As filed with the Securities and Exchange Commission
on February 28, 1997
Securities Act File No. 33-98102
Investment Company Act File No. 811-1743
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 x
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Post-Effective Amendment No. 2 x
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and/or
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 x
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Amendment No. 15 x
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(Check appropriate box or boxes)
SPECTRA FUND
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(Exact Name of Registrant as Specified in Charter)
75 MAIDEN LANE
NEW YORK, NEW YORK 10038
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 212-806-8800
MR. GREGORY S. DUCH
FRED ALGER MANAGEMENT, INC.
75 MAIDEN LANE
NEW YORK, NY 10038
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(Name and Address of Agent for Service)
<PAGE>
It is proposed that this filing will become effective (check appropriate box):
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x immediately upon filing pursuant to paragraph (b), or
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on May 1, 1996 pursuant to paragraph (b), or
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60 days after filing pursuant to paragraph (a), or
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on (date) pursuant to paragraph (a) or Rule 485
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DECLARATION PURSUANT TO RULE 24f-2
Registrant has registered an indefinite number or amount of securities
under the Securities Act of 1933, as amended, pursuant to Securities (a)(1) of
Rule 24f-2 under the Investment Company Act of 1940, as amended. The Rule 24f-2
Notice for Registrant's fiscal year ended October 31, 1996 was filed on December
20, 1996.
SPECTRA FUND
FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
PART A
ITEM NO. PROSPECTUS HEADING
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<S> <C> <C>
1. Cover Page............................................ Front Cover Page
2. Synopsis ............................................. Expenses
3. Condensed Financial Information ...................... Financial Highlights
4. General Description of Registrant .................... Front Cover Page; Investment Objective
and Policies; Investment Practices;
Management of the Fund
5. Management of the Fund ............................... Management of the Fund
5a. Management's Discussion of Fund Perfor-
mance ................................................ Management's Discussion of
Performance
6. Capital Stock and Other Securities ................... Front Cover Page; Management of the
Fund; Dividends and Taxes
7. Purchase of Securities Being Offered ................. How to Buy Shares; Net Asset Value
8. Redemption or Repurchase ............................. How to Sell Shares; How to Exchange
Shares
9. Pending Legal Proceedings ............................ Not Applicable
PART B HEADING IN STATEMENT OF
ITEM NO. ADDITIONAL INFORMATION
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10. Cover Page ........................................... Front Cover Page
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
11. Table of Contents .................................... Contents
12. General Information and History ...................... Not Applicable
13. Investment Objective and Policies .................... Investment Objective and Policies;
Appendix
14. Management of the Fund ............................... Management
15. Control Persons and Principal Holders of
Securities ......................................... Certain Shareholders
16. Investment Advisory and Other Services ............... Management; Custodian and Transfer
Agent; Purchases; See in the Prospectus
"Management of the Fund"
17. Brokerage Allocation and Other Practices ............. Investment Objective and Policies
18. Capital Stock and Other Securities ................... Organization; See in the Prospectus "Div-
idends and Taxes" and "Management of
the Fund"
19. Purchase, Redemption and Pricing of Secu-
rities Being Offered ................................. Net Asset Value; Purchases; Redemp-
tions
20. Tax Status ........................................... Taxes; See in the Prospectus "Taxes"
21. Underwriters ......................................... Purchases
22. Calculation of Performance Data ...................... Determination of Performance; See
in the Prospectus "Performance"
23. Financial Statements ................................. Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
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SPECTRA|75 Maiden Lane
FUND|New York, New York 10038
|(800) 711-6141
Spectra Fund (the "Fund") is a non-diversified mutual fund with the investment
objective of capital appreciation. It seeks to achieve this objective by
investing primarily in common stocks. There is no sales charge on purchases of
Fund shares.
This Prospectus, which should be retained for future reference, contains
important information that you should know before investing. A Statement of
Additional Information dated February 28, 1997 containing further information
about the Fund has been filed with the Securities and Exchange Commission and is
incorporated by reference into this Prospectus. It is available at no charge by
contacting the Fund at the address or phone number above.
TABLE OF CONTENTS
Page
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Expenses........................................................ ii
Financial Highlights............................................ iii
Investment Objective and Policies............................... 1
Risk Factors and Investment Practices........................... 1
How to Buy Shares............................................... 4
Special Investor Services....................................... 5
How to Sell Shares.............................................. 5
Management of the Fund.......................................... 6
Net Asset Value................................................. 7
Dividends and Taxes............................................. 8
Performance..................................................... 8
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by any bank, and the shares are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
February 28, 1997
<PAGE>
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EXPENSES
The Table below is designed to assist you in understanding the direct and
indirect costs and expenses that you will bear as a shareholder. The Example
below shows the amount of expenses you would pay on a $1,000 investment in the
Fund. These amounts assume the reinvestment of all dividends and distributions,
and payment by the Fund of operating expenses as shown in the Table under Total
Fund Expenses. The Example is an illustration only and actual expenses may be
greater or less than those shown.
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases............................. None
Maximum Sales Load Imposed on Reinvested Dividends.................. None
Redemption Fees..................................................... None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees..................................................... 1.50%
Other Expenses ..................................................... 1.74%
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Total Fund Expenses ................................................ 3.24%*
=====
Example
You would pay the following expenses
on a $1,000 investment, assuming
(1) 5% annual return and
(2) redemption at the end of each time period:
One Year........................................................... $ 33
Three Years........................................................ 100
Five Years......................................................... 169
Ten Years.......................................................... 354
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* Based on expenses incurred for the year ended October 31, 1996; restated to
reflect the discontinuance of statutory expense reimbursement requirements.
Actual Total Fund Expenses are not expected to exceed 2.50%
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i
<PAGE>
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FINANCIAL HIGHLIGHTS
During the period July 1, 1975 to August 22, 1978, the Fund was an open-end
investment company. From August 23, 1978 through February 11, 1996 the Fund was
a closed-end investment company organized as a Massachusetts corporation. Since
February 12, 1996, the Fund has been an open-end investment company organized as
a Massachusetts business trust. The Financial Highlights for the fiscal periods
ended June 30, 1991 through October 31, 1996 have been audited by Arthur
Andersen LLP, the Fund's independent public accountants. This information should
be read in conjunction with the financial statements of the Fund contained in
its Annual Report. These financial statements are incorporated by reference into
the Statement of Additional Information. An Annual Report of the Fund is
available by contacting the Fund at (800) 711-6141. The Financial Highlights,
with the exception of the total return information, for the periods prior to
1991 have been audited by other independent accountants, who have expressed an
unqualified opinion thereon.
SPECTRA FUND
Financial Highlights
For a share outstanding throughout the period
<TABLE>
<CAPTION>
Four
Year Year Months
Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Year Ended June 30,
---------- ---------- --------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994(i) 1994 1993 1992 1991
----- ----- ----- ---- ---- ---- ----
Net asset value, beginning of year........ $20.93 $18.82 $17.12 $19.02 $17.93 $19.50 $18.72
----- ----- ----- ----- ----- ----- -----
Net investment income (loss).............. (0.23)(ii) (0.53) (0.10) (0.28) (0.29) (0.22) (0.15)
Net realized and unrealized gain (loss)
on investments......................... 1.22 7.24 1.80 2.66 3.70 1.65 2.25
----- ----- ----- ----- ----- ----- -----
Total from investment operations.......... 0.99 6.71 1.70 2.38 3.41 1.43 2.10
Dividends from net investment
income................................. -- -- -- -- -- -- --
Distributions from net realized gains..... (8.31) (4.60) -- (4.28) (2.32) (3.00) (1.32)
----- ----- ----- ----- ----- ----- -----
Total Distributions....................... (8.31) (4.60) -- (4.28) (2.32) (3.00) (1.32)
----- ----- ----- ----- ----- ----- -----
Net asset value, end of year.............. $13.61 $20.93 $18.82 $17.12 $19.02 $17.93 $19.50
===== ===== ===== ===== ===== ===== =====
Total return(iii) ........................ 12.68% 57.72% 9.93% 17.53% 23.66% 11.65% 15.63%
===== ===== ===== ===== ===== ===== =====
Ratios and Supplemental Data:
Net assets, end of year
(000's omitted)....................... $11,485 $5,374 $4,832 $4,394 $4,884 $4,603 $5,006
====== ====== ====== ====== ====== ====== ======
Ratio of expenses to average net
assets (iv).......................... 2.55%(v) 3.76% 2.75% 2.59% 2.57% 2.14% 2.74%
====== ====== ====== ====== ====== ====== ======
Ratio of net investment income (loss)
to average net assets................ (1.69)% (3.05)% (1.72)% (1.47)% (1.55)% (1.07)% (0.85)%
====== ====== ===== ====== ====== ===== =====
Portfolio Turnover Rate................. 197.04% 207.25% 56.24% 116.61% 100.17% 63.54% 78.00%
====== ====== ===== ====== ====== ===== =====
Average Commission Rate Paid............ $.0661
======
</TABLE>
Year Ended June 30,
--------------------------------
1990 1989 1988
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Net asset value, beginning of year........ $15.12 $13.73 $23.45
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Net investment income (loss).............. (0.13) (0.19) (0.19)
Net realized and unrealized gain (loss)
on investments......................... 3.83 1.66 (2.34)
----- ----- -----
Total from investment operations.......... 3.70 1.47 (2.53)
Dividends from net investment
income................................. -- -- --
Distributions from net realized gains..... (0.10) (0.08) (7.19)
----- ----- -----
Total Distributions....................... (0.10) (0.08) (7.19)
----- ----- -----
Net asset value, end of year.............. $18.72 $15.12 $13.73
===== ===== ======
Total return(iii) ........................ 24.76% 10.96% (1.36)%
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Ratios and Supplemental Data:
Net assets, end of year
(000's omitted)....................... $4,805 $3,881 $3,525
====== ====== ======
Ratio of expenses to average net
assets............................... 3.01%(v) 4.09%(v) 3.05%(v)
====== ====== ======
Decrease reflected in above expense
ratio due to expense
reimbursements.......................
Ratio of net investment income (loss)
to average net assets................ (0.76)% (1.35)% (1.07)%
====== ====== ======
Portfolio turnover rate................. 81.70% 139.94% 139.59%
====== ====== ======
Average Commission Rate Paid............
(i)Ratios have been annualized; total return has not been annualized.
(ii)Amount was computed based on average shares outstanding during the year.
(iii)Dividends and distributions paid when the Fund operated as a closed-end
fund (i.e. prior to February 12, 1996) have been reflected as being
reinvested at market value.
(iv)Reflects total expenses, including fees offset by earnings credits. The
expense ratios net of earnings credits would have been 2.52% and 3.69% for
the years ended October 31, 1996 and 1995, respectively. Expense ratios for
the periods ended prior to October 31, 1995, do not reflect the effect
of fees offset by earnings credits, if any.
(v)Amount has been reduced by 0.69% due to expense reimbursements.
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ii
<PAGE>
<TABLE>
<CAPTION>
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1986 1985 1984 1983 1982 1981 1980 1979 1978
----- ---- ---- ---- ---- ---- ---- ---- ---- ----
$27.28 $20.43 $16.91 $22.86 $11.80 $14.39 $ 9.17 $ 7.23 $ 5.98 $ 4.87
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(0.04) 0.01 (0.05) (0.04) (0.14) (0.02) (0.12) (0.14) (0.11) (0.02)
2.09 8.87 4.40 (4.35) 11.20 (2.57) 5.34 2.08 1.36 1.14
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
2.05 8.88 4.35 (4.39) 11.06 (2.59) 5.22 1.94 1.25 1.12
-- -- -- -- -- -- -- -- -- (0.01)
(5.88) (2.03) (0.83) (1.56) -- -- -- -- -- --
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
(5.88) (2.03) (0.83) (1.56) -- -- -- -- -- (0.01)
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
$23.45 $27.28 $20.43 $16.91 $22.86 $11.80 $14.39 $ 9.17 $ 7.23 $ 5.98
===== ====== ====== ====== ====== ====== ====== ====== ====== ======
11.88% 49.02% 27.08% (19.03)% 93.73% (18.00)% 56.92% 26.83% 20.90% 22.94%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
$6,021 $7,003 $5,244 $4,340 $5,870 $3,028 $3,694 $2,355 $1,857 $2,077
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
2.39% 2.25% 2.70% 2.73% 2.47% 3.10% 2.59% 4.19% 3.92% 2.64%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
(0.19)% 0.07% (0.27)% (0.23)% (0.82)% (0.19)% (0.90)% (1.66)% (1.65)% (0.48)%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
127.30% 122% 106% 84% 94% 85% 94% 133% 162% 142%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
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1977 1976
---- ----
$ 4.99 $ 4.14
- ------ ------
0.00 0.01
(0.11) 0.88
- ------
(0.11) 0.89
(0.01) (0.04)
-- --
- ------ ------
(0.01) (0.04)
- ------ ------
$ 4.87 $ 4.99
====== ======
(2.14)% 21.84%
====== ======
$1,910 $2,248
====== ======
1.57% 1.84%
====== ======
0.15% 0.26%
====== ======
124% 167%
====== ======
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iii
<PAGE>
INVESTMENT OBJECTIVE
AND POLICIES
The Fund's investment objective and the restrictions summarized in the next
paragraph are fundamental which means that they may not be changed without
shareholder approval. Except where otherwise indicated, all other investment
policies and practices described below and elsewhere in this Prospectus are not
fundamental, so the Fund's Board of Trustees may change them without shareholder
approval. There is no guarantee that the Fund's objective will be achieved.
As a matter of fundamental policy, the Fund will not: (1) invest more than
25% of its total assets in any one industry; (2) borrow money or pledge its
assets, except that the Fund may borrow from banks so long as it maintains asset
coverage of at least 300% with respect to all borrowings and may pledge its
assets in connection with permissible borrowings or investments; (3) invest more
than 5% of its total assets in securities of issuers (other than U.S. government
securities) that have been in continuous operation for less than three years; or
(4) make loans to others, except through purchasing qualified debt obligations,
lending its securities or entering into repurchase agreements. The Statement of
Additional Information contains additional investment restrictions as well as
additional information on the Fund's investment practices.
The investment objective of the Fund is capital appreciation. The Fund seeks
to achieve its objective primarily by investing in equity securities, such as
common or preferred stocks, or securities convertible into or exchangeable for
equity securities, including warrants and rights. The Fund will invest
principally in companies whose securities are traded on domestic stock exchanges
or in the over-the-counter market. Investing in equity securities involves
inherent risks since the Fund's price per share generally fluctuates with
changes in stock market prices. Many factors affect stock prices including
economic and financial trends and expectations about business activity and, as a
result, there can be a wide variability of returns on stocks in any one year.
The companies in which the Fund will invest may still be in the
developmental stage, may be older companies that appear to be entering a new
stage of growth progress owing to factors such as management changes or
development of new technology, products or markets or may be companies providing
products or services with a high unit volume growth rate. Investing in smaller,
newer issuers generally involves greater risk than investing in larger, more
established issuers. Such companies may have limited product lines, markets or
financial resources and may lack management depth. Their securities may have
limited marketability and may be subject to more abrupt or erratic market
movements than securities of larger, more established companies or the market
averages in general.
In order to afford the Fund the flexibility to take advantage of new
opportunities for investments in accordance with its investment objective or to
meet redemptions, it may, under normal circumstances, hold up to 15% of its
total assets in money market instruments and repurchase agreements. When
management's analysis of economic and technical market factors suggests that
common stock prices will decline sufficiently that a temporary defensive
position is deemed advisable, the Fund may invest in high-grade senior
securities or U.S. Government securities or retain cash or cash equivalents, all
without limitation.
The Fund may purchase put and call options and sell (write) covered put and
covered call options on securities and securities indexes to increase gain and
to hedge against the risk of unfavorable price movements, and may enter into
futures contracts on securities indexes and purchase and sell call and put
options on these futures contracts.
RISK FACTORS AND
INVESTMENT PRACTICES
The Fund may use the investment strategies and invest in the types of
securities described below, which may involve certain risks. The Statement of
Additional Information contains more detailed information about these practices
and information about other investment practices of the Fund.
1
<PAGE>
REPURCHASE AGREEMENTS
In a repurchase agreement, the Fund buys a security at one price and
simultaneously agrees to sell it back at a higher price. In the event of a
bankruptcy or default of the other party to the repurchase agreement, the Fund
could experience costs and delays in liquidating the underlying security, which
is held as collateral, and the Fund might incur a loss if the value of the
collateral held declines during this period.
ILLIQUID AND RESTRICTED SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
securities, including restricted securities that have not been determined to be
liquid. An investment may be illiquid because of the absence of an active
trading market, making it difficult to sell promptly at an acceptable price. A
restricted security is one that has a contractual restriction on its resale or
which cannot be sold publicly until it is registered under the Securities Act of
1933. The Fund may purchase securities eligible for resale under Rule 144A of
the Securities Act of 1933. This rule permits otherwise restricted securities to
be sold to certain institutional buyers. Under the policies and procedures
established by the Fund's Board of Trustees, the Fund's investment manager, Fred
Alger Management, Inc. ("Alger Management") determines the liquidity of the
Fund's Rule 144A investments.
LENDING OF PORTFOLIO SECURITIES
In order to generate income and to offset expenses, the Fund may lend
portfolio securities with a value up to 33 1/3% of the Fund's total assets to
brokers, dealers and other financial organizations. Any such loan will be
continuously secured by collateral at least equal to the value of the securities
loaned. Such lending could result in delays in receiving additional collateral
or in the recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially.
FOREIGN SECURITIES
The Fund may invest up to 20% of its total assets in foreign securities.
Investing in securities of foreign companies and foreign governments, which
generally are denominated in foreign currencies, may involve certain risk and
opportunity considerations not typically associated with investing in domestic
companies and could cause the Fund to be affected favorably or unfavorably by
changes in currency exchange rates and revaluations of currencies. Dividends
paid by foreign issuers may be subject to withholding and other foreign taxes
that may decrease the net return on these investments as compared to dividends
paid to the Fund by domestic corporations. There may also be less publicly
available information about foreign issuers than about domestic issuers. In
addition, securities of some foreign issuers are less liquid and more volatile
than securities of comparable domestic issuers and foreign brokerage commissions
are generally higher than in the United States. Foreign securities markets may
also be less liquid, more volatile and less subject to government supervision
than those in the United States. Generally, the Fund does not invest in foreign
securities. If it does so in the future, the Fund intends to limit such
investments to more established issuers and markets.
The Fund may purchase American Depositary Receipts ("ADRs"), American
Depositary Shares ("ADS") or U.S. dollar-denominated securities of foreign
issuers that are not included in the 20% foreign securities limitation. ADRs are
receipts issued by U.S. banks or trust companies in respect of securities of
foreign issuers held on deposit for use in the U.S. securities markets. While
ADRs may not necessarily be denominated in the same currency as their underlying
securities, many of the risks associated with foreign securities may also apply
to ADRs.
OPTIONS
The Fund may buy and sell (write) listed options in order to obtain
additional return or to hedge the value of its portfolio. As a matter of
2
<PAGE>
fundamental policy, the Fund may write options on securities only if such
options are covered. Although the Fund will generally purchase or write only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option. The Fund will not purchase options if, as a result, the
aggregate cost of all outstanding options exceeds 10% of the Fund's total
assets, although no more than 5% will be committed to transactions entered into
for non-hedging (speculative) purposes. The Fund may purchase and sell put and
call options on stock indexes in order to increase its gross income or to hedge
its portfolio against price fluctuations.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. Additional discussion of these risks
and techniques is included in the Statement of Additional Information.
STOCK INDEX FUTURES AND OPTIONS ON
STOCK INDEX FUTURES
The Fund may purchase and sell stock index futures contracts and options on
stock index futures contracts. These investments may be made only for hedging,
not speculative, purposes. Hedging transactions are made to reduce the risk of
price fluctuations.
There can be no assurance of the Fund's successful use of stock index
futures as a hedging device. If Alger Management uses a hedging instrument at
the wrong time or judges market conditions incorrectly, hedging strategies may
reduce the Fund's return. The Fund could also experience losses if the prices of
its futures and options positions were not correlated with its other investments
or if it could not close out a position because of an illiquid market for the
future or option.
LEVERAGE THROUGH BORROWING
The Fund may borrow money from banks and use it to purchase additional
securities. This borrowing is known as leveraging. Leveraging increases both
investment opportunity and investment risk. If the investment gains on
securities purchased with borrowed money exceed the interest paid on the
borrowing, the net asset value of the Fund's shares will rise faster than would
otherwise be the case. On the other hand, if the investment gains fail to cover
the cost (including interest) of borrowings, or if there are losses, the net
asset value of the Fund's shares will decrease faster than would otherwise be
the case. The Fund is required to maintain continuous asset coverage (that is,
total assets including borrowings, less liabilities exclusive of borrowings) of
300% of the amount borrowed. If such asset coverage should decline below 300% as
a result of market fluctuations or other reasons, the Fund may be required to
sell some of its portfolio holdings within three days to reduce the debt and
restore the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time.
PORTFOLIO TURNOVER
Portfolio changes will generally be made without regard to the length of
time a security has been held or whether a sale would result in a profit or
loss. Higher levels of portfolio activity generally result in higher transaction
costs and may also result in taxes on realized capital gains to be borne by the
Fund's shareholders.
DIVERSIFICATION
The Fund is classified as a "non-diversified" investment company under the
Investment Company Act of 1940. A "diversified" investment company is required,
with respect to 75% of its total assets, to limit its investment in any one
issuer (other than the U.S. Government) to no more than 5% of the investment
company's total assets. Because the Fund is not subject to this requirement, its
portfolio may at times not show as much diversification among securities, and
3
<PAGE>
thus diversification of risk, as it would if the Fund had elected to register as
a "diversified" company. However, the Fund intends to continue to qualify as a
"regulated investment company" under the Internal Revenue Code; one of the
requirements for such qualification is a quarterly diversification test,
applicable to 50% (rather than 75%) of the Fund's assets, similar to the
requirement stated above.
HOW TO BUY SHARES
IN GENERAL
You can buy shares of the Fund in any of the following ways: through the
Fund's transfer agent; through a Processing Organization, as discussed below;
through Fred Alger & Company, Incorporated ("Alger Inc."), the Fund's
distributor; or automatically from your bank account through an Automatic
Investment Plan. The Fund or the transfer agent may reject any purchase order.
The offering price of a share is its net asset value.
You can open a Fund account with a minimum initial investment of $1,000 and
make additional investments of at least $100 at any time. There is no sales
charge on purchases or redemptions of Fund shares. The Fund reserves the right
to redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account falls below $500
due to redemptions. The Fund will give shareholders 60 days' prior written
notice in which to purchase sufficient additional shares to avoid such
redemption. The Fund reserves the right to waive the minimum investment amount.
PURCHASES THROUGH THE TRANSFER AGENT
You can buy shares through Alger Shareholder Services, Inc., the Fund's
transfer agent, by filling out the New Account Application and returning it with
a check drawn on a U.S. bank to Alger Shareholder Services, Inc. at 30
Montgomery Street, Box 2001, Jersey City, NJ 07302. You can also purchase shares
by wire transfer according to the instructions below.
Purchases will be processed at the next net asset value calculated after
your order is received and accepted. If your purchase is made by check or wire
and is received by the close of business of the New York Stock Exchange
(normally 4:00 p.m. Eastern time), your account will be credited on the day of
receipt. If your purchase is received after such time, it will be credited the
next business day. Third-party checks will not be honored except in the case of
employer sponsored retirement plans.
WIRE TRANSFERS
Investors establishing new accounts by wire transfer should forward their
completed New Account Applications to the transfer agent, stating that the
account was established by wire transfer and the date and amount of the
transfer. Further information regarding wire transfers is available by calling
(800) 711-6141.
The following information should be included in wire transfers
to Fund accounts:
1. State Street Bank & Trust Company, Boston, MA 02101
2. ABA #011000028
3. BNF = Spectra Fund
4. AC - 00797548
5. ORIGINATOR TO BENEFICIARY INFORMATION (OBI):
30-Shareholder Account Number (if new account, indicate such),
Shareholder Name, Social Security or Taxpayer Identification Number
EXAMPLE:
State Street Bank & Trust Company,
Boston, MA 02101
ABA #011000028
BNF = Spectra Fund
AC-00797548
OBI = Spectra Fund
30-123456789 or 30-New Account
John & Jane Doe
123-45-6789
4
<PAGE>
PURCHASES THROUGH PROCESSING ORGANIZATIONS
You can buy shares through a "Processing Organization", which is a
broker-dealer, bank or other financial institution that purchases shares for its
customers. Processing Organizations may impose charges and restrictions in
addition to or different from those applicable if you invest with the Fund
directly. Therefore, you should read the materials provided by the Processing
Organization in conjunction with this Prospectus. Certain Processing
Organizations may receive compensation from the Fund, Alger Inc., or any of its
affiliates.
SPECIAL INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN
The Fund offers an Automatic Investment Plan which permits you to make
regular transfers to your Fund account from your bank account (minimum $100) on
the last business day of every month. Your bank must be a member of the
Automated Clearing House.
RETIREMENT PLANS
Shares of the Fund are available as an investment for your retirement plans,
including IRAs, Keogh Plans, corporate pension and profit-sharing plans,
Simplified Employee Pension IRAs, 401(k) Plans and 403(b) Plans. The minimum
initial investment for a retirement plan account is $250. Please call the Fund
at (800) 711-6141 to receive the appropriate documents which contain important
information and applications.
HOW TO SELL SHARES
You can sell (redeem) some or all of your shares on any business day. Your
shares will be sold at the next net asset value calculated after your redemption
request is received and accepted by the transfer agent and your payment will be
made by check within seven days. Redemptions may be suspended and payments
delayed under certain emergency circumstances as determined by the Securities
and Exchange Commission. The Fund's transfer agent will reject any redemption
request made within 15 days after receipt of the purchase check order against
which such redemption is requested. You can sell your shares in any of the
following ways: by mail, by telephone or through a Processing Organization.
SELLING SHARES BY MAIL
You should send a letter of instruction to the transfer agent that includes
your name, account number, the number of shares or dollar amount and where you
want the money to be sent. The letter must be signed by all registered owners
and, if the redemption is for more than $5,000 or if the proceeds are to be sent
to an address other than the address of record, the signature must be
guaranteed. The transfer agent will accept a signature guarantee by the
following financial institutions: a U.S. bank, trust company, broker, dealer,
municipal securities broker or dealer, government securities broker or dealer,
credit union which is authorized to provide signature guarantees, national
securities exchange, registered securities association or clearing agency.
If you have a certificate for your Fund shares, you should mail your
certificate to the transfer agent with a letter of instruction to deposit the
shares in your account for redemption.
SELLING SHARES BY TELEPHONE
If you wish to use this service, you should mark the appropriate box on the
New Account Application or send a written request with a guaranteed signature.
To sell shares by telephone, please call (800) 711-6141. Redemption requests
will generally be paid on the next business day. If your proceeds are less than
$5,000, they will be mailed to your address of record. If the proceeds are more
than $5,000 you may choose either to have them mailed to your address of record
or wired to your designated bank account. This service is not available within
90 days of changing your address or bank account of record.
The Fund, the transfer agent and their affiliates are not liable for acting
in good faith on telephone instructions relating to your account, so long as
they follow reasonable procedures to determine that the telephone instructions
5
<PAGE>
are genuine. Such procedures may include recording the telephone calls and
requiring some form of personal identification. You should verify the accuracy
of telephone transactions immediately upon receipt of your confirmation
statement.
SYSTEMATIC WITHDRAWAL Plan
If your account is $10,000 or more, you can establish a Systematic
Withdrawal Plan to receive payments of at least $50 on a monthly, quarterly or
annual basis. The maximum monthly withdrawal is one percent of the current
account value in the Fund at the time you begin participation in the Plan.
REDEMPTION IN KIND
Under unusual circumstances, shares of the Fund may be redeemed "in kind",
which means that the redemption proceeds will be paid with securities which are
held by the Fund. Please refer to the Statement of Additional Information for
more details.
MANAGEMENT OF THE FUND
ORGANIZATION
From its inception in 1968 until February 12, 1996, the Fund was organized
as a Massachusetts business corporation, and it had operated as a registered
closed-end investment company since 1978. Shares of closed-end investment
companies, unlike those of open-end companies, are ordinarily not redeemable and
are not continuously offered for sale to the public. On February 12, 1996, the
Fund reorganized as a Massachusetts business trust and also converted to an
open-end investment company, or "mutual fund." In connection with the
reorganization, the name of the Fund was changed from "Spectra Fund, Inc." to
"Spectra Fund." The Fund is authorized to offer an unlimited number of shares.
Although, as a Massachusetts business trust, the Fund is not required by law
to hold annual shareholder meetings, it may hold meetings from time to time on
important matters, and shareholders have the right to call a meeting to remove a
Trustee or to take other action described in the Trust's Declaration of Trust.
BOARD OF TRUSTEES
The Fund is governed by a Board of Trustees which is responsible for
protecting the interests of shareholders under Massachusetts law. The Statement
of Additional Information contains general background information about each
Trustee and officer of the Fund.
INVESTMENT MANAGER
Alger Management is the Fund's investment manager and is responsible for the
overall administration of the Fund, subject to the supervision of the Board of
Trustees. Alger Management makes investment decisions for the Fund, places
orders to purchase and sell securities on behalf of the Fund and selects
broker-dealers that, in its judgment, provide prompt and reliable execution at
favorable prices and reasonable commission rates. It is anticipated that Alger
Inc. will serve as the Fund's broker in effecting substantially all of the
Fund's transactions on securities exchanges and will retain commissions in
accordance with certain regulations of the Securities and Exchange Commission.
The Fund will consider sales of its shares as a factor in the selection of
broker-dealers to execute over-the-counter portfolio transactions, subject to
the requirements of best price and execution. Alger Management employs
professional securities analysts who provide research services exclusively to
the Fund and other accounts for which Alger Management or its affiliates serve
as investment adviser or subadviser.
Alger Management has been in the business of providing investment advisory
services since 1964 and, as of December 31, 1996, had approximately $7.1 billion
under management, consisting of $5.2 billion in mutual fund accounts and $1.9
billion in other advisory accounts. Alger Management is owned by Alger Inc.
which in turn is owned by Alger Associates, Inc., ("Associates"), a financial
services holding company. At January 31, 1997, Associates held 40.82% of the
Fund's shares and could therefore be deemed to control the Fund as of that date.
Further investment in the Fund by Associates or a period of net redemptions of
Fund shares by other shareholders could cause this percentage to increase.
Conversely, Associates' relative position in the Fund could decrease as a result
6
<PAGE>
of strong sales of Fund shares to the public, even if Associates makes
additional investments in the Fund. Fred M. Alger, III and his brother, David D.
Alger, are the majority shareholders of Associates and may be deemed to control
that company, its subsidiaries and indirectly (through Associates' investment in
the Fund) the Fund.
PORTFOLIO MANAGERS
David D. Alger, Seilai Khoo and Ron Tartaro are primarily responsible for
the day-to-day management of the Fund. Mr. Alger has been employed by Alger
Management as Executive Vice President and Director of Research since 1971 and
as President since 1995. Ms. Khoo has been employed by Alger Management since
1989 and as a Senior Vice President since 1995. Mr. Tartaro has been employed by
Alger Management since 1990 and as a Senior Vice President since 1995.
Alger Management personnel ("Access Persons") are permitted to engage in
personal securities transactions subject to the restrictions and procedures of
the Fund's Code of Ethics. Pursuant to the Code of Ethics, Access Persons
generally must preclear all personal securities transactions prior to trading
and are subject to certain prohibitions on personal trading. You can get a copy
of the Fund's Code of Ethics by calling the Fund toll-free at (800) 711-6141.
FEES AND EXPENSES
The Fund pays Alger Management a management fee computed daily and paid
monthly at an annual rate of 1.50% of the value of the Fund's average daily net
assets. The management fee paid by the Fund is higher than that paid by most
other registered investment companies. Prior to February 12, 1996, Alger
Management received no management fee but was reimbursed for its expenses by the
Fund.
The Fund pays other expenses related to its daily operations, such as
custodian fees, Trustees' fees, transfer agency fees, legal and auditing costs.
More information about the Fund's investment management agreement and other
expenses paid by the Fund is included in the Statement of Additional
Information, which also contains information about the Fund's brokerage policies
and practices.
DISTRIBUTOR
Alger Inc. serves as the Fund's distributor and also distributes the shares
of other mutual funds managed by Alger Management.
TRANSFER AGENT
Alger Shareholder Services, Inc., an affiliate of Alger Management, serves
as transfer agent for the Fund. Certain record-keeping services that would
otherwise be performed by Alger Shareholder Services, Inc. may be performed by
other entities providing similar services to their customers who invest in the
Funds. The Fund, Alger Shareholder Services, Inc., Alger Inc. or any of its
affiliates may elect to enter into a contract to pay them for such services.
SHAREHOLDER SERVICING AGREEMENT
The Fund pays Alger Inc. a shareholder servicing fee of .25% of the average
daily net assets of the Fund for ongoing service and maintenance of shareholder
accounts. Alger Inc. may compensate other organizations from this fee who
provide personal service and maintenance of shareholder accounts.
NET ASSET VALUE
The price of one share of the Fund is its "net asset value." The net asset
value is computed by adding the value of the Fund's investments plus cash and
other assets, deducting liabilities and then dividing the result by the number
of its shares outstanding. The net asset value is calculated as of the close of
business (normally 4:00 p.m. Eastern time) on each day the New York Stock
Exchange is open.
7
<PAGE>
DIVIDENDS AND TAXES
DIVIDENDS
Dividends and distributions will be automatically reinvested on the payment
date in additional Fund shares at net asset value, unless you elected on the New
Account Application to have all dividends and distributions paid in cash.
Dividends are declared and paid annually. Distributions of any net realized
short-term and long-term capital gains usually will be made annually after the
close of the fiscal year in which the gains are earned.
TAXES
The Fund intends to qualify and elect to be treated each year as a
"regulated investment company" for federal income tax purposes. A regulated
investment company is not subject to regular income tax on any income or capital
gains distributed to its shareholders if it, among other things, distributes at
least 90 percent of its investment company taxable income to them within
applicable time periods.
For federal income tax purposes dividends and distributions are taxable to
you whether paid in cash or reinvested in additional shares. You may also be
liable for tax on any gain realized upon the redemption of shares in the Fund.
Shortly after the close of each calendar year, you will receive a statement
setting forth the dollar amounts of dividends and any distributions for the
prior calendar year and the tax status of the dividends and distributions for
federal income tax purposes. You should consult your tax adviser to assess the
federal, state and local tax consequences of investing in the Fund. This
discussion is not intended to address the tax consequences of an investment by a
nonresident alien.
PERFORMANCE
All performance figures are based on historical earnings and are not
intended to indicate future performance.
The Fund may include quotations of "total return" in advertisements or
reports to shareholders or prospective investors. Total return figures show the
aggregate or average percentage change in value of an investment in the Fund
from the beginning date of the measuring period to the end of the measuring
period. These figures reflect changes in the price of the Fund's shares and
assume that any income dividends and/or capital gains distributions made by the
Fund during the period were reinvested in shares of the Fund. Figures will be
given for recent 1, 5, and 10 year periods, including periods during which the
Fund operated as a closed-end investment company, and may be given for other
periods as well (such as from commencement of the Fund's operations, or on a
year-by-year basis) and may utilize dollar cost averaging. The Fund may also use
"aggregate" total return figures for various periods, representing the
cumulative change in value of an investment in the Fund for the specific period
(again reflecting changes in share net asset value and assuming reinvestment of
dividends and distributions) as well as "actual annual" and "annualized" total
return figures. Total returns may be shown by means of schedules, charts or
graphs, and may indicate subtotals of the various components of total return
(i.e., change in value of initial investment, income dividends and capital gains
distributions). "Total return" will vary based on changes in market conditions.
In addition, since the deduction of expenses is reflected in the total return
figures, "total return" will also vary based on the level of the Fund's
expenses. Current total return quotations may be obtained by contacting the
Fund. Further information about the Fund's performance is contained in its
Annual Report to Shareholders, which may be obtained without charge by
contacting the Fund.
The Statement of Additional Information further describes the method used to
determine the yields and total return figures.
8
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION OR THE FUND'S OFFICIAL SALES LITERATURE IN CONNECTION
WITH THE OFFERING OF THE FUND'S SHARES, AND IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED
BY THE FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH,
OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT BE LAWFULLY MADE.
----------------------
INVESTMENT MANAGER:
Fred Alger Management, Inc.
75 Maiden Lane
New York, New York 10038
DISTRIBUTOR:
Fred Alger & Company, Incorporated
30 Montgomery Street
Jersey City, New Jersey 07302
TRANSFER AGENT:
Alger Shareholder Services, Inc.
30 Montgomery Street
Box 2001
Jersey City, New Jersey 07302
AUDITORS:
Arthur Andersen LLP
1345 Avenue of the Americas
New York, New York 10105
COUNSEL:
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
SPECTRA|Meeting the challenge
FUND|of investing
|
PROSPECTUS|February 28, 1997
|
<PAGE>
STATEMENT OF February 28, 1997
ADDITIONAL INFORMATION
- ----------------------
SPECTRA|75 Maiden Lane
FUND|New York, New York 10038
|(800)711-6141
================================================================================
This Statement of Additional Information is not a Prospectus. This document
contains additional information about Spectra Fund (the "Fund") and supplements
information in the Prospectus dated February 28, 1997. It should be read
together with the Prospectus which may be obtained free of charge by writing or
calling the Fund at the address or toll-free number shown above.
CONTENTS
Investment Objective and Policies.......................................... 2
Net Asset Value............................................................ 8
Purchases.................................................................. 8
Redemptions................................................................ 8
Management................................................................. 9
Taxes...................................................................... 11
Custodian and Transfer Agent............................................... 12
Certain Shareholders....................................................... 12
Organization............................................................... 12
Determination of Performance............................................... 13
Financial Statements ...................................................... 13
Appendix................................................................... A-1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
The Prospectus discusses the investment objective of the Fund and the policies
to be employed to achieve this objective. This section contains supplemental
information concerning the types of securities and other instruments in which
the Fund may invest, the investment policies and portfolio strategies that the
Fund may utilize and certain risks attendant to those investments, policies and
strategies.
U.S. GOVERNMENT OBLIGATIONS
Bills, notes, bonds, and other debt securities issued by the U.S. Treasury are
direct obligations of the U.S. Government and differ mainly in the length of
their maturities.
SHORT-TERM CORPORATE DEBT SECURITIES
These are outstanding nonconvertible corporate debt securities (e.g., bonds and
debentures) which have one year or less remaining to maturity. Corporate notes
may have fixed, variable, or floating rates.
COMMERCIAL PAPER
These are short-term promissory notes issued by corporations primarily to
finance short-term credit needs.
REPURCHASE AGREEMENTS
Under the terms of a repurchase agreement, the Fund would acquire a high quality
money market instrument for a relatively short period (usually not more than one
week) subject to an obligation of the seller to repurchase, and the Fund to
resell, the instrument at an agreed price (including accrued interest) and time,
thereby determining the yield during the Fund's holding period. Repurchase
agreements may be seen to be loans by the Fund collateralized by the underlying
instrument. This arrangement results in a fixed rate of return that is not
subject to market fluctuations during the Fund's holding period and not
necessarily related to the rate of return on the underlying instrument. The
value of the underlying securities, including accrued interest, will be at least
equal at all times to the total amount of the repurchase obligation, including
interest. The Fund bears a risk of loss in the event that the other party to a
repurchase agreement defaults on its obligations and the Fund is delayed in or
prevented from exercising its rights to dispose of the collateral securities,
including the risk of a possible decline in the value of the underlying
securities during the period in which the Fund seeks to assert these rights, the
risk of incurring expenses associated with asserting these rights and the risk
of losing all or part of the income from the agreement. Fred Alger Management,
Inc. ("Alger Management"), acting under the supervision of the Fund's Board of
Trustees, reviews the credit worthiness of those banks and dealers with which
the Fund enters into repurchase agreements to evaluate these risks and monitors
on an ongoing basis the value of the securities subject to repurchase agreements
to ensure that the value is maintained at the required level.
WARRANTS AND RIGHTS
The Fund may invest in warrants and rights. A warrant is a type of security that
entitles the holder to buy a proportionate amount of common stock at a specified
price, usually higher than the market price at the time of issuance, for a
period of years or to perpetuity. In contrast, rights, which also represent the
right to buy common shares, normally have a subscription price lower than the
current market value of the common stock and a life of two to four weeks.
Warrants are freely transferable and are traded on the major securities
exchanges.
RESTRICTED SECURITIES
The Fund may invest in restricted securities governed by Rule 144A under the
Securities Act of 1933. In adopting Rule 144A, the Securities and Exchange
Commission specifically stated that restricted securities traded under Rule 144A
may be treated as liquid for purposes of investment limitations if the board of
trustees (or the fund's adviser acting subject to the board's supervision)
determines that the securities are in fact liquid. The Board has delegated its
responsibility to Alger Management to determine the liquidity of each restricted
security purchased pursuant to the Rule, subject to the Board's oversight and
review. Examples of factors that will be taken into account in evaluating the
liquidity of a Rule 144A security, both with respect to the initial purchase and
on an ongoing basis, will include, among others: (1) the frequency of trades and
quotes for the security; (2) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
transfer). Because institutional trading in restricted securities is relatively
new, it is not possible to predict how institutional markets will develop. If
institutional trading in restricted securities were to decline to limited
levels, the liquidity of the Fund's portfolio could be adversely affected.
-2-
<PAGE>
SHORT SALES
The Fund may sell securities "short against the box." While a short sale is the
sale of a security the Fund does not own, it is "against the box" if at all
times when the short position is open the Fund owns an equal amount of the
securities or securities convertible into, or exchangeable without further
consideration for, securities of the same issue as the securities sold short.
LENDING OF PORTFOLIO SECURITIES
The Fund may lend securities to brokers, dealers and other financial
organizations. The Fund will not lend securities to Alger Management or its
affiliates. By lending its securities, the Fund can increase its income by
continuing to receive interest or dividends on the loaned securities as well as
by either investing the cash collateral in short-term securities or by earning
income in the form of interest paid by the borrower when U.S. Government
securities are used as collateral. The Fund will adhere to the following
conditions whenever its securities are loaned: (a) the Fund must receive at
least 100 percent cash collateral or equivalent securities from the borrower;
(b) the borrower must increase this collateral whenever the market value of the
loaned securities including accrued interest exceeds the value of the
collateral; (c) the Fund must be able to terminate the loan at any time; (d) the
Fund must receive reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities and any increase in
market value; (e) the Fund may pay only reasonable custodian fees in connection
with the loan; and (f) voting rights on the loaned securities may pass to the
borrower; provided, however, that if a material event adversely affecting the
investment occurs, the Fund's Board of Trustees must terminate the loan and
regain the right to vote the securities. The Fund bears a risk of loss in the
event that the other party to a stock loan transaction defaults on its
obligations and the Fund is delayed in or prevented from exercising its rights
to dispose of the collateral including the risk of a possible decline in the
value of the collateral securities during the period in which the Fund seeks to
assert these rights, the risk of incurring expenses associated with asserting
these rights and the risk of losing all or a part of the income from the
transaction.
FOREIGN SECURITIES
The Fund may invest up to 20% of the value of its total assets in foreign
securities (not including American Depositary Receipts ("ADRs"), American
Depositary Shares("ADSs") or U.S. dollar denominated securities of foreign
issuers). Foreign securities investments may be affected by changes in currency
rates or exchange control regulations, changes in governmental administration or
economic or monetary policy (in the United States and abroad) or changed
circumstances in dealing between nations. Dividends paid by foreign issuers may
be subject to withholding and other foreign taxes that may decrease the net
return on these investments as compared to dividends paid to the Fund by
domestic corporations. It should be noted that there may be less publicly
available information about foreign issuers than about domestic issuers, and
foreign issuers are not subject to uniform accounting, auditing and financial
reporting standards and requirements comparable to those of domestic issuers.
Securities of some foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers and foreign brokerage commissions are
generally higher than in the United States. Foreign securities markets may also
be less liquid, more volatile and less subject to government supervision than
those in the United States. Investments in foreign countries could be affected
by other factors not present in the United States, including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations. Securities purchased on foreign exchanges may be held in custody by
a foreign branch of a domestic bank.
OPTIONS
A call option on a security is a contract that gives the holder of the option
the right to buy from the writer (seller) of the call option, in return for a
premium paid, the security underlying the option at a specified exercise price
at any time during the term of the option. The writer of the call option has the
obligation upon exercise of the option to deliver the underlying security upon
payment of the exercise price during the option period. A put option on a
security is a contract that, in return for the premium, gives the holder of the
option the right to sell to the writer (seller) the underlying security at a
specified price during the term of the option. The writer of the put, who
receives the premium, has the obligation to buy the underlying security upon
exercise at the exercise price during the option period.
A call option written by the Fund on a security is "covered" if the Fund owns
the underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if the Fund holds a call on the same security as the call
written where the exercise price of the call held is (1) equal to or less than
the exercise price of the call written or (2) greater than the exercise price of
the call written if the difference is maintained by the Fund in cash, U.S.
Government securities or other high grade short-term obligations in a segregated
account held with its custodian. A put option is "covered" if the Fund maintains
cash or
-3-
<PAGE>
other high grade short-term obligations with a value equal to the exercise price
in a segregated account held with its custodian, or else holds a put on the same
security as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written.
If the Fund has written an option, it may terminate its obligation by effecting
a closing purchase transaction. This is accomplished by purchasing an option of
the same series as the option previously written. However, once the Fund has
been assigned an exercise notice, the Fund will be unable to effect a closing
purchase transaction. Similarly, if the Fund is the holder of an option it may
liquidate its position by effecting a closing sale transaction. This is
accomplished by selling an option of the same series as the option previously
purchased. There can be no assurance that either a closing purchase or sale
transaction can be effected when the Fund so desires.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the Fund will realize a loss from
a closing transaction if the price of the transaction is less than the premium
paid to purchase the option. Since call option prices generally reflect
increases in the price of the underlying security, any loss resulting from the
repurchase of a call option may also be wholly or partially offset by unrealized
appreciation of the underlying security. Other principal factors affecting the
market value of a put or a call option include supply and demand, interest
rates, the current market price and price volatility of the underlying security
and the time remaining until the expiration date.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option. In such event it might not be
possible to effect closing transactions in particular options, so that the Fund
would have to exercise its option in order to realize any profit and would incur
brokerage commissions upon the exercise of the options. If the Fund, as a
covered call option writer, is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise or
otherwise covers the position.
In addition to options on securities, the Fund may also purchase and sell call
and put options on securities indexes. A stock index reflects in a single number
the market value of many different stocks. Relative values are assigned to the
stocks included in an index and the index fluctuates with changes in the market
values of the stocks. The options give the holder the right to receive a cash
settlement during the term of the option based on the difference between the
exercise price and the value of the index. By writing a put or call option on a
securities index, the Fund is obligated, in return for the premium received, to
make delivery of this amount. The Fund may offset its position in stock index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
Use of options on securities indexes entails the risk that trading in the
options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase these options unless Alger
Management is satisfied with the development, depth and liquidity of the market
and Alger Management believes the options can be closed out.
Price movements in the Fund's securities may not correlate precisely with
movements in the level of an index and, therefore, the use of options on indexes
cannot serve as a complete hedge and will depend, in part, on the ability of
Alger Management to predict correctly movements in the direction of the stock
market generally or of a particular industry. Because options on securities
indexes require settlement in cash, Alger Management may be forced to liquidate
portfolio securities to meet settlement obligations.
The Fund has qualified and intends to continue to qualify as a "Regulated
Investment Company" under the Internal Revenue Code. One requirement for such
qualification is that the Fund must derive less than 30% of its gross income
from gains from the sale or other disposition of securities held for less than
three months. Therefore, the Fund may be limited in its ability to engage in
options transactions.
Although Alger Management will attempt to take appropriate measures to minimize
the risks relating to the Fund's writing of put and call options, there can be
no assurance that the Fund will succeed in any option-writing program it
undertakes.
-4-
<PAGE>
STOCK INDEX FUTURES AND OPTIONS ON STOCK
INDEX FUTURES
Futures are generally bought and sold on the commodities exchanges where they
are listed with payment of initial and variation margin as described below. The
sale of a futures contract creates a firm obligation by the Fund, as seller, to
deliver to the buyer the net cash amount called for in the contract at a
specific future time. Put options on futures might be purchased to protect
against declines in the market values of securities occasioned by a decline in
stock prices and securities index futures might be sold to protect against a
general decline in the value of securities of the type that comprise the index.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract and obligates the seller
to deliver such position.
A stock index future obligates the seller to deliver (and the purchaser to take)
an amount of cash equal to a specific dollar amount times the difference between
the value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. No physical delivery of
the underlying stocks in the index is made. With respect to stock indexes that
are permitted investments, the Fund intends to purchase and sell futures
contracts on the stock index for which it can obtain the best price with
considerations also given to liquidity. While incidental to its securities
activities, the Fund may use index futures as a substitute for a comparable
market position in the underlying securities
The risk of imperfect correlation increases as the composition of the Fund
varies from the composition of the stock index. In an effort to compensate for
the imperfect correlation of movements in the price of the securities being
hedged and movements in the price of the stock index futures, the Fund may buy
or sell stock index futures contracts in a greater or lesser dollar amount than
the dollar amount of the securities being hedged if the historical volatility of
the stock index futures has been less or greater than that of the securities.
Such "over hedging" or "under hedging" may adversely affect the Fund's net
investment results if market movements are not as anticipated when the hedge is
established.
An option on a stock index futures contract, as contrasted with the direct
investment in such a contract, gives the purchaser the right, in return for the
premium paid, to assume a position in a stock index futures contract at a
specified exercise price at any time prior to the expiration date of the option.
The Fund will sell options on stock index futures contracts only as part of
closing purchase transactions to terminate its options positions. No assurance
can be given that such closing transactions can be effected or that there will
be correlation between price movements in the options on stock index futures and
price movements in the Fund's securities which are the subject of the hedge. In
addition, the Fund's purchase of such options will be based upon predictions as
to anticipated market trends, which could prove to be inaccurate.
The Fund's use of stock index futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management or other portfolio management
purposes. Typically, maintaining a futures contract or selling an option thereon
requires the Fund to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on stock index
futures involves payment of a premium for the option without any further
obligation on the part of the Fund. If the Fund exercises an option on a futures
contract it will be obligated to post initial margin (and potential subsequent
variation margin) for the resulting futures position just as it would for any
position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur. In order to cover its potential obligations when the Fund
enters into futures contracts and options thereon, the Fund will maintain a
segregated account with its custodian which will contain only liquid assets in
an amount equal to the total market value of such futures contracts less the
amount of initial margin on deposit for such contracts.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation.
-5-
<PAGE>
INVESTMENT RESTRICTIONS
Under the Investment Company Act of 1940, as amended (the "Act"), a
"fundamental" policy may not be changed without the vote of a "majority of the
outstanding voting securities" of the Fund, which is defined in the Act as the
lesser of (a) 67 percent or more of the shares present at a Fund meeting if the
holders of more than 50 percent of the outstanding shares of the Fund are
present or represented by proxy or (b) more than 50 percent of the outstanding
shares. A "nonfundamental policy" may be changed by vote of a majority of the
Fund's Board of Trustees at any time.
As a matter of fundamental policy, the Fund may not:
1. Issue senior securities, except that the writing of covered options on
securities and stock indexes, and transactions in stock index futures and
options thereon, shall not be deemed to be the issuance of a senior security.
2. Purchase securities on margin; but it may obtain such short-term credits from
banks as may be necessary for the clearance of purchases and sales of
securities.
3. Make short sales of securities or maintain a short position, unless, at all
times when a short position is open, it owns an equal amount of such securities
or owns securities convertible into or exchangeable for, without payment of any
further consideration, securities of the same issuer at least equal in amount to
the securities sold short.
4. Borrow money, except that the Fund may borrow from banks if, immediately
after such borrowing the value of the total assets of the Fund (including the
amount borrowed) less its liabilities (not including any borrowing) is at least
300% of the amount of the borrowings. 5. Pledge, mortgage, hypothecate or
otherwise encumber its assets except in connection with permissible borrowings
or investments.
6. Act as a securities underwriter, or act as a distributor of securities issued
by it except through an underwriter, acting as principal or agent, who may not
be obligated to sell or take up any specific amount of securities, except that
the Fund might be deemed an underwriter within the meaning of Section 2(11) of
the Securities Act of 1933 in making sales of securities not registered under
Federal Securities law.
7. Participate on a joint or joint and several basis in any securities trading
account.
8. Make any investment in a particular industry if, immediately after the making
of such investment, 25% or more of the Fund's total assets would be invested in
such industry.
9. Purchase or sell real estate or interests therein or real estate mortgages,
provided that the Fund may purchase marketable securities of real estate
investment trusts.
10. Purchase or sell commodities or commodity contracts, nor invest in oil, gas
or other mineral exploration development programs, including mineral leases,
except that the Fund may purchase or sell stock index futures contracts and
related options thereon if, thereafter, no more than 5% of its total assets are
invested in margin and premiums.
11. Make loans to others, except through purchasing qualified debt obligations,
lending its securities or entering into repurchase agreements.
12. Make any investment
in warrants or rights if, immediately after the making of such investment, more
than 5% of the Fund's net assets would be so invested or more than 2% of the
Fund's net assets would be invested in warrants not listed on a recognized
domestic stock exchange, provided, however, that warrants or rights which are
attached to other securities shall be deemed to have no value for purposes
hereof.
13. Purchase or retain the securities of any issuer, if, to the knowledge of the
Treasurer of the Fund, those officers and directors of the Fund or the Adviser
owning individually more the 1/2 of 1% of the securities of such issuer together
own more than 5% of the securities of such issuer.
14. Purchase any security if, as a result, the Fund would then have more than 5%
of its total assets invested in securities of issuers (including predecessors)
that have been in continuous operation for less than three years. This
limitation shall not apply to investments in obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
15. Purchase the securities of any other investment company, except that it may
make such a purchase in the open market involving no commission or profit to a
sponsor or dealer (other than the customary broker's commission), provided that
not more than 5% of the Fund's total assets (taken at market or other current
value) would be invested in such securities immediately after the making of any
such investment, or the Fund may make such a purchase as part of a merger,
consolidation or acquisition of assets.
-6-
<PAGE>
16. The Fund may purchase and sell (write) put and call options on securities
and stock indexes, but only if such options are exchange-traded or traded on an
automated quotation system of a national securities association; provided,
however, that options on securities written by the Fund must be covered.
The following restriction is nonfundamental:
17. The Fund may not invest more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale.
Except in the case of the 300% limitation set forth in Investment Restriction
No. 4, the percentage limitations contained in the foregoing restrictions apply
at the time of the purchase of the securities and a later increase or decrease
in percentage resulting from a change in the values of the securities or in the
amount of the Fund's assets will not constitute a violation of the restriction.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities and other financial instruments for the
Fund are made by Alger Management, which also is responsible for placing these
transactions, subject to the overall review of the Fund's Board of Trustees.
Although investment requirements for the Fund are reviewed independently from
those of the other accounts managed by Alger Management, investments of the type
the Fund may make may also be made by these other accounts. When the Fund and
one or more other accounts managed by Alger Management are prepared to invest
in, or desire to dispose of, the same security or other financial instrument,
available investments or opportunities for sales will be allocated in a manner
believed by Alger Management to be equitable to each. In some cases, this
procedure may affect adversely the price paid or received by the Fund or the
size of the position obtained or disposed of by the Fund.
Transactions in equity securities are in many cases effected on U.S. stock
exchanges and involve the payment of negotiated brokerage commissions. There is
generally no stated commission in the case of securities traded in the
over-the-counter markets, but the prices of those securities include undisclosed
commissions or mark-ups. Purchases and sales of money market instruments and
debt securities usually are principal transactions. These securities are
normally purchased directly from the issuer or from an underwriter or market
maker for the securities. The cost of securities purchased from underwriters
includes an underwriting commission or concession and the prices at which
securities are purchased from and sold to dealers include a dealer's mark-up or
mark-down. U.S. Government securities are generally purchased from underwriters
or dealers, although certain newly-issued U.S. Government securities may be
purchased directly from the U.S. Treasury or from the issuing agency or
instrumentality.
To the extent consistent with applicable provisions of the Act and the rules and
exemptions adopted by the Securities and Exchange Commission (the "SEC")
thereunder, as well as other regulatory requirements, the Fund's Board of
Trustees has determined that portfolio transactions will be executed through
Fred Alger & Company, Incorporated ("Alger Inc.") if, in the judgment of Alger
Management, the use of Alger Inc. is likely to result in price and execution at
least as favorable as those of other qualified broker-dealers and if, in
particular transactions, Alger Inc. charges the Fund a rate consistent with that
charged to comparable unaffiliated customers in similar transactions. Such
transactions will be fair and reasonable to the Fund's shareholders.
Over-the-counter purchases and sales are transacted directly with principal
market makers except in those cases in which better prices and executions may be
obtained elsewhere. Principal transactions are not entered into with affiliates
of the Fund except pursuant to exemptive rules or orders adopted by the SEC.
In selecting brokers or dealers to execute portfolio transactions, Alger
Management seeks the best overall terms available. In assessing the best overall
terms available for any transaction, Alger Management will consider the factors
it deems relevant, including the breadth of the market in the investment, the
price of the investment, the financial condition and execution capability of the
broker or dealer and the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis. In addition, Alger Management is
authorized, in selecting parties to execute a particular transaction and in
evaluating the best overall terms available, to consider the brokerage and
research services, as those terms are defined in section 28(e) of the Securities
Exchange Act of 1934, provided to the Fund and/or the other accounts over which
Alger Management or its affiliates exercise investment discretion. The Fund will
consider sales of its shares as a factor in the selection of broker-dealers to
execute over-the-counter transactions, subject to the requirements of best price
and execution. Alger Management's fees under its agreements with the Fund are
not reduced by reason of its receiving brokerage and research service. The
Fund's Board of Trustees will periodically review the commissions paid by the
Fund to determine if the commissions paid over representative periods of time
-7-
<PAGE>
are reasonable in relation to the benefits inuring to the Fund. During the
fiscal periods ended October 31, 1995, October 31, 1994, and June 30, 1994, the
Fund paid an aggregate of approximately $11,681, $6,769, and $11,278,
respectively, in commissions to broker-dealers in connection with portfolio
transactions, all of which was paid to Alger Inc. For the fiscal year ended
October 31, 1996 the Fund paid an aggregate of approximately $19,091 in
commissions to broker-dealers in connection with portfolio transactions, of
which $17,275 was paid to Alger Inc. and $1,816 was paid to other
broker-dealers. accordingly, received no compensation in connection with
securities purchased or sold in that manner, which include securities traded in
the over-the-counter markets, money market investments and most debt securities.
NET ASSET VALUE
The Prospectus discusses the time at which the net asset value of the Fund is
determined for purposes of sales and redemptions. The New York Stock Exchange is
currently open on each Monday through Friday, except (i) January 1st,
Presidents' Day (the third Monday in February), Good Friday, Memorial Day (the
last Monday in May), July 4th, Labor Day (the first Monday in September),
Thanksgiving Day (the fourth Thursday in November) and December 25th and (ii)
the preceding Friday when any one of those holidays falls on a Saturday, or the
subsequent Monday when any one of those holidays falls on a Sunday.
The assets of the Fund are generally valued on the basis of market quotations.
Securities whose principal market is on an exchange or in the over-the-counter
market are valued at the last reported sales price or, in the absence of
reported sales, at the mean between the bid and asked price or, in the absence
of a recent bid or asked price, the equivalent as obtained from one or more of
the major market makers for the securities to be valued. Bonds and other fixed
income securities may be valued on the basis of prices provided by a pricing
service when the Fund's Board of Trustees believes that these prices reflect the
fair market value of the securities. Other investments and other assets,
including restricted securities and securities for which market quotations are
not readily available, are valued at fair value under procedures approved by the
Fund's Board of Trustees. Short-term securities with maturities of 60 days or
less are valued at amortized cost, which constitutes fair value as determined by
the Fund's Board of Trustees.
PURCHASES
Shares of the Fund are offered continuously by the Fund and are distributed on a
best efforts basis by Alger Inc. as principal underwriter for the Fund pursuant
to a distribution agreement (the "Distribution Agreement"). Under the
Distribution Agreement, Alger Inc. bears all selling expenses, including the
costs of advertising and of printing prospectuses and distributing them to
prospective shareholders.
PURCHASES THROUGH PROCESSING ORGANIZATIONS
When shares are purchased this way, the Processing Organization, rather than its
customer, may be the shareholder of record of the shares. Processing
Organizations may charge their customers a fee in connection with services
offered to customers.
AUTOMATIC INVESTMENT PLAN
While there is no charge to shareholders for this service, a charge of $10.00
will be deducted from a shareholder's Fund account in the case of insufficient
funds. A shareholder's Automatic Investment Plan may be terminated at any time
without charge or penalty by the shareholder, the Fund, the Transfer Agent or
Alger Inc.
REDEMPTIONS
The right of redemption of shares of the Fund may be suspended or the date of
payment postponed for more than seven days (a) for any periods during which the
New York Stock Exchange (the "NYSE") is closed (other than for customary weekend
and holiday closings), (b) when trading in the markets the Fund normally
utilizes is restricted, or an emergency, as defined by the rules and regulations
of the SEC, exists, making disposal of the Fund's investments or determination
of its net asset value not reasonably practicable or (c) for such other periods
as the SEC by order may permit for protection of the Fund's shareholders.
REDEMPTIONS IN KIND
Payment for shares tendered for redemption is ordinarily made in cash. However,
if the Board of Trustees of the Fund determines that it would be detrimental to
the best interest of the remaining
-8-
<PAGE>
shareholders of the Fund to make payment of a redemption order wholly or partly
in cash, the Fund may pay the redemption proceeds in whole or in part by a
distribution "in kind" of securities from the Fund, in lieu of cash, in
conformity with applicable rules of the SEC. The Fund has elected to be governed
by Rule 18f-1 under the Act, pursuant to which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net assets of
the Fund during any 90-day period for any one shareholder. If shares are
redeemed in kind, the redeeming shareholder might incur brokerage or other costs
in selling the securities for cash. The method of valuing securities used to
make redemptions in kind will be the same as the method the Fund uses to value
its portfolio securities and such valuation will be made as of the time the
redemption price is determined.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan (the "Withdrawal Plan") is available to
shareholders who own shares of the Fund with a value exceeding $10,000 and who
wish to receive specific amounts of cash periodically. Withdrawals of at least
$50 monthly (but no more than one percent of the value of a shareholder's shares
in the Fund) may be made under the Withdrawal Plan by redeeming as many shares
of the Fund as may be necessary to cover the stipulated withdrawal payment. To
the extent that withdrawals exceed dividends, distributions and appreciation of
a shareholder's investment in the Fund, there will be a reduction in the value
of the shareholder's investment and continued withdrawal payments may reduce the
shareholder's investment and ultimately exhaust it. Withdrawal payments should
not be considered as income from investment in a Fund.
Shareholders who wish to participate in the Withdrawal Plan and who hold their
shares in certificated form must deposit their share certificates of the Fund
from which withdrawals will be made with Alger Shareholder Services, Inc., as
agent for Withdrawal Plan members. All dividends and distributions on shares in
the Withdrawal Plan are automatically reinvested at net asset value in
additional shares of the Fund. For additional information regarding the
Withdrawal Plan, contact the Fund.
MANAGEMENT
TRUSTEES AND OFFICERS OF THE FUND
The names of the Trustees and officers of the Fund, together with information
concerning their principal business occupations, and compensation during the
year ended October 31, 1996 are set forth below. Each of the officers of the
Fund is also an officer, and each of the Trustees is also a director or Trustee,
as the case may be, of Castle Convertible Fund, Inc. ("Castle"), a registered
closed-end investment company, The Alger Fund, The Alger American Fund and The
Alger Retirement Fund, registered open-end management investment companies, for
which Alger Management serves as investment adviser. Fred M. Alger III and David
D. Alger are "interested persons" of the Fund, as defined in the Act. Fred M.
Alger III and David D. Alger are brothers. Unless otherwise noted, the address
of each person named below is 75 Maiden Lane, New York, New York 10038.
-9-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
NAME, POSITION WITH
THE FUND AND ADDRESS PRINCIPAL OCCUPATIONS
Fred M. Alger III Chairman of the Boards of Alger Associates, Inc. ("Associates"),
Chairman of the Board Alger Inc., Alger Management, Alger Properties, Inc. ("Properties"),
Alger Shareholder Services, Inc. ("Services"), Alger Life Insurance
Agency, Inc. ("Agency"), The Alger American Asset Growth Fund
("Asset Growth"), Fred Alger International Advisory S.A. ("International"),
and Analysts Resources, Inc. ("ARI").
David D. Alger President and Director of Associates, Alger Management, Alger Inc.,
President and Trustee Properties, Services, International and Agency; Executive Vice Presiden
and Director of ARI.
Gregory S. Duch Executive Vice President, Treasurer and Director of Alger Management
Treasurer and Properties; Executive Vice President and Treasurer of Associates,
Alger Inc., ARI, Services and Agency; Treasurer and Director of International.
Mary E. Marsden-Cochran General Counsel and Secretary, Associates, Alger Management, Alger Inc.,
Secretary Properties, ARI, Services, International and Agency (2/96-present); Associate
General Counsel and Vice President, Smith Barney Inc.
(12/94-2/96); Blue Sky Attorney, AMT Capital (1/94-11/94).
Frederick A. Blum Senior Vice President of Associates, Alger Management, Alger Inc.,
Assistant Secretary Properties, ARI, Services and Agency.
And Assistant Treasurer
Arthur M. Dubow Private investor since 1985; Director of Coolidge Investment Corporation;
Trustee formerly Chairman of the Board of Institutional Shareholder Services, Inc.;
P.O. Box 969 formerly President of Fourth Estate, Inc.
Wainscott, NY 11975
Stephen E. O'Nei Of Counsel to the law firm of Kohler & Barnes PC;
Trustee Private investor since 1981; Director of NovaCare, Inc. and
805 Third Avenue Brown-Forman Distillers Corporation; formerly President and Vice Chairman
New York, NY 10022 of City Investing Company and Director of Centerre
Bancorporation and Syntro Corporation.
Nathan Emile Saint-Amand, M. D. Medical doctor in private practice.
Trustee
805 Third Avenue
New York, NY 10128
John T. Sargent Private investor since 1987; Director of Atlantic Mutual Insurance Co.;
Trustee formerly Director of River Bank America.
14 E. 69th Street
New York, NY 10021
</TABLE>
No director, officer or employee of Alger Management or its affiliates will
receive any compensation from the Fund for serving as an officer or Trustee of
the Fund. The Fund pays each Trustee who is not a director, officer or employee
of Alger Management or its affiliates an annual fee of $250.
-10-
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C>
Total Compensation Paid to Trustees from
The Alger Retirement Fund,
Aggregate The Alger Fund,
Compensation The Alger American Fund,
from Castle Convertible Fund, Inc. and
Name of Person, Position Spectra Fund Spectra Fund
- ------------------------- ------------------ ---------------------------------------
Arthur M. Dubow, Trustee $250 $28,250
Stephen E. O'Neil, Trustee $250 $28,250
Nathan E. Saint-Amand, Trustee $250 $28,250
John T. Sargent, Trustee $250 $28,250
</TABLE>
INVESTMENT MANAGER
Alger Management serves as investment manager to the Fund pursuant to a written
agreement (the "Management Agreement"). Certain of the services provided by, and
the fees paid by the Fund to, Alger Management under the Management Agreement
are described in the Prospectus. Alger Management pays the salaries of all
officers who are employed by both it and the Fund. Alger Management has agreed
to maintain office facilities for the Fund, furnish the Fund with statistical
and research data, clerical, accounting and bookkeeping services, and certain
other services required by the Fund, and to compute the net asset value, net
income and realized capital gains or losses of the Fund. Alger Management
prepares semi-annual reports to the SEC and to shareholders, prepares federal
and state tax returns and filings with state securities commissions, maintains
the Fund's financial accounts and records and generally assists in all aspects
of the Fund's operations. Alger Management bears all expenses in connection with
the performance of its services under the Management Agreement.
Prior to February 12, 1996, Alger Management received no management fee but was
reimbursed for its expenses by the Fund. On February 12, 1996, a new management
agreement became effective which provides for the payment of an investment
management fee based upon the value of the average daily net assets of the Fund.
During the fiscal periods ended October 31, 1996, October 31, 1995, October 31,
1994 and June 30, 1994, Alger Management received $99,209, $78,214, $26,537 and
$79,286, respectively, from the Fund under these arrangements. For the year
ended October 31, 1996, the Fund was reimbursed for expenses exceeding
applicable state expense limitations by Alger Management in the amount of
$44,457.
SHAREHOLDER SERVICING AGREEMENT
Payments under the Shareholder Servicing Agreement are not tied exclusively to
the shareholder servicing expenses actually incurred by Alger Inc. and the
payments may exceed expenses actually incurred by Alger Inc. The Fund's Board of
Trustees evaluates the appropriateness of the Shareholder Servicing Agreement
and its payment terms on a continuing basis and in doing so considers all
relevant factors, including expenses borne by Alger Inc. and the amounts it
receives under the Shareholder Servicing Agreement.
EXPENSES OF THE FUND
Operating expenses for the Fund generally consist of all costs not specifically
borne by Alger Management, including investment management fees, fees for
necessary professional and brokerage services, costs of regulatory compliance
and costs associated with maintaining legal existence and shareholder relations.
In addition, the Fund may compensate Alger Inc. for servicing shareholder
accounts. From time to time, Alger Management, in its sole discretion and as it
deems appropriate, may assume certain expenses of the Fund while retaining the
ability to be reimbursed by the Fund for such amounts prior to the end of the
fiscal year. This will have the effect of lowering the Fund's overall expense
ratio and of increasing return to investors, or the converse, at the time such
amounts are assumed or reimbursed, as the case may be.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP serves as independent public accountants for the Fund.
TAXES
The following is a summary of selected federal income tax considerations that
may affect the Fund and its shareholders. The summary is not intended to
substitute for individual tax advice and investors are urged to consult their
own tax advisers as to the federal, state and local tax consequences of
investing in the Fund.
-11-
<PAGE>
taxable income other than net realized capital gains) and its net realized
capital gains that are distributed to shareholders. To qualify under Subchapter
M, the Fund must, among other things distribute to its shareholders at least 90%
of its taxable net investment income and net realized short-term capital gains.
In so qualifying the Fund may be restricted in the selling of securities held by
the Fund for less than three months and in the utilization of certain of the
investment techniques described above and in the Fund's prospectus. As a
regulated investment company, the Fund is subject to a non-deductible excise tax
of 4% with respect to certain undistributed amounts of income and capital gains
during the calendar year. The Fund expects to make additional distributions or
change the timing of its distributions so as to avoid the application of this
tax.
In general, any gain or loss on the redemption or exchange of Fund shares will
be long-term capital gain or loss if held by the shareholder for more than one
year, and will be short-term capital gain or loss if held for one year or less.
However, if a shareholder receives a distribution taxable as long-term capital
gain with respect to Fund shares, and redeems or exchanges the shares before
holding them for more than six months, any loss on the redemption or exchange up
to the amount of the distribution will be treated as a long-term capital loss.
Dividends of the Fund's investment income and distributions of its short-term
capital gains will be taxable as ordinary income. Distributions of long-term
capital gains will be taxable as such at the appropriate rate, regardless of the
length of time you have held shares of the Fund. Only dividends that reflect a
Fund's income from certain dividend-paying stocks will be eligible for the
federal dividends-received deduction for corporate shareholders.
If a shareholder fails to furnish a correct taxpayer identification number,
fails to fully report dividend or interest income, or fails to certify that he
or she has provided a correct taxpayer identification number and that he or she
is not subject to such withholding, then the shareholder may be subject to a 31
percent "backup withholding tax" with respect to (i) any taxable dividends and
distributions and (ii) any proceeds of any redemption of Fund shares.
CUSTODIAN AND TRANSFER AGENT
State Street Bank & Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, serves as custodian for the Fund pursuant to a custodian agreement. Alger
Shareholder Services, Inc., 30 Montgomery Street, Jersey City, New Jersey 07302,
serves as transfer agent for the Fund pursuant to a transfer agency agreement.
Under the transfer agency agreement Services processes purchases and redemptions
of shares of the Fund, maintains the shareholder account records for the Fund,
handles certain communications between shareholders and the Fund and distributes
any dividends and distributions payable by the Fund.
CERTAIN SHAREHOLDERS
Set forth below is certain information regarding significant shareholders of the
Fund. In the aggregate, Alger Associates, Inc. ("Associates") (a Delaware
corporation), Fred M. Alger III and David D. Alger owned beneficially or of
record 41.95% of the shares of the Fund at January 31, 1997. Alger Management is
a wholly owned subsidiary of Alger Inc., which in turn is a wholly owned
subsidiary of Associates. Fred M. Alger III and David D. Alger are the majority
shareholders of Associates and may be deemed to control that company and its
subsidiaries. As a result of these securities holdings, these persons and
Associates individually and jointly may be deemed to control the Fund, which may
have the effect of proportionately diminishing the voting power of other
shareholders of the Fund.
The following table contains information regarding persons who are known by the
Fund to own beneficially or of record five percent or more of the shares of the
Fund. Unless otherwise noted, the address of each owner is 75 Maiden Lane, New
York, New York 10038. All holdings are expressed as a percentage of the Fund's
outstanding shares as of January 31, 1997.
Record/Beneficial
Ownership
------------------
Alger Associates, Inc........................... 40.82% / 40.82%
Schwab........................................... 16.22% / 16.22%
All Trustees and
Officers as a Group............................. 1.91% / 1.91%
- ---------------
* Indicates shareholder owns less than 5%.
ORGANIZATION
The Fund has been organized as a business trust under the laws of the
Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust
dated July 5, 1995 (the "Trust Agreement").
-12-
<PAGE>
Shares do not have cumulative voting rights, which means that holders of more
than 50 percent of the shares voting for the election of Trustees can elect all
Trustees. Shares are transferable but have no preemptive, conversion or
subscription rights. In the interest of economy and convenience, certificates
representing shares of the Fund are physically issued only upon specific written
request of a shareholder.
Meetings of shareholders normally will not be held for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time the Trustees
then in office will call a shareholders' meeting for the election of Trustees.
Under the Act, shareholders of record of no less than two-thirds of the
outstanding shares of the Fund may remove a Trustee through a declaration in
writing or by vote cast in person or by proxy at a meeting called for that
purpose. Under the Trust Agreement, the Trustees are required to call a meeting
of shareholders for the purpose of voting on the question of removal of any such
Trustee when requested in writing to do so by the shareholders of record of not
less than 10 percent of the Fund's outstanding shares.
Massachusetts law provides that shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the Trust
Agreement disclaims shareholder liability for acts or obligations of the Fund
and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or a Trustee. The
Trust Agreement provides for indemnification from the Fund's property for all
losses and expenses of any shareholder held personally liable for the
obligations of the Fund. Thus, the risk of a shareholder's incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Fund itself would be unable to meet its obligations, a possibility that the
Fund believes is remote. Upon payment of any liability incurred by the Fund, the
shareholder paying the liability will be entitled to reimbursement from the
general assets of the Fund. The Trustees intend to conduct the operations of the
Fund in a manner so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of the Fund.
DETERMINATION OF PERFORMANCE
The "total return" described in the Prospectus, is computed according to
formulas prescribed by the SEC. These performance figures are calculated in the
following manner:
A. Total Return--The Fund's average annual total return described in the
Prospectus is computed according to the following formula:
P (1+T)n=ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5, or 10 year periods at
the end of the 1, 5 and 10 year periods (or fractional
portion thereof);
The average annual total returns for the Fund for the periods indicated below
were as follows:
Five Ten
Years Years
Year-Ended Ended Ended
10/31/96 10/31/96 10/31/96
-------- -------- --------
12.68% 23.39% 19.69%
IN GENERAL
Current performance information for the Fund may be obtained by calling the Fund
at the telephone number provided on the cover page of this Statement of
Additional Information. The Fund's quoted performance may not be indicative of
future performance. The Fund's performance will depend upon factors such as the
Fund's expenses and the types of instruments held by the Fund.
From time to time, advertisements or reports to shareholders may compare the
yield or performance of the Fund to that of other mutual funds with a similar
investment objective. The performance of the Fund, for example, might be
compared to rankings prepared by Lipper Analytical Services Inc., which is a
widely recognized, independent service that monitors the performance of mutual
funds, as well as to various unmanaged indices, such as the S&P 500. In
addition, evaluations of the Fund published by nationally recognized ranking
services or articles regarding performance, rankings and other Fund
characteristics may appear in national publications including, but not limited
to, Barron's, Business Week, Forbes, Institutional Investor, Investor's Business
Daily, Kiplinger's Personal Finance, Money, Morningstar, The New York Times, USA
Today and The Wall Street Journal and may be included in advertisements or
communications to shareholders. Any given performance comparison should not be
considered as representative of the Fund's performance for any future period.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended October 31, 1996, together
with the Report of Independent Public Accountants thereon, all of which are
contained in the Annual Report to shareholders for that fiscal year, are hereby
incorporated by reference and a copy may be obtained by telephoning (800)
711-6141.
-13-
<PAGE>
APPENDIX
CORPORATE BOND RATINGS
Bonds rated Aa by Moody's Investors Service, Inc. ("Moody's") are judged
by Moody's to be of high quality by all standards. Together with bonds rated Aaa
(Moody's highest rating) they comprise what are generally known as high-grade
bonds. Aa bonds are rated lower than Aaa bonds because margins of protection may
not be as large as those of Aaa bonds, or fluctuation of protective elements may
be of greater amplitude, or there may be other elements present that make the
long-term risks appear somewhat larger than those applicable to Aaa securities.
Bonds that are rated A by Moody's 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 that suggest a susceptibility to impairment in the future.
Moody's Baa rated bonds 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.
Bonds rated Ba by Moody's 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. Bonds which are rated B by Moody's generally
lack characteristics of a 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.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
Bonds rated AA by Standard & Poor's Corporation ("S&P") are judged by S&P
to be high-grade obligations and in the majority of instances differ only in
small degree from issues rated AAA (S&P's highest rating). Bonds rated AAA are
considered by S&P to be the highest grade obligations and possess the ultimate
degree of protection as to principal and interest. With AA bonds, as with AAA
bonds, prices move with the long-term money market. Bonds rated A by S&P have a
strong capacity to pay principal and interest, although they are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions.
S&P's BBB rated bonds, or medium-grade category bonds, are borderline
between definitely sound obligations and those where the speculative elements
begin to predominate. These bonds have adequate asset coverage and normally are
protected by satisfactory earnings. Their susceptibility to changing conditions,
particularly to depressions, necessitates constant watching. These bonds
generally are more responsive to business and trade conditions than to interest
rates. This group is the lowest that qualifies for commercial bank investment.
Bonds rated BB and B by S&P 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. These ratings may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories. Debt rated BB has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions that could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
A-1
<PAGE>
APPENDIX
(continued)
Bonds rated AAA by Fitch Investors Service, Inc. ("Fitch") are judged by
Fitch to be strictly high grade, broadly marketable, suitable for investment by
trustees and fiduciary institutions and liable to but slight market fluctuation
other than through changes in the money rate. The prime feature of an AA bond is
a showing of earnings several times or many times interest requirements, with
such stability of applicable earnings that safety is beyond reasonable question
whatever changes occur in conditions. Bonds rated AA by Fitch are judged by
Fitch to be of safety virtually beyond question and are readily salable, whose
merits are not unlike those of the AAA class, but whose margin of safety is less
strikingly broad. The issue may be the obligation of a small company, strongly
secured but influenced as to rating by the lesser financial power of the
enterprise and more local type of market.
Bonds rated Duff-1 are judged by Duff and Phelps, Inc. ("Duff") to be of
the highest credit quality with negligible risk factors; only slightly more than
U. S. Treasury debt. Bonds rated Duff-2, 3 and 4 are judged by Duff to be of
high credit quality with strong protection factors. Risk is modest but may vary
slightly from time to time because of economic conditions.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. The rating Prime-1 is the highest commercial paper rating
assigned by Moody's. Issuers rated Prime-1, or related supporting institutions,
are considered to have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2, or related supporting
institutions, are considered to have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of issuers rated Prime-l, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample liquidity is maintained.
Commercial paper ratings of S&P are current assessments of the likelihood
of timely payment of debts having original maturities of no more than 365 days.
Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues deter mined
to possess overwhelming safety characteristics are denoted A-1+. Capacity for
timely payment on commercial paper rated A-2 is strong, but the relative degree
of safety is not as high as for issues designated A-1. The rating Fitch-1
(Highest Grade) is the highest commercial paper rating assigned by Fitch. Paper
rated Fitch-1 is regarded as having the strongest degree of assurance for timely
payment. The rating Fitch-2 (Very Good Grade) is the second highest commercial
paper rating assigned by Fitch which reflects an assurance of timely payment
only slightly less in degree than the strongest issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff.
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by ample asset protection.
Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets and sound liquidity factors
and company fundamentals. Risk factors are small.
A-2
<PAGE>
INVESTMENT MANAGER:
Fred Alger Management, Inc.
75 Maiden Lane
New York, New York 10038
- --------------------------------------------------------------------------------
DISTRIBUTOR:
Fred Alger & Company, Incorporated
30 Montgomery Street
Jersey City, New Jersey 07302
- --------------------------------------------------------------------------------
CUSTODIAN:
NatWest N.A.
10 Exchange Place
Jersey City, New Jersey 07302
- --------------------------------------------------------------------------------
TRANSFER AGENT:
Alger Shareholder Services, Inc.
30 Montgomery Street
Box 2001
Jersey City, New Jersey 07302
- --------------------------------------------------------------------------------
INDEPENDENT PUBLIC ACCOUNTANTS:
Arthur Andersen LLP
1345 Avenue of the Americas
New York, New York 10105
- --------------------------------------------------------------------------------
COUNSEL:
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SPECTRA|Meeting the challeng
FUND|of investing
STATEMENT|
OF ADDITIONAL|February 28, 1997
INFORMATION|
- -------------------------------------------------------------------------------
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Financial Statements included in Part A:
Condensed Financial Information
(2) Financial Statements incorporated by
reference into Part B:
Report of Independent Public
Accountants;
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statements of Changes in Net Assets
for the Years Ended October 31, 1996
and October 31, 1995
Financial Highlights
Notes to Financial Statements
(b) Exhibits:
Exhibit No. Description of Exhibit
----------- ----------------------
1 Agreement and Declaration of Trust (1)
2 By-laws of Registrant (1)
3 Not applicable
4 Form of Specimen Share Certificate (3)
5 Form of Investment Management Agreement (1)
6 Form of Distribution Agreement (1)
7 Not applicable
<PAGE>
8 Custody Agreement
9 Shareholder Servicing Agreement (1)
10 Opinion and Consent of Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP (3)
10(a) Opinion and Consent of Sullivan & Worcester (2)
11 Consent of Arthur Andersen LLP
12 Not applicable
13 Not applicable
14 Not applicable
15 Not applicable
16 Schedule for computation of performance quotations
provided in the Statement of Additional Information
- ------------------------------
(1) Incorporated by reference to Registrant's Registration
Statement (the "Registration Statement") filed with the
Securities and Exchange Commission (the "SEC") on October 6,
1995.
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to
the Registration Statement, filed with the SEC on December 4,
1995.
(3) Incorporated by reference to Pre-Effective Amendment No. 2 to
the Registration Statement, filed with the SEC on February 6,
1996.
Item 25. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------
None.
<PAGE>
Item 26. Number of Holders of Securities
-------------------------------
As of February 26, 1997, there were 1821 record holders of Registrant's
shares.
Item 27. Indemnification
---------------
Under Section 8.4 of Registrant's Agreement and Declaration of Trust,
any past or present Trustee or officer of Registrant (including persons who
serve at Registrant's request as directors, officers or Trustees of another
organization in which Registrant has any interest as a shareholder, creditor or
otherwise[hereinafter referred to as a "Covered Person"]) is indemnified to the
fullest extent permitted by law against liability and all expenses reasonably
incurred by him in connection with any action, suit or proceeding to which he
may be a party or otherwise involved by reason of his being or having been a
Covered Person. This provision does not authorize indemnification when it is
determined, in the manner specified in the Agreement and Declaration of Trust,
that such Covered Person has not acted in good faith in the reasonable belief
that his actions were in or not opposed to the best interests of Registrant.
Moreover, this provision does not authorize indemnification when it is
determined , in the manner specified in the Agreement and Declaration of Trust,
that such Covered Person would otherwise be liable to Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties. Expenses may be paid by Registrant in advance
of the final disposition of any action, suit or proceeding upon receipt of an
undertaking by such Covered Person to repay such expenses to Registrant in the
event that it is ultimately determined that indemnification of such expenses is
not authorized under the Agreement and Declaration of Trust and either (i) the
Covered Person provides security for such undertaking, (ii) Registrant is
insured against losses from such advances, or (iii) the disinterested Trustees
or independent legal counsel determines, in the manner specified in the
Agreement and Declaration of Trust, that there is reason to believe the Covered
Person will be found to be entitled to indemnification.
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to Trustees, officers and
controlling persons of Registrant pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that in the opinion of the Securities and
Exchange Commission (the "SEC") such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of Registrant in the successful defense of any action, suit
<PAGE>
or proceeding) is asserted by such Trustee, officer orcontrolling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
Alger Management, which serves as investment manager to Registrant, is
generally engaged in rendering investment advisory services to institutions and,
to a lesser extent, individuals. Alger Management presently serves as investment
adviser to one closed-end investment company and to three other open-end
investment companies. The list required by this Item 28 regarding any other
business, profession, vocation or employment of a substantial nature engaged in
by officers and directors of Alger Management during the past two years is
incorporated by reference to Schdules A and D of Form ADV filed by Alger
Management pursuant to the Investment Advisers Act of 1940 (SEC File No.
801-06709).
Item 29. Principal Underwriter
---------------------
(a) Alger Inc. acts as principal underwriter for Registrant, The Alger
Fund, The Alger American Fund and The Alger Defined Contribution Trust and has
acted as subscription agent for Castle Convertible Fund, Inc.
(b) The information required by this Item 29 with respect to each
director, officer or partner of Alger Inc. is incorporated by reference to
Schedule A of Form BD filed by Alger Inc. pursuant to the Securities Exchange
Act of 1934 (SEC File No. 8-6423).
(c) Not applicable.
Item 30. Location of Accounts and Records
--------------------------------
All accounts and records of Registrant are maintained by Mr. Gregory S.
Duch, Fred Alger & Company, Incorporated, 30 Montgomery Street, Jersey City, NJ
07302.
<PAGE>
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, Registrant certifies that it meets
all of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933, and has duly caused
this Amendment to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of New York and State of New York on the 28th day of
February, 1997.
SPECTRA FUND
By: /s/ David D. Alger
-------------------------------
David D. Alger, President
ATTEST: /s/ Gregory S. Duch
--------------------------------------
Gregory S. Duch, Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Fred M. Alger III* February 28, 1997
- ----------------------------------------------------- Chairman of the Board ----------------------
Fred M. Alger III
/s/ David D. Alger February 28, 1997
- ----------------------------------------------------- President and Trustee ----------------------
David D. Alger (Chief Executive Officer)
/s/ Gregory S. Duch February 28, 1997
- ----------------------------------------------------- Treasurer ----------------------
Gregory S. Duch (Chief Financial and Accounting
Officer)
/s/ Nathan E. Saint-Amand* February 28, 1997
- ----------------------------------------------------- Trustee ----------------------
Nathan E. Saint-Amand
/s/ Stephen E. O'Neil* February 28, 1997
- ----------------------------------------------------- Trustee ----------------------
Stephen E. O'Neil
/s/ Arthur M. Dubow* February 28, 1997
- ----------------------------------------------------- Trustee ----------------------
Arthur M. Dubow
/s/ John T. Sargent* February 28, 1997
- ----------------------------------------------------- Trustee ----------------------
John T. Sargent
*By: Gregory S. Duch
--------------------------
Gregory S. Duch
Attorney-in-Fact
</TABLE>
<PAGE>
Securities Act File No. 33-98102
Investment Company Act File No. 811-1743
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
---
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 x
---
---
Post-Effective Amendment No. 2 x
---
and/or
---
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 x
---
---
Amendment No. 15 x
---
(Check appropriate box or boxes)
SPECTRA FUND
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
--------------------------
E X H I B I T S
--------------------------
<PAGE>
INDEX TO EXHIBITS
Page Number
Exhibit in Sequential
No. Number System
--- -------------
8 Custody Agreement.....................................
11 Consent of Arthur Andersen LLP........................
16 Schedule for computation of performance quota-
tions provided in the Statement of Additional
Information...........................................
CUSTODY AGREEMENT
CUSTODIAN CONTRACT
Between
SPECTRA FUND
and
STATE STREET BANK AND TRUST COMPANY
Global/Trust
21M
<PAGE>
TABLE OF CONTENTS
PAGE
1. Employment of Custodian and Property to be Held By
It..................................................................1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States............1
2.1 Holding Securities....................................1
2.2 Delivery of Securities................................2
2.3 Registration of Securities............................4
2.4 Bank Accounts.........................................4
2.5 Availability of Federal Funds.........................4
2.6 Collection of Income..................................5
2.7 Payment of Fund Monies................................5
2.8 Liability for Payment in Advance of Receipt of
Securities Purchased..................................6
2.9 Appointment of Agents.................................6
2.10 Deposit of Fund Assets in U.S. Securities System......7
2.11 Fund Assets Held in the Custodian's Direct
Paper System..........................................8
2.12 Segregated Account....................................9
2.13 Ownership Certificates for Tax Purposes...............9
2.14 Proxies...............................................9
2.15 Communications Relating to Portfolio
Securities...........................................10
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States.......................10
3.1 Appointment of Foreign Sub-Custodians................10
3.2 Assets to be Held....................................10
3.3 Foreign Securities Systems...........................10
3.4 Holding Securities...................................11
3.5 Agreements with Foreign Banking Institutions.........11
3.6 Access of Independent Accountants of the Fund........11
3.7 Reports by Custodian.................................11
3.8 Transactions in Foreign Custody Account..............12
3.9 Bank Accounts........................................12
3.10 Liability of Foreign Sub-Custodians..................12
<PAGE>
3.11 Liability of Custodian...............................12
3.11 Reimbursement for Advances...........................12
3.12 Monitoring Responsibilities..........................13
3.13 Branches of U.S. Banks...............................13
3.14 Tax Law..............................................13
3.15 Rule 17f-5...........................................14
4. Payments for Repurchases or Redemptions and Sales
of Shares of the Fund............................................14
5. Proper Instructions..............................................14
6. Actions Permitted Without Express Authority......................15
7. Evidence of Authority............................................15
8. Duties of Custodian With Respect to the Books of Account
and Calculation of Net Asset Value and Net Income................16
9. Records .........................................................16
10. Opinion of Fund's Independent Accountants........................16
11. Reports to Fund by Independent Public Accountants................16
12. Compensation of Custodian........................................17
13. Responsibility of Custodian......................................17
14. Effective Period, Termination and Amendment......................18
15. Successor Custodian..............................................19
16. Interpretive and Additional Provisions...........................20
17. Massachusetts Law to Apply.......................................20
18. Prior Contracts..................................................20
19. Shareholder Communications Election..............................20
20. Limitation of Liability..........................................21
<PAGE>
21. Headings ........................................................21
22. Notices ........................................................21
<PAGE>
CUSTODIAN CONTRACT
This Contract between Spectra Fund, a business trust organized and
existing under the laws of the Commonwealth of Massachusetts, having its
principal place of business at 75 Maiden Lane, New York, NY 10038, hereinafter
called the "Fund", and State Street Bank and Trust Company, a Massachusetts
trust company, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts, 02110, hereinafter called the "Custodian",
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT
The Fund hereby employs the Custodian as the custodian of its
assets, including securities which it desires to be held in places within the
United States ("domestic securities") and securities it desires to be held
outside the United States ("foreign securities") pursuant to the provisions of
the Declaration of Trust. The Fund agrees to deliver to the Custodian all
securities and cash owned by it, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Fund from time to time, and the cash consideration received by it
for such new or treasury shares of beneficial interest, ("Shares") of the Fund
as may be issued or sold from time to time. The Custodian shall not be
responsible for any property of the Fund held or received by the Fund and not
delivered to the Custodian or a sub-custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall from time to time employ one or more sub-custodians
located in the United States, but only in accordance with an applicable vote by
the Board of Trustees of the Fund, and provided that the Custodian shall have no
more or less responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian so employed than any such sub-custodian has to
the Custodian. The Custodian may employ as sub-custodian for the Fund's foreign
securities and other assets the foreign banking institutions and foreign
securities depositories designated in Schedule A hereto but only in accordance
with the provisions of Article 3.
2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD BY
THE CUSTODIAN IN THE UNITED STATES
2.1 HOLDING SECURITIES. The Custodian shall hold and physically
segregate for the account of the Fund all non-cash property, to be
held by it in the United States including all domestic securities
owned by the Fund, other than (a) securities which are maintained
pursuant to Section 2.10 in a clearing agency which acts as a
securities depository or in a book-entry system authorized by the
U.S. Department of the Treasury and certain federal agencies (each,
a "U.S. Securities System") and (b) commercial paper of an issuer
for which State Street Bank and Trust Company acts as issuing and
paying agent ("Direct Paper") which is deposited and/or maintained
in the Direct Paper System of the Custodian (the "Direct Paper
System") pursuant to Section 2.11.
<PAGE>
2.2 DELIVERY OF SECURITIES. The Custodian shall release and deliver
domestic securities owned by the Fund held by the Custodian or in a
U.S. Securities System account of the Custodian or in the
Custodian's Direct Paper book entry system account ("Direct Paper
System Account") only upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties,
and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a U.S. Securities
System, in accordance with the provisions of Section 2.10
hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable; provided
that, in any such case, the cash or other consideration is to
be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name
of the Fund or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or
for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units; PROVIDED that, in any such case, the new
securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
2
<PAGE>
pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be delivered
to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by
the Fund, BUT ONLY against receipt of adequate collateral as
agreed upon from time to time by the Custodian and the Fund,
which may be in the form of cash or obligations issued by the
United States government, its agencies or instrumentalities,
except that in connection with any loans for which collateral
is to be credited to the Custodian's account in the book-entry
system authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the
delivery of securities owned by the Fund prior to the receipt
of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, BUT ONLY
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian and a broker-dealer registered
under the Securities Exchange Act of 1934 (the "Exchange Act")
and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national
securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in
connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian, and a Futures Commission
Merchant registered under the Commodity Exchange Act, relating
to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar
organization or organizations, regarding account deposits in
connection with transactions by the Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to
the holders of Shares in connection with distributions in kind,
as may be described from time to time in the Fund's currently
effective prospectus and statement of additional information
("prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
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15) For any other proper corporate purpose, BUT ONLY upon receipt
of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Trustees or of the Executive
Committee signed by an officer and certified by the Secretary
or an Assistant Secretary, specifying the securities of the
Fund to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a proper
corporate purpose, and naming the person or persons to whom
delivery of such securities shall be made.
2.3 REGISTRATION OF SECURITIES. Domestic securities held by the
Custodian (other than bearer securities) shall be registered in the
name of the Fund or in the name of any nominee of the Fund or of any
nominee of the Custodian which nominee shall be assigned exclusively
to the Fund, UNLESS the Fund has authorized in writing the
appointment of a nominee to be used in common with other registered
investment companies having the same investment adviser as the Fund,
or in the name or nominee name of any agent appointed pursuant to
Section 2.9 or in the name or nominee name of any sub-custodian
appointed pursuant to Article 1. All securities accepted by the
Custodian on behalf of the Fund under the terms of this Contract
shall be in "street name" or other good delivery form. If, however,
the Fund directs the Custodian to maintain securities in "street
name", the Custodian shall utilize its best efforts only to timely
collect income due the Fund on such securities and to notify the
Fund on a best efforts basis only of relevant corporate actions
including, without limitation, pendency of calls, maturities, tender
or exchange offers.
2.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund,
subject only to draft or order by the Custodian acting pursuant to
the terms of this Contract, and shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it
from or for the account of the Fund, other than cash maintained by
the Fund in a bank account established and used in accordance with
Rule 17f-3 under the Investment Company Act of 1940. Funds held by
the Custodian for the Fund may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian or in such
other banks or trust companies as it may in its discretion deem
necessary or desirable; PROVIDED, however, that every such bank or
trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust
company and the funds to be deposited with each such bank or trust
company shall be approved by vote of a majority of the Board of
Trustees of the Fund. Such funds shall be deposited by the Custodian
in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 AVAILABILITY OF FEDERAL FUNDS. Upon mutual agreement between the
Fund and the Custodian, the Custodian shall, upon the receipt of
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Proper Instructions, make federal funds available to the Fund as of
specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for Shares of
the Fund which are deposited into the Fund's account.
2.6 COLLECTION OF INCOME. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other
payments with respect to United States registered securities held
hereunder to which the Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall collect on
a timely basis all income and other payments with respect to United
States bearer domestic securities if, on the date of payment by the
issuer, such securities are held by the Custodian or its agent and
shall credit such income, as collected, to the Fund's custodian
account. Without limiting the generality of the foregoing, the
Custodian shall detach and present for payment all coupons and other
income items requiring presentation as and when they become due and
shall collect interest when due on securities held hereunder. Income
due the Fund on United States securities loaned pursuant to the
provisions of Section 2.2 (10) shall be the responsibility of the
Fund. The Custodian will have no duty or responsibility in
connection therewith, other than to provide the Fund with such
information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to
which the Fund is properly entitled.
2.7 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out monies of the Fund in the
following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Fund but only (a) against the delivery of such securities
or evidence of title to such options, futures contracts or
options on futures contracts to the Custodian (or any bank,
banking firm or trust company doing business in the United
States or abroad which is qualified under the Investment
Company Act of 1940, as amended, to act as a custodian and has
been designated by the Custodian as its subcustodian or as its
agent (pursuant to Section 2.9 hereof), as the case may be, for
this purpose) registered in the name of the Fund or in the name
of a nominee of the Custodian referred to in Section 2.3 hereof
or in proper form for transfer; (b) in the case of a purchase
effected through a U.S. Securities System, in accordance with
the conditions set forth in Section 2.10 hereof; (c) in the
case of a purchase involving the Direct Paper System, in
accordance with the conditions set forth in Section 2.11; (d)
in the case of repurchase agreements entered into between the
Fund and the Custodian, or another bank, or a broker-dealer
which is a member of NASD, (i) against delivery of the
securities either in certificate form or through an entry
crediting the Custodian's account at the Federal Reserve Bank
with such securities or (ii) against delivery of the receipt
evidencing purchase by the Fund of securities owned by the
Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Fund or (e)
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for transfer to a time deposit account of the Fund in any bank,
whether domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker and/or the
applicable bank pursuant to Proper Instructions as defined in
Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, BUT ONLY upon receipt of, in
addition to Proper Instructions, a certified copy of a
resolution of the Board of Trustees or of the Executive
Committee of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or
persons to whom such payment is to be made.
2.8 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF SECURITIES PURCHASED.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of the Fund is made by the Custodian in advance of receipt
of the securities purchased in the absence of specific written
instructions from the Fund to so pay in advance, the Custodian shall
be absolutely liable to the Fund for such securities to the same
extent as if the securities had been received by the Custodian.
2.9 APPOINTMENT OF AGENTS. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the Investment Company
Act of 1940, as amended, to act as a custodian, as its agent to
carry out such of the provisions of this Article 2 as the Custodian
may from time to time direct; PROVIDED, however, that the Fund shall
be notified of such appointment and the appointment of any agent
shall not relieve the Custodian of its responsibilities or
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liabilities hereunder. The Fund acknowledges that the Custodian has
notified the Fund that Chemical Bank acts as agent for the Custodian
for the delivery and safekeeping of physical securities in New York.
2.10 DEPOSIT OF FUND ASSETS IN U.S. SECURITIES SYSTEMS. The Custodian may
deposit and/or maintain domestic securities owned by the Fund in a
clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934,
which acts as a securities depository, or in the book-entry system
authorized by the U.S. Department of the Treasury and certain
federal agencies, collectively referred to herein as "U.S.
Securities System" in accordance with applicable Federal Reserve
Board and Securities and Exchange Commission rules and regulations,
if any, and subject to the following provisions:
1) The Custodian may keep domestic securities of the Fund in a
U.S. Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the
U.S. Securities System which shall not include any assets of
the Custodian other than assets held as a fiduciary, custodian
or otherwise for customers;
2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a U.S.
Securities System shall identify by book-entry those securities
belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased for
the account of the Fund upon (i) receipt of advice from the
U.S. Securities System that such securities have been
transferred to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall
transfer domestic securities sold for the account of the Fund
upon (i) receipt of advice from the U.S. Securities System that
payment for such securities has been transferred to the
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account
of the Fund. Copies of all advices from the U.S. Securities
System of transfers of domestic securities for the account of
the Fund shall identify the Fund, be maintained for the Fund by
the Custodian and be provided to the Fund at its request. Upon
request, the Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund in the form of
a written advice or notice and shall furnish to the Fund copies
of daily transaction sheets reflecting each day's transactions
in the U.S. Securities System for the account of the Fund;
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the U.S. Securities System's accounting
system, internal accounting control and procedures for
safeguarding securities deposited in the U.S. Securities
System;
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5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 14 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to
the Fund resulting from use of the U.S. Securities System by
reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the U.S.
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with
respect to any claim against the U.S. Securities System or any
other person which the Custodian may have as a consequence of
any such loss or damage if and to the extent that the Fund has
not been made whole for any such loss or damage.
2.11 FUND ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM. The
Custodian may deposit and/or maintain securities owned by the Fund
in the Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in an
account ("Account") of the Custodian in the Direct Paper System
which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for
customers;
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Fund;
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on the next business
day following such transfer and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transaction in the U.S. Securities System for the account of
the Fund;
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6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may
reasonably request from time to time.
2.12 SEGREGATED ACCOUNT. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts
for and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained
in an account by the Custodian pursuant to Section 2.10 hereof, (i)
in accordance with the provisions of any agreement among the Fund,
the Custodian and a broker-dealer registered under the Exchange Act
and a member of the NASD (or any futures commission merchant
registered under the Commodity Exchange Act), relating to compliance
with the rules of The Options Clearing Corporation and of any
registered national securities exchange (or the Commodity Futures
Trading Commission or any registered contract market), or of any
similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund, (ii) for
purposes of segregating cash or government securities in connection
with options purchased, sold or written by the Fund or commodity
futures contracts or options thereon purchased or sold by the Fund,
(iii) for the purposes of compliance by the Fund with the procedures
required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, BUT ONLY, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of
the Board of Trustees or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate purposes.
2.13 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of the Fund held by it
and in connection with transfers of securities.
2.14 PROXIES. The Custodian shall, with respect to the domestic
securities held hereunder, cause to be promptly executed by the
registered holder of such securities, if the securities are
registered otherwise than in the name of the Fund or a nominee of
the Fund, all proxies, without indication of the manner in which
such proxies are to be voted, and shall promptly deliver to the Fund
such proxies, all proxy soliciting materials and all notices
relating to such securities.
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2.15 COMMUNICATIONS RELATING TO FUND SECURITIES. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to
the Fund all written information (including, without limitation,
pendency of calls and maturities of domestic securities and
expirations of rights in connection therewith and notices of
exercise of call and put options written by the Fund and the
maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from issuers of the domestic securities
being held for the Fund. With respect to tender or exchange offers,
the Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the domestic
securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Fund desires
to take action with respect to any tender offer, exchange offer or
any other similar transaction, the Fund shall notify the Custodian
at least three business days prior to the date on which the
Custodian is to take such action.
3. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD
OUTSIDE OF THE UNITED STATES
3.1 APPOINTMENT OF FOREIGN SUB-CUSTODIANS. The Fund hereby authorizes
and instructs the Custodian to employ as sub-custodians for the
Fund's securities and other assets maintained outside the United
States the foreign banking institutions and foreign securities
depositories designated on Schedule A hereto ("foreign
sub-custodians"). Upon receipt of "Proper Instructions", as defined
in Section 5 of this Contract, together with a certified resolution
of the Fund's Board of Trustees, the Custodian and the Fund may
agree to amend Schedule A hereto from time to time to designate
additional foreign banking institutions and foreign securities
depositories to act as sub-custodian. Upon receipt of Proper
Instructions, the Fund may instruct the Custodian to cease the
employment of any one or more such sub-custodians for maintaining
custody of the Fund's assets.
3.2 ASSETS TO BE HELD. The Custodian shall limit the securities and
other assets maintained in the custody of the foreign sub-custodians
to: (a) "foreign securities", as defined in paragraph (c)(1) of Rule
17f-5 under the Investment Company Act of 1940, and (b) cash and
cash equivalents in such amounts as the Custodian or the Fund may
determine to be reasonably necessary to effect the Fund's foreign
securities transactions. The Custodian shall identify on its books
as belonging to the Fund, the foreign securities of the Fund held by
each foreign sub-custodian.
3.3 FOREIGN SECURITIES SYSTEMS. Except as may otherwise be agreed upon
in writing by the Custodian and the Fund, assets of the Funds shall
be maintained in a foreign clearing agency which acts as a
securities depository or in a book-entry system for the central
handling of securities in a country or a foreign securities
depository or clearing agency which operates a transnational system
for the central handling of securities or equivalent book entries,
located outside of the United States (each a "Foreign Securities
System") only through arrangements implemented by the foreign
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banking institutions serving as sub-custodians pursuant to the terms
hereof (Foreign Securities Systems and U.S. Securities Systems are
collectively referred to herein as the "Securities Systems"). Where
possible, such arrangements shall include entry into agreements
containing the provisions set forth in Section 3.5 hereof.
3.4 HOLDING SECURITIES. The Custodian may hold securities and other
non-cash property for all of its customers, including the Fund, with
a foreign sub-custodian in a single account that is identified as
belonging to the Custodian for the benefit of its customers,
PROVIDED HOWEVER, that (i) the records of the Custodian with respect
to securities and other non-cash property of the Fund which are
maintained in such account shall identify by book-entry those
securities and other non-cash property belonging to the Fund and
(ii) the Custodian shall require that securities and other non-cash
property so held by the foreign sub-custodian be held separately
from any assets of the foreign sub-custodian or of others.
3.5 AGREEMENTS WITH FOREIGN BANKING INSTITUTIONS. Each agreement with a
foreign banking institution shall provide that: (a) the Fund's
assets will not be subject to any right, charge, security interest,
lien or claim of any kind in favor of the foreign banking
institution or its creditors or agent, except a claim of payment for
their safe custody or administration; (b) beneficial ownership of
the Fund's assets will be freely transferable without the payment of
money or value other than for custody or administration; (c)
adequate records will be maintained identifying the assets as
belonging to the Fund; (d) officers of or auditors employed by, or
other representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants
for the Fund, will be given access to the books and records of the
foreign banking institution relating to its actions under its
agreement with the Custodian; and (e) assets of the Fund held by the
foreign sub-custodian will be subject only to the instructions of
the Custodian or its agents.
3.6 ACCESS OF INDEPENDENT ACCOUNTANTS OF THE FUND. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the
books and records of any foreign banking institution employed as a
foreign sub-custodian insofar as such books and records relate to
the performance of such foreign banking institution under its
agreement with the Custodian.
3.7 REPORTS BY CUSTODIAN. The Custodian will supply to the Fund from
time to time, as mutually agreed upon, and in any event upon the
Fund's reasonable request, statements in respect of the securities
and other assets of the Fund held by foreign sub-custodians,
including but not limited to an identification of entities having
possession of such securities and other assets and advices or
notifications of any transfers of securities to or from each
custodial account maintained by a foreign banking institution for
the Custodian on behalf of the Fund indicating, as to securities
acquired for the Fund, the identity of the entity having physical
possession of such securities.
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3.8 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT. (a) Except as otherwise
provided in paragraph (b) of this Section 3.8, the provisions of
Sections 2.2 and 2.7 of this Contract shall apply, MUTATIS MUTANDIS
to the foreign securities of the Fund held outside the United States
by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of
the Fund and delivery of securities maintained for the account of
the Fund may be effected in accordance with the customary
established securities trading or securities processing practices
and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian
may be maintained in the name of such entity's nominee to the same
extent as set forth in Section 2.3 of this Contract, and the Fund
agrees to hold any such nominee harmless from any liability as a
holder of record of such securities.
3.9 BANK ACCOUNTS. The Custodian (or its foreign sub-custodian) may open
and maintain outside the United States a bank account or bank
accounts on behalf of the Fund in foreign banking institutions,
subject only to draft or order by the Custodian or its foreign
sub-custodian, acting pursuant to the terms of this Contract to hold
cash received by or from or for the account of the Fund.
3.10 LIABILITY OF FOREIGN SUB-CUSTODIANS. Each agreement pursuant to
which the Custodian employs a foreign banking institution as a
foreign sub-custodian shall require the institution to exercise
reasonable care in the performance of its duties and to indemnify,
and hold harmless, the Custodian and the Fund from and against any
loss, damage, cost, expense, liability or claim arising out of or in
connection with the institution's performance of such obligations.
At the election of the Fund, it shall be entitled to be subrogated
to the rights of the Custodian with respect to any claims against a
foreign banking institution as a consequence of any such loss,
damage, cost, expense, liability or claim if and to the extent that
the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.11 LIABILITY OF CUSTODIAN. The Custodian shall be liable for the acts
or omissions of a foreign banking institution to the same extent as
set forth with respect to sub-custodians generally in this Contract
and, regardless of whether assets are maintained in the custody of a
foreign banking institution, a foreign securities depository or a
branch of a U.S. bank as contemplated by paragraph 3.13 hereof, the
Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from nationalization, expropriation,
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currency restrictions, or acts of war or terrorism or any loss where
the sub-custodian has otherwise exercised reasonable care.
Notwithstanding the foregoing provisions of this paragraph 3.10, in
delegating custody duties to State Street London Ltd., the Custodian
shall not be relieved of any responsibility to the Fund for any loss
due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses
(excluding a bankruptcy or insolvency of State Street London Ltd.
not caused by political risk) due to Acts of God, nuclear incident
or other losses under circumstances where the Custodian and State
Street London Ltd. have exercised reasonable care.
3.12 MONITORING RESPONSIBILITIES. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the
foreign sub-custodians employed by the Custodian. Such information
shall be similar in kind and scope to that furnished to the Fund in
connection with the initial approval of this Contract. In addition,
the Custodian will promptly inform the Fund in writing in the event
that the Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or any material loss
of the assets of the Fund or in the case of any foreign
sub-custodian not the subject of an exemptive order from the
Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that
its shareholders' equity will decline below $200 million (U.S.
dollars or the equivalent thereof) or that its shareholders' equity
has declined below $200 million (in each case computed in accordance
with generally accepted U.S. accounting principles).
3.13 BRANCHES OF U.S. BANKS. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
the Funds assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth
in Section 26(a) of said Act. The appointment of any such branch as
a sub-custodian shall be governed by paragraph 1 of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained
in an interest bearing account established for the Fund with the
Custodian's London branch, which account shall be subject to the
direction of the Custodian, State Street London Ltd. or both.
3.14 TAX LAW. The Custodian shall have no responsibility or liability for
any obligations now or hereafter imposed on the Fund or the
Custodian as custodian of the Fund by the tax law of the United
States of America or any state or political subdivision thereof
other than for income, franchise or similar taxes imposed on or
assessed against the Custodian as Custodian. It shall be the
responsibility of the Fund to notify the Custodian of the
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obligations imposed on the Fund or the Custodian as custodian of the
Fund by the tax law of jurisdictions other than those mentioned in
the above sentence, including responsibility for withholding and
other taxes, assessments or other governmental charges,
certifications and governmental reporting. The sole responsibility
of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for
exemption or refund under the tax law of jurisdictions for which the
Fund has provided such information.
3.15 RULE 17F-5. This Article 3 shall be governed by, and interpreted in
accordance with, and the practices, arrangements and other matters
contemplated hereby shall be conducted in conformity with, Rule
17f-5 under the Investment Company Act of 1940, as amended, as such
Rule is interpreted in publications of the Securities and Exchange
Commission and its staff; in any conflict between this Article 3 and
the Rule (as interpreted), the Rule shall govern.
4. PAYMENTS FOR REPURCHASES OR REDEMPTIONS AND SALES OF SHARES OF THE
FUND
The Custodian shall receive from the distributor for the Fund's
Shares or from the transfer agent of the Fund ("Transfer Agent") and deposit
into the Fund's account such payments as are received for Shares of that Fund
issued or sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund and the Transfer Agent of any receipt by it of payments
for Shares of the Fund.
From such funds as may be available for the purpose but subject to
the limitations of the Declaration of Trust and any applicable votes of the
Board of Trustees of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor payable-through
drafts drawn on the Custodian by a holder of Shares, which payable-through
drafts have been furnished by the Fund to the holder of Shares, when presented
to the Custodian in accordance with such procedures and controls as are mutually
agreed upon from time to time between the Fund and the Custodian.
5. PROPER INSTRUCTIONS
Proper Instructions as used herein means a writing signed or
initialled by one or more person or persons as the Board of Trustees shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved, including a specific statement of
the purpose for which such action is requested. Oral instructions will be
considered Proper Instructions if the Custodian reasonably believes them to have
been given by a person authorized to give oral instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be confirmed
14
<PAGE>
in writing. Upon receipt of a certificate of the Secretary or an Assistant
Secretary as to the authorization by the Board of Trustees of the Fund
accompanied by a detailed description of procedures approved by the Board of
Trustees, Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the Board of
Trustees and the Custodian are satisfied that such procedures afford adequate
safeguards for the Fund's assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.12. The Fund shall provide the Custodian with a list
of authorized persons, certified as to their authority by the Secretary or
Assistant Secretary to the Fund and updated as appropriate from time to time.
6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from
the Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, PROVIDED that all such payments
shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property of
the Fund except as otherwise directed by the Board of Trustees
of the Fund.
7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting as provided herein upon
any instructions, notice, request, consent, certificate or other instrument or
paper reasonably believed by it to be genuine and to have been properly executed
by or on behalf of the Fund. The Custodian may receive and accept a certified
copy of a vote of the Board of Trustees of the Fund as conclusive evidence (a)
of the authority of any person to act in accordance with such vote or (b) of any
determination or of any action by the Board of Trustees pursuant to the
Declaration of Trust as described in such vote, and such vote may be considered
as in full force and effect until receipt by the Custodian of written notice to
the contrary.
15
<PAGE>
8. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND
CALCULATION OF NET ASSET VALUE AND NET INCOME
The Custodian shall cooperate with and supply necessary information
to the entity or entities appointed by the Board of Trustees of the Fund to keep
the books of account of the Fund and/or compute the net asset value per share of
the outstanding Shares of the Fund or, if directed in writing to do so by the
Fund, shall itself keep such books of account and/or compute such net asset
value per share. If so directed, the Custodian shall also calculate daily the
net income of the Fund as described in the Fund's currently effective prospectus
related to the Fund and shall advise the Fund and the Transfer Agent daily of
the total amounts of such net income and, if instructed in writing by an officer
of the Fund to do so, shall advise the Transfer Agent periodically of the
division of such net income among its various components. The calculations of
the net asset value per share and the daily income of the Fund shall be made at
the time or times described from time to time in the Fund's currently effective
prospectus.
9. RECORDS
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by the Fund and
held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
10. OPINION OF FUND'S INDEPENDENT ACCOUNTANT
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's registration statement and
amendments thereto, and Form N-SAR or other annual reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
11. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts, including
domestic securities deposited and/or maintained in a Securities System, relating
16
<PAGE>
to the services provided by the Custodian under this Contract; such reports,
shall be of sufficient scope and in sufficient detail, as may reasonably be
required by the Fund to provide reasonable assurance that any material
inadequacies would be disclosed by such examination, and, if there are no such
inadequacies, the reports shall so state. In addition, the Custodian shall
supply the Fund and its independent public accountants with such information as
they may reasonably request from time to time in order to monitor the
performance of the Custodian under this Contract.
12. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as set forth in the attached [Appendix A],
which may be changed as agreed from time to time between the Fund and the
Custodian.
13. RESPONSIBILITY OF CUSTODIAN
So long as and to the extent that it is in the exercise of
reasonable care, the Custodian shall not be responsible for the title, validity
or genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. Except as otherwise specifically
stated herein in Section 2.8, the Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for the Fund) on
all matters, and shall be without liability for any action reasonably taken or
omitted in good faith and without negligence in conformity with such advice.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian, nominee
or agent, the Custodian shall be without liability to the Fund for any loss,
liability, claim or expense resulting from or caused by; (i) events or
circumstances beyond the reasonable control of the Custodian or any
sub-custodian or Securities System or any agent or nominee of any of the
foregoing, including, without limitation, nationalization or expropriation,
imposition of currency controls or restrictions, the interruption, suspension or
restriction of trading on or the closure of any securities market, power or
other mechanical or technological failures or interruptions, computer viruses or
communications disruptions, acts of war or terrorism, riots, revolutions, work
stoppages, natural disasters or other similar events or acts; (ii) errors by the
Fund or the Investment Advisor in their instructions to the Custodian provided
such instructions have been in accordance with this Contract; (iii) the
insolvency of or acts or omissions by a Securities System; (iv) any delay or
failure of any broker, agent or intermediary, central bank or other commercially
prevalent payment or clearing system to deliver to the Custodian's sub-custodian
or agent securities purchased or in the remittance or payment made in connection
17
<PAGE>
with securities sold; (v) any delay or failure of any company, corporation, or
other body in charge of registering or transferring securities in the name of
the Custodian, the Fund, the Custodian's sub-custodians, nominees or agents or
any consequential losses arising out of such delay or failure to transfer such
securities including non-receipt of bonus, dividends and rights and other
accretions or benefits; (vi) delays or inability to perform its duties due to
any disorder in market infrastructure with respect to any particular security or
Securities System; and (vii) any provision of any present or future law or
regulation or order of the United States of America, or any state thereof, or
any other country, or political subdivision thereof or of any court of competent
jurisdiction. The Custodian shall promptly inform the Fund in writing of any of
the foregoing matters; as they may arise. Upon the occurrence of any of the
foregoing events which causes or may cause any loss, damage or expense to the
Fund, the Custodian shall use all commercially reasonable efforts and take all
reasonable steps under the circumstances to mitigate the effects of such event
and to avoid continuing harm to the Fund.
If the Fund requires the Custodian to take any action with respect
to securities, which action involves the payment of money or which action may,
in the opinion of the Custodian, result in the Custodian or its nominee assigned
to the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it as shall be agreed by the parties in writing.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement) or
in the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses incurred on behalf of the Fund, assessments, claims or
liabilities in connection with the performance of this Contract, except such as
may arise from its or its nominee's own negligent action, negligent failure to
act or willful misconduct, any property at any time held for the account of the
Fund other than property held in a segregated account pursuant to Section 2.10
hereof shall be security therefor and should the Fund fail to repay the
Custodian promptly upon written notice from the Custodian, the Custodian shall,
upon written notice to the Fund, be entitled to utilize available cash and to
dispose of the Fund assets to the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
14. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; PROVIDED,
18
<PAGE>
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Trustees of the Fund has approved the initial use of
a particular Securities System, as required by Rule 17f-4 under the Investment
Company Act of 1940, as amended and that the Custodian shall not act under
Section 2.11 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Trustees has approved the
initial use of the Direct Paper System; PROVIDED further, however, that neither
party shall amend or terminate this Contract in contravention of any applicable
federal or state regulations, or any provision of the Declaration of Trust, and
further provided, that the Fund may at any time by action of its Board of
Trustees (i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii) immediately terminate
this Contract in the event of the appointment of a conservator or receiver for
the Custodian by the Comptroller of the Currency or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund shall pay to the
Custodian such compensation as may be due as of the date of such termination and
shall likewise reimburse the Custodian for its costs, expenses and
disbursements.
15. SUCCESSOR CUSTODIAN
If a successor custodian shall be appointed by the Board of Trustees
of the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it hereunder and shall transfer to an
account of the successor custodian all of the Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of the Board
of Trustees of the Fund, deliver at the office of the Custodian and transfer
such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian
or certified copy of a vote of the Board of Trustees shall have been delivered
to the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
19
<PAGE>
In the event that securities, funds and other properties remain in
the possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
16. INTERPRETIVE AND ADDITIONAL PROVISIONS
In connection with the operation of this Contract, the Custodian and
the Fund, may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, PROVIDED that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the prospectus or the Declaration of Trust of the Fund. No interpretive or
additional provisions made as provided in the preceding sentence shall be deemed
to be an amendment of this Contract.
17. MASSACHUSETTS LAW TO APPLY
This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth of
Massachusetts.
18. PRIOR CONTRACTS
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund and the Custodian relating to the custody of
the Fund's assets.
19. SHAREHOLDER COMMUNICATIONS ELECTION
Securities and Exchange Commission Rule 14b-2 requires banks which
hold securities for the account of customers to respond to requests by issuers
of securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
20
<PAGE>
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [ X ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
20. LIMITATION OF LIABILITY
The Fund is a business trust organized under the laws of the
Commonwealth of Massachusetts and under a Declaration of Trust, to which
reference is hereby made, a copy of which is on file at the office of the
Secretary of State of the Commonwealth of Massachusetts, and to any and all
amendments thereto so filed or hereafter filed. The obligations of the Fund
entered into hereunder in the name of the Fund or on behalf thereof by any of
its trustees, officers, employees or agents are undertaken not individually but
in such capacities, and are not binding upon any of the trustees, officers,
employees or shareholders of the Fund personally, but bind only the assets of
the Fund or of the particular Portfolio in question, as the case may be.
21. HEADINGS
The section headings contained in this Contract are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Contract.
22. NOTICES
Except as may be otherwise provided herein, any notice or other
instrument in writing authorized or required by this Contract to be given by
either party hereto shall be sufficiently given if addressed to such party and
mailed or delivered to it at the address set forth below:
(a) If to the Fund, to:
Spectra Fund
30 Montgomery Street
Jersey City, NJ 07302
Attention: Gregory S. Duch
21
<PAGE>
(b) If the Custodian, to:
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
Attention: Robert Bagdasarian
or at such other place as the receiving party may from time to time designate in
writing.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument
to be executed in its name and behalf by its duly authorized representative and
its seal to be hereunder affixed as of the 15th day of July, 1996.
ATTEST SPECTRA FUND
/s/ Mary Marsden-Cochran By /s/ Gregory S. Duch
- ---------------------------- -----------------------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ Francine Hayes By /s/Donald E. Lozar
- ---------------------------- -----------------------------------
Executive Vice President
w:\hayes\algers\spectra\custody.doc
<PAGE>
SCHEDULE A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Trustees of Spectra Fund for use
as sub-custodians for the Fund's securities and other assets:
Country Subcustodian Central Depository
Austria GiroCredit Bank Oesterreichische
Aktiengesellschaft Kontrollbank AG
der Sparkassen (Wertpapiersammelbank
Division)
Belgium Generale Bank Caisse Interprofessionnelle
de Depots et de Virements
de Titres S.A. (CIK);
Banque Nationale de Belgique
Denmark Den Danske Bank Vaerdipapircentralen -
The Danish Securities
Center (VP)
Finland Merita Bank Limited The Central Share Register of
Finland
France Banque Paribas Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres
(SICOVAM);
Banque de France,
Saturne System
Germany Dresdner Bank A.G. The Deutscher Kassenverein AG
Ireland Bank of Ireland None;
The Central Bank of Ireland,
The Gilt Settlement Office
(GSO)
Italy Morgan Guaranty Trust Monte Titoli S.p.A.;
Company
Banca d'Italia
Netherlands MeesPierson N.V. Nederlands Centraal
Instituut voor Giraal
Effectenverkeer B.V.
(NECIGEF)
Norway Christiania Bank og Verdipapirsentralen -
Kreditkasse The Norwegian Registry
of Securities (VPS)
<PAGE>
Schedule A (Cont.)
Country Subcustodian Central Depository
Portugal Banco Comercial Portugues Central de Valores
Mobiliarios (Central)
Spain Banco Santander, S.A. Servicio de Compensacion y
Liquidacion de Valores
(SCLV);
Banco de Espana,
Anotaciones en Cuenta
Sweden Skandinaviska Enskilda Vardepapperscentralen VPC AB
Banken The Swedish Central Securities
Depository
Switzerland Union Bank of Switzerland Schweizerische Effekten -
Giro AG (SEGA)
United Kingdom State Street Bank and None;
Trust Company
The Bank of England,
The Central Gilts Office (CGO);
The Central Moneymarkets
Office (CMO)
Euroclear (The Euroclear System)/ State Street London Limited
Cedel (Cedel Bank societe anonyme)/ State Street London Limited
Certified:
- -------------------------
Fund's Authorized Officer
Date:
--------------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated December 16, 1996 on the financial statements of
Spectra Fund for the period ended October 31, 1996 and to all references to our
Firm included in or made a part of the registration statement of Spectra Fund,
filed on Form N-1A (Amendment No. 15), Investment Company Act File No. 811-1743
with the Securities and Exchange Commission.
ARTHUR ANDERSEN LLP
New York, New York
February 27, 1997
AVERAGE ANNUAL RETURN COMPUTATION
The Average Annual Return for the Fund was computed according to the
following formula:
n
FORMULA: P(1+T) =ERV
Where: P = a hypothetical investment 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 (or other) periods at
the end of the 1, 5, or 10 year (or other)
periods (or fractional portion thereof)
ENDING AVERAGE
PERIOD REDEEMABLE ANNUAL RATE
COVERED VALUE OF RETURN FORMULA *
------- ------- ------- ------------
10 YEARS ENDED 10/31/96 6,031.75 19.69% @RATE(6031.75,1000,10)
5 YEARS ENDED 10/31/96 2,860.54 23.39% @RATE(2860.54,1000,5)
YEAR ENDED 10/31/96 1,126.77 12.68% @RATE(1126.77,1000,1)
Average annual rates of returns reflect dividends and distributions
reinvested at market value.
* LOTUS 123 @RATE FUNCTION:
@RATE(FV,PV,TERM) The periodic interest rate necessary for
present value "pv", to grow to future
value "fv", over the number of compounding
periods in "term".
