expenses paid by the Adviser or voluntary fee
reimbursements):
FISCAL PERIOD MANAGEMENT FEE FEES WAIVED
------------- -------------- -----------
Year ended October 31, 1999 $72,549 $ 0
Year ended October 31, 1998 $69,575 $30,985
Period from March 31 through October 31, 1997* $ 0 $30,239
* March 31, 1997 is commencement of operations
The Trust and the Adviser, in connection with the fund, have entered into a
sub-advisory agreement with another firm as discussed in the Prospectus. The
Adviser pays the Sub-Adviser a sub-advisory fee equal to one-half of the one and
one quarter percent (1.25%) annual management fee paid by the fund. The fund
will not be responsible for the Sub-Adviser's fee.
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,
and 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 Adviser,
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 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 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 was approved 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 the fund, as
long as it is approved at least annually both (i) by a vote of a majority of the
outstanding voting securities of the fund as defined in the Investment Company
Act of 1940 (Act) or by the Board of Trustees of the Trust, and (ii) by 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.
In addition to advising client accounts, the Adviser and Sub-Adviser invest in
securities for their own accounts. The Adviser and Sub-Adviser have adopted
policies and procedures intended to minimize or avoid potential conflicts with
their clients when trading for their own accounts. The investment objectives and
strategies of the Adviser and Sub-Adviser are different from those of their
clients, emphasizing venture capital investing, private placement arbitrage and
speculative short-term trading. The Adviser 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 Adviser invests in start-up companies in the natural resources or technology
fields.
DISTRIBUTION, TRANSFER AGENCY AND OTHER SERVICES
U.S. Global Brokerage, Inc., 7900 Callaghan Road, San Antonio, Texas 78229, a
subsidiary of the Adviser (U.S. Global Brokerage), is the principal underwriter
and exclusive agent for distribution of the fund's shares. U.S. Global Brokerage
is obligated to use all reasonable efforts, consistent with its other business,
to secure purchasers for the fund's shares, which are offered on a continuous
basis.
Beginning September 3, 1998, U.S. Global Brokerage commenced marketing the fund
and distributing the fund's shares pursuant to a Distribution Agreement between
the Trust and U.S. Global Brokerage ( Distribution Agreement). Under the
Distribution Agreement, U.S. Global Brokerage may enter into agreements with
selling brokers, financial planners and other financial representatives for the
sale of the fund's shares. Following such sales, the fund will receive the net
asset value per share and U.S. Global Brokerage will retain the applicable sales
charge, if any, subject to any reallowance obligations of U.S. Global Brokerage
in its selling agreements and/or as set forth in the Prospectus and/or herein
with respect to the fund's shares.
Pursuant to the Distribution Agreement, the annual fee for distribution and
distribution support services on behalf of the Trust is $24,000, payable $2,000
per month. The fee is allocated among the portfolios of the Trust, including the
fund, in equal amounts. In addition, the Trust is responsible for the payment of
all fees and expenses (i) in connection with the preparation, setting in type
and filing of any registration statement under the 1933 Act, and any amendments
thereto, for the issuance of the fund's shares; (ii) in connection with the
registration and qualification of the fund's shares for sale in states in which
the Board of Trustees shall determine it advisable to qualify such shares for
sale; (iii) of preparing, setting in type, printing and mailing any report or
other communication to holders of the fund's shares in their capacity as such;
and (iv) of preparing, setting in type, printing and mailing Prospectuses, SAIs,
and any supplements thereto, sent to existing holders of the fund's shares. To
the extent not covered by any Distribution Plan of the Trust pursuant to Rule
12b-1 of the 1940 Act (Distribution Plan) and/or agreements between the Trust
and investment advisers providing services to the Trust, U.S. Global Brokerage
is responsible for paying the cost of (i) printing and distributing
Prospectuses, SAIs and reports prepared for its use in connection with the
offering of the fund's shares for sale to the public; (ii) any other literature
used in connection with such offering; (iii) advertising in connection with such
offering; and (iv) any additional out-of-pocket expenses incurred in connection
with these costs. Notwithstanding the above, and subject to and calculated in
accordance with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (NASD), if during the annual period the total of (i)
the compensation payable to U.S. Global Brokerage and (ii) amounts payable under
the Distribution Plan exceeds 0.25% of the fund's average daily net assets, U.S.
Global Brokerage will rebate that portion of its fee necessary to result in the
total of (i) and (ii) above not exceeding 0.25% of the fund's average daily net
assets. The payment of compensation and reimbursement of expenditures is
authorized pursuant to the Distribution Plan and is contingent upon the
continued effectiveness of the Distribution Plan.
The Distribution Agreement continues in effect from year to year, provided
continuance is approved at least annually by either (i) the vote of a majority
of the Trustees of the Trust, or by the vote of a majority of the outstanding
voting securities of the Trust, and (ii) the vote of a majority of the Trustees
of the Trust who are not interested persons of the Trust and who are not parties
to the Distribution Agreement or interested persons of any party to the
Distribution Agreement; however, the Distribution Agreement may be terminated at
any time by vote of a majority of the Trustees of the Trust who are not
interested persons of the Trust, or by vote of a majority of the outstanding
voting securities of the Trust, on not more than sixty (60) days' written notice
by the Trust. For these purposes, the term "vote of a majority of the
outstanding voting securities" is deemed to have the meaning specified in the
1940 Act and the rules enacted thereunder.
The Transfer Agency Agreement with the Trust provides for the fund to pay United
Shareholder Services, Inc. (USSI) an annual fee of $23.00 per account (1/12 of
$23.00 monthly). In connection with obtaining and/or providing administrative
services to the beneficial owners of Trust shares through broker-dealers, banks,
trust companies and similar institutions which provide such services and
maintain an omnibus account with the Transfer Agent, the fund pays to the
Transfer Agent a monthly fee equal to one-twelfth (1/12) of 12.5 basis points
(.00125) of the value of the shares of the fund held in accounts at the
institutions (including institutions affiliated with the Transfer Agent), which
payment shall not exceed $1.92 multiplied by the average daily number of
accounts holding Trust shares at the institution. These fees, in lieu of the
annual fee of $23.00 per account, are paid to such institutions by the Transfer
Agent for their services. In addition, the fund bears certain other Transfer
Agent expenses such as the costs of record retention and postage, internet
services, and the telephone and line charges (including the toll-free 800
service) used by shareholders to contact the Transfer Agent. For the fiscal year
ended October 31, 1999, the fund paid a total of $30,212 for transfer agency
fees and expenses.
USSI maintained the books and records of the Trust and of each fund of the Trust
until November 1, 1997, at which time Brown Brothers Harriman & Co. assumed such
responsibility.
For the fiscal periods shown below, the fund paid the following amounts for
portfolio accounting services (net of expenses paid by the Adviser or voluntary
fee reimbursements):
FEES TO
FISCAL PERIOD FEES TO USSI FEES WAIVED BROWN BROTHERS
---------------------------- ------------ ----------- --------------
Year ended October 31, 1999 $ 0 $ 0 $35,562
Year ended October 31, 1998 $ 0 $ 0 $53,754
Period from March 31 through
October 31, 1997* $23,748 $2,654 $ 0
* March 31, 1997 is commencement of operations
A & B Mailers, Inc., a corporation wholly owned by the Adviser, 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. For the fiscal year ended October 31, 1999, the
fund paid A&B Mailers, Inc. $4,540 for mail handling services.
DISTRIBUTION PLAN
The fund has adopted a Distribution Plan pursuant to Rule 12b-1 of the 1940 Act
(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 on an annual basis. For the period ended October 31,
1999, the fund paid a total of $13,270 in distribution fees. The majority of
these fees were used to pay for printing and mailing of prospectuses.
Distribution expenses paid by the Adviser 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 Distribution Plan in the current
or future periods, so long as the 0.25% limitation is never exceeded.
Expenses of the fund in connection with the Rule Distribution Plan are set forth
in the table below.
<TABLE>
<CAPTION>
ADVERTISING PROSPECTUS DISTRIBUTION COMPENSATION TO TRAVEL & PROMOTION POSTAGE &
& LITERATURE PRINTING FEES BROKER/DEALERS EXPENSES MAILING
------------ -------- ---- -------------- -------- -------
<S> <C> <C> <C> <C> <C>
$4,187 $2,423 $3,205 $6,927 $5,920 $1,000
</TABLE>
The amount of any unreimbursed expenses incurred under the Distribution Plan
during the fiscal year ended October 31, 1999, which will be carried over to
future years is $220,949 or 4.24% of net assets. The fund is not legally
obligated to pay any reimbursed expenses if the Distribution Plan is terminated
or not renewed. U.S. Global Brokerage, Inc., the principal underwriter for
distribution of the fund's shares, and its affiliated persons, including Frank
Holmes, David J. Clark, and Elias Suarez have a direct or indirect financial
interest in the operation of the fund's distribution Plan and related
Distribution Agreement.
Expenses that 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 of Trustees, as a
whole, and the Qualified Trustees determine whether, in their reasonable
business judgment and considering their fiduciary duties 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 a majority vote of the outstanding
voting securities of the fund.
CERTAIN PURCHASES OF SHARES OF THE FUND
The following information supplements the discussion of how to buy fund shares
as discussed in the fund's prospectus.
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 policies of the fund
and are otherwise acceptable to the Adviser, which 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
NYSE, or Nasdaq-AMEX;
4. any securities so acquired by the fund shall not comprise over 5% of the
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 titled Net Asset Value 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 costs
or 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
The following information supplements the discussion of how to redeem fund
shares as discussed in the fund's prospectus.
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,
that 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 receiving a
redemption in kind would then have to pay brokerage fees in order to convert his
fund investment into cash. All redemptions in kind will be made in marketable
securities of the fund.
CALCULATION OF PERFORMANCE DATA
The performance quotations described below are based on historical earnings and
are not intended to indicate future performance.
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) SUP 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.
<PAGE>
CALCULATION OF PERFORMANCE DATA
The average annual total return for the fund for the periods ended October 31,
1999, are as follows:
1 Year..................................................29.70%
Since Inception (March 31, 1997).........................3.12%
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.
EFFECT OF FEE WAIVER AND EXPENSE REIMBURSEMENT. From time to time, the Adviser
has limited expenses and without such limit the fund's returns would have been
less.
TAX STATUS
TAXATION OF THE FUND - IN GENERAL. The fund intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (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 (90% test); (b) satisfy certain diversification requirements at the
close of each quarter of the fund's taxable year; and (c) distribute at least
90% of its net investment income and net short-term taxable gains for the fiscal
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 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 portion (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 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 the 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 before a distribution. The price of such shares
purchased then includes the amount of any forthcoming distribution. Investors
purchasing the fund's shares immediately before a distribution may receive a
return of investment upon distribution that 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.
FOREIGN TAXES. Income received by the fund from sources within any countries
outside the United States in which the issuers of securities purchased by the
fund are located may be subject to withholding and other taxes imposed by such
countries.
If the fund is liable for foreign income and withholding taxes that can be
treated as income taxes under U.S. Federal income tax principles, the fund
expects to meet the requirements of the Code for "passing-through" to its
shareholders such foreign taxes paid, but there can be no assurance that the
fund will be able to do so. Under the Code, if more than 50% of the value of the
fund's total assets at the close of its taxable year consists of stocks or
securities of foreign corporations, the fund will be eligible for, and intends
to file, an election with the Internal Revenue Service to "pass-through" to the
fund's shareholders the amount of such foreign income and withholding taxes paid
by the fund. Pursuant to this election a shareholder will be required to: (1)
include in gross income (in addition to taxable dividends actually received) his
pro rata share of such foreign taxes paid by the fund; (2) treat his pro rata
share of such foreign taxes as having been paid by him; and (3) either deduct
his pro rata share of such foreign taxes in computing his taxable income or use
it as a foreign tax credit against his U.S. Federal income taxes. No deduction
for such foreign taxes may be claimed by a shareholder who does not itemize
deductions. Each shareholder will be notified within 60 days after the close of
the fund's taxable year whether the foreign taxes paid by the fund will
"pass-through" for that year and, if so, such notification will designate (a)
the shareholder's portion of the foreign taxes paid to each such country; and
(b) the portion of dividends that represents income derived from sources within
each such country.
The amount of foreign taxes for which a shareholder may claim a credit in any
year will be subject to an overall limitation which is applied separately to
"passive income," which includes, among other types of income, dividends and
interest.
The foregoing is only a general description of the foreign tax credit under
current law. Because applicability of the credit depends on the particular
circumstances of each shareholder, shareholders are advised to consult their own
tax advisors.
The foregoing discussion relates only to generally applicable federal income tax
provisions in effect as of the date of the prospectus and Statement of
Additional Information. Shareholders should consult their tax advisors about the
status of distributions from the fund in their own states and localities.
CUSTODIAN, FUND ACCOUNTANT AND ADMINISTRATOR
Beginning November 1997 Brown Brothers Harriman & Co. began serving as
custodian, fund accountant and administrator for all funds of the Trust. With
respect to the funds owning foreign securities, Brown Brothers Harriman & Co.
may hold securities outside the United States pursuant to sub-custody
arrangements separately approved by the Trust. Prior to November 1997, Bankers
Trust Company provided custody services and USSI provided fund accounting and
administrative services.
<PAGE>
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, audit and
report on the fund's annual financial statements, review certain regulatory
reports and the fund's federal income tax returns, and perform other
professional accounting, auditing, tax, and advisory services when engaged to do
so by the Trust. Prior to October 31, 1999, another accounting firm was engaged
to provide these services.
FUND COUNSEL
General Counsel to the Adviser, also serves as General Counsel to the Trust. The
Adviser is reimbursed for time spent by the Adviser's staff attorneys on matters
pertaining to the Trust. Pursuant to this arrangement, the fund reimbursed the
Adviser $2,506 during the fiscal year ended October 31, 1999.
COUNSEL TO INDEPENDENT TRUSTEES
Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street, Chicago, Illinois
60601, is counsel to the independent Trustees of the Trust.
FINANCIAL STATEMENTS
The financial statements for the fiscal year ended October 31, 1999 are hereby
incorporated by reference from the U.S. Global Accolade Funds 1999 Annual Report
to Shareholders of that date that accompanies this Statement of Additional
Information. The Trust will promptly provide a copy of the financial statements,
free of charge, upon request to: U.S. Global Investors, Inc., P.O. Box 29467,
San Antonio, Texas 78229-0467, 1-800-873-8637 or (210) 308-1234.
