Filed pursuant to Rule 497B
33 Act File #333-20889
40 Act File #811-00018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
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Post-Effective Amendment No. 16 [X]
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AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 22 [X]
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(check appropriate box or boxes)
AMERITOR SECURITY TRUST
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(Exact Name of Registrant as Specified in Charter)
1730 K Street, N.W., Washington, D.C. 20006
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 202-223-1000
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Max Katcher, President
Ameritor Security Trust
1730 K Street, N.W.
Washington, D.C. 20006
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(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering: AS SOON AS POSSIBLE AFTER
EFFECTIVENESS
It is proposed that this filing will become effective (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
<PAGE>
PROSPECTUS
AMERITOR SECURITY TRUST
A No-Load Fund - No Sales Charge
Shares are Purchased and Redeemed at Net Asset Value
November 16, 1999
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This Prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
Fund, dated November 16, 1999, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this Prospectus. To obtain a free
copy, call 202-223-1000 or 1-800-424-8570.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the Federal Deposit Insurance
Corporation (FDIC), or any other agency, and are subject to investment risks,
including possible loss of the principal amount invested.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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TABLE OF CONTENTS
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INFORMATION ABOUT THE AMERITOR SECURITY TRUST.....................................................................1
About the Fund...........................................................................................1
Investments, Risks, and Performance: What to Expect.....................................................1
Fees and Expenses: What to Expect........................................................................4
Other Information about the Fund.........................................................................5
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND RELATED RISKS.........................................6
Investment Objective of the Fund.........................................................................6
Implementation of Investment Objective...................................................................6
Concentration Policy.....................................................................................7
Temporary Defensive Positions............................................................................7
Portfolio Turnover.......................................................................................8
Portfolio Risks..........................................................................................8
Portfolio Diversification...............................................................................12
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE......................................................................13
Performance Graph.......................................................................................13
Comparison of Fund Performance for the Fiscal Years Ended June 30, 1999 and 1998........................14
Year 2000 Issue.........................................................................................14
MANAGEMENT, ORGANIZATION, AND CAPITAL STRUCTURE..................................................................15
Investment Advisor......................................................................................15
Organization and Capital Structure......................................................................16
Special Provisions of the Trust Indenture of the Fund...................................................16
Legal Proceedings.......................................................................................17
SHAREHOLDER INFORMATION..........................................................................................17
Pricing of Fund Shares..................................................................................17
Purchase of Fund Shares.................................................................................18
Redemption of Fund Shares...............................................................................18
Dividends and Distributions.............................................................................19
Tax Status and Consequences.............................................................................20
CONDENSED FINANCIAL INFORMATION OF THE FUND......................................................................20
Financial Highlights....................................................................................21
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SUMMARY INFORMATION ABOUT THE AMERITOR SECURITY TRUST
ABOUT THE FUND
The Ameritor Security Trust (hereinafter, the "Fund") is a common-law trust
organized under the laws of the District of Columbia. The Fund was originally
founded in 1939 under the name Associated Fund Trust. As of June 30, 1999, the
Fund had approximately $5 million of assets under management.
INVESTMENTS, RISKS, AND PERFORMANCE: WHAT TO EXPECT
To help you decide whether this fund is appropriate for you, this section
reviews the Fund's investment objective, strategy, and potential risks. As with
all mutual funds, there is no guarantee this fund will achieve its goals.
What is the Fund's investment objective?
The primary investment objective of the Fund is to seek current income.
As a secondary objective, the Fund seeks to maximize the total return
but only to the extent consistent with its primary investment
objective.
What are the Fund's principal investment strategies?
The Fund seeks to meet its investment objective through a broad range
of investment vehicles. The Fund may also make substantial temporary
defensive investments in (i) high-grade debt securities of all types,
(ii) U.S. government securities, and (iii) repurchase agreements. If
the Fund makes substantial temporary defensive investments, the Fund
may not achieve its investment objective.
In choosing an investment for the Fund, the Fund is not restricted to
any particular criteria or quality standards except as expressly
provided for in this Prospectus. With respect to common and preferred
stock investments, the Fund's financial adviser generally looks for
issuers that pay attractive dividends and show growth potential, based
on fundamental analysis of the relevant industries and the issuers'
financial strength. With respect to debt instruments (other than
short-term debt used for defensive purposes), the Fund's investment
adviser considers probable interest rate movements and generally
chooses investment grade instruments. The yield sought by the Fund on
investment grade instruments usually exceeds that of short-term U.S.
treasury securities.
The Fund uses the following principal investment strategies to attempt
to achieve its investment objective.
o The purchase and sale of common and preferred stock of U.S.
and non-U.S. (foreign) issuers.
o The purchase and sale of call options. This is primarily to
achieve premium income but may also be used for hedging
purposes.
o The purchase and sale of U.S. government securities.
o The purchase and sale of high-yield/high-risk bonds, sometimes
called Junk Bonds.
o The purchase and sale of U.S. government agency
mortgage-backed securities.
1
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What are the main risks of investing in the Fund?
Investing in the Fund involves investment risk. Because securities
fluctuate in price, there is a risk of loss of principal.
An investor should select investments which reflect his or her
financial goals, time horizon, and risk tolerance. The Fund is not
intended to provide a complete or balanced investment program, but can
serve as one component of an investor's program to accumulate assets
for retirement, college tuition, or other major goals. Investors should
consult with their personal accountant or investment advisor prior to
making an investment in the Fund.
-> The fund should not represent your complete investment program
or be used for short-term trading.
By investing in the Fund, an investor assumes the risks of investing in
the types of investments acquired by the Fund. Investing in securities
involves varying degrees of market risk, credit or financial risk, and
prepayment risk. The Fund invests primarily in stocks, some of which
may not be currently producing income, which could limit its potential
for current income compared with a fund that invests primarily in
interest-earning assets such as debt securities. In addition, the Fund
is not restricted in the investment vehicles and techniques that it may
use, some of which are highly specialized and involve significant
risks.
The use of the investment techniques described in this Prospectus can
produce portfolio turnover of 100% or more per year. The portfolio
turnover for the year ended June 30, 1999 was 0%. High portfolio
turnover (100% or more) increases the Fund's brokerage costs and
increases the likelihood that the Fund will experience short-term gains
and losses.
Common and preferred stock issued by non-U.S. (foreign) issuers
presents additional special risks. For example, political, social, and
economic developments abroad might adversely affect foreign
investments. Often, there is less information publicly available about
foreign issuers, so it can be more challenging to assess the viability
and prospects of foreign companies. The value of investments that are
denominated in foreign currencies may be adversely affected by
fluctuations in foreign currency values. In addition, given the
particular risks associated with investing in developing countries, an
investment in the developing countries should be considered
speculative.
The Fund may engage in a variety of investment strategies relating to
the use of options, including the writing (selling) of covered call
options. When writing a covered call option, the Fund, in return for
the premium (purchase price), gives up the opportunity for profit from
a price increase in the underlying security above the exercise price.
However, the Fund retains the risk of loss should the price of the
security decline. The use of options could limit the Fund's ability to
meet its investment objective because, unlike one who owns securities
not subject to an option, the Fund has no control over when it may be
required to sell the underlying securities. The Fund may be presented
with an exercise notice at any time prior to the expiration of its
obligation as a writer, even if selling the underlying security at that
time is not advantageous to the Fund.
The Fund is a "non-diversified" investment company. Because the Fund is
a non-diversified investment company, the Fund's assets may be invested
in the securities of a single issuer generally without limitation.
Moreover, the Fund has not elected to conduct its operations so as to
qualify as a "regulated investment company" for purposes of the
Internal Revenue Code of 1986. Thus, unlike most mutual funds, the Fund
is not restricted by certain diversification requirements
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imposed by the Internal Revenue Code. Because a relatively high
percentage of the Fund's assets may be invested in the securities or
obligations of a limited number of issuers, some of which may be within
the same economic sector, the Fund's portfolio of investments will be
more susceptible to a single economic, political, or regulatory event
than the portfolio of investments of a more diversified investment
company.
Because the Fund is not a regulated investment company, the Fund is
subject to taxation on its income similar to a corporation. In
addition, the distributions from the Fund are taxable under the normal
corporate tax rules. This double layer of tax may result in a decrease
in the amount of distributions an investor may receive.
The Fund has not made a distribution or paid a dividend to shareholders
since 1989. Because of the size of the Fund and management's desire to
increase net assets of the Fund, the Fund does not anticipate paying
any cash dividends in the foreseeable future. Prospective investors
should not view an investment in the Fund as a source of current
income.
For the year ended June 30, 1999, the Fund's percentage of expenses to
average net assets was 7.24%. This expense ratio is higher than most
other funds, which typically have substantially more assets. With an
expense ratio of 7.24%, the Fund would need to increase net assets
equivalent to the expense ratio in order to maintain its net assets at
the same level, assuming there are no redemptions. A decrease in net
assets, whether caused by redemptions or a decrease in return on the
Fund's investments, would cause the expense ratio to increase, absent a
reduction in expenses.
-> The above Summary Information about the Ameritor Security
Trust is a summary of information contained in other portions
of this Prospectus. For more details on the Fund's investment
strategies and techniques and the risks of such investments,
see the section entitled "Investment Objectives, Principal
Investment Strategies, and Related Risks" in this Prospectus
and see the Fund's Statement of Additional Information. Also,
additional information about the Fund's investments is
available in the Fund's annual and semi-annual reports to
shareholders.
Risk/Return Bar Chart and Table
The bar chart and table shown below provide an indication of the risks
of investing in the Fund by showing the percentage increase or decrease
in the net asset value per share of the Fund's shares from year to year
over a 10-year period. The table also shows the Fund's average annual
returns for one, five, and ten years compared to those of a broad-based
securities index. The Fund can experience short-term performance swings
and results may very widely from year to year. How the Fund has
performed in the past is not necessarily an indication of how the Fund
will perform in the future.
3
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[GRAPH APPEARS HERE]
PLEASE INSERT PLOT POINTS
- -32% 1990
17% 1991
-4% 1992
36% 1993
- -17% 1994
2% 1995
-4% 1996
9% 1997
21% 1998
46% 1999
During the 10-year period shown in the above bar chart, the highest
return for a quarter was approximately 31% (quarter ended December 31, 1998) and
the lowest return for a quarter was approximately negative 29% (quarter ended
September 30, 1990).
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Average Annual Return (1)
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Past Fiscal Year Past 5 Fiscal Years Past 10 Fiscal Years
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Ameritor Security Trust 46.33% 13.40% 5.72%
Standard & Poor's 500(2) 22.76% 23.59% 19.38%
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(1) Adjusted to reflect reinvestment of dividends.
(2) The Standard & Poor's Composite Index of 500 Stocks is a widely recognized,
unmanaged index of common stock prices.
FEES AND EXPENSES: WHAT TO EXPECT
What fees or expenses will I pay?
For a better understanding of the expenses you will incur when
investing in the Fund, a summary based on the Fund's operations during
the fiscal year ended June 30, 1999 is set forth below. There are no
sales fees (loads) imposed upon any purchase of Fund shares,
reinvestment or dividends, or redemption of Fund shares. Furthermore,
there are no distribution (and/or service) (12b-1) fees.
The following tables describe the fees and expenses that you may pay if
you buy and hold shares of the Fund.
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SHAREHOLDER FEES (fees paid directly from your investment)
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Maximum Sales Charge (Load) Imposed on Purchases................................ None
Maximum Deferred Sales Charge (Load)............................................ None
Maximum Sales Charge (Load) Imposed on Reinvested Dividend...................... None
Redemption Fees (1)............................................................. None
Exchange Fees................................................................... None
Maximum Account Fee............................................................. None
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(1) The Fund imposes a service charge on wire redemptions of less than
$5,000.
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ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) As a Percentage of
Average Net Assets
Management fees (1)............................................................ 1.00%
0.00
Distribution (and/or service) (12b-1) fees.....................................
Other expenses
Salaries and employee benefits........................................ 1.85
Professional fees..................................................... 1.62
Total other expenses.................................................. 2.77
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Total annual Fund operating expenses........................................... 7.24%
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(1) The management fee is higher than that paid by most other
investment companies.
The numbers in the above table provide an estimate of how much it will
cost to operate the Fund for a year based on 1999 fiscal year expenses.
These are costs you pay directly because they are deducted from the
Fund's total assets before the daily share price is determined and
before distributions are made.
EXAMPLE: This example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds.
The example assumes you invest $10,000 in the Fund for the time periods
indicated. The example also assumes (i) a 5% annual return and (ii)
redemption at the end of the period.
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1 year 3 years 5 years 10 years
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$716 $2,100 $3,423 $6,479
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This example should not be considered a representation of past or
future expenses, and actual expenses may be greater or less than shown.
OTHER INFORMATION ABOUT THE FUND
What are some of the Fund's potential rewards?
Income is normally a more stable and predictable component of total
return than capital appreciation. While the price of a company's stock
can go up or down in response to earnings or to fluctuations in the
general market, income is usually more reliable.
The Fund is designed for investors seeking to balance the income and
relative stability of securities over the long term with potential
capital appreciation through common stocks. The Fund's approach to
achieving a combination of income, growth, and stability is used by
many large pension funds because of their conservative, long-term
focus. The Fund is currently not paying dividends from net investment
income, but intends to distribute net capital gains, if any.
How can I tell if the Fund is appropriate for me?
5
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Consider your investment goals, your time horizon for achieving those
goals, and your tolerance for risk. If you are investing primarily for
safety and liquidity or primarily for current income (such as
dividends), you should consider another investment. The Fund is
currently not paying dividends from net investment income, but intends
to distribute realized capital gains. If you can accept the price
fluctuations of stocks in an effort to achieve income and capital
appreciation, the Fund could be an appropriate part of your overall
investment strategy.
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT
STRATEGIES, AND RELATED RISKS
INVESTMENT OBJECTIVE OF THE FUND
The primary investment objective of the Fund is to seek current income.
As a secondary objective, the Fund seeks to maximize the total return but only
to the extent consistent with its primary investment objective. The Fund's
investment objective may be changed by a vote of the Trustees of the Fund at any
time without a vote of the shareholders of the Fund.
IMPLEMENTATION OF INVESTMENT OBJECTIVE
The Fund seeks to meet its investment objective through a broad range
of investment vehicles. In seeking to achieve its investment objective, the Fund
primarily will use the following principal investments, without limitation:
o Common stocks of any issuer.
o Preferred stocks, warrants, and convertible securities of any
issuer.
o Corporate bonds and debentures and debt securities issued or
guaranteed by the U.S. government or its agencies or
instrumentalities.
o Money market instruments, such as commercial paper, bank
certificates of deposit, and U.S. government securities.
In choosing an investment for the Fund, the Fund is not restricted to
any particular criteria or quality standards except as expressly provided for in
this Prospectus. With respect to equity investments, the Fund's financial
adviser generally looks for issuers that pay attractive dividends and show
growth potential, based on fundamental analysis of the relevant industries and
the issuers' financial strength. With respect to debt instruments (other than
short-term debt used for defensive purposes), the Fund's investment adviser
considers probable interest rate movements and generally chooses investment
grade instruments. The yield sought by the Fund on investment grade instruments
usually exceeds that of short-term U.S. treasury securities.
The Fund may also use the following principal investment strategies:
o The purchase and sale of securities of U.S. and non-U.S.
issuers.
o The purchase and sale of call options. This is primarily to
achieve premium income but may also be used for hedging
purposes.
o The purchase and sale of U.S. government securities.
6
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o The purchase and sale of high-yield bonds, sometimes called
Junk Bonds.
o The purchase and sale of U.S. government agency
mortgage-backed securities.
The Fund may also on occasion use derivatives as a non-principal
investment strategy. The term derivative is used to describe financial
instruments whose value is derived from an underlying security (E.G., a stock or
bond) or a market benchmark (E.G., an interest rate index). Many types of
investments representing a wide range of potential risks and rewards fall under
the "derivatives" umbrella - from conventional instruments, such as callable
bonds, futures, and options, to more exotic investments, such as stripped
mortgage securities and structured notes. While the term "derivative" only
recently became widely known among the investing public, derivatives have in
fact been employed by investment managers for many years.
The Fund will invest in derivatives only if the expected risks and
rewards are consistent with its objectives, policies, and overall risk profile
as described in this Prospectus. The Fund currently only writes covered call
options. The Fund will limit its use of derivatives to situations in which they
may enable the Fund to accomplish the following: increase yield; hedge against a
decline in principal value; invest in eligible asset classes with greater
efficiency and lower cost than is possible through direct investment; or adjust
portfolio duration.
The Fund may also investment in high yield (high-risk) debt securities
as a non-principal investment strategy. These bonds, which are commonly known as
"junk bonds," may provide higher yields, but present a higher risk of loss of
interest and principal, as well as a greater risk of default. These securities
may also be more susceptible to changes in economic or market conditions than
investment grade bonds, resulting in greater price volatility. At times, the
markets in which these securities are traded may be less liquid than the markets
for higher rated securities. Lower liquidity may adversely affect the price at
which a particular security may be sold. Accordingly, an investment in high
yield (high-risk) debt securities should also be considered speculative.
CONCENTRATION POLICY
The current concentration policy of the Fund states that it is not the
policy of the Fund to invest 25% or more of the value of its total assets in any
one industry. An industry is determined by looking at the standard industry
classification (SIC) code (i.e., if two companies have the same SIC code, the
companies would be in the same industry). However, when securities of a given
industry come to constitute 25% or more of the value of the Fund's total assets
by reason of changes in value of either the concentrated securities or other
securities, the excess need not be sold. The Fund has also instituted policies
and procedures to assist in preventing a violation of the concentration policy
of the Fund. The policy provides that prior to the investment advisor making a
purchase of a security, the chief financial officer, or designee thereof, must
confirm that the purchase will not result in a violation of the concentration
policy. In addition, pursuant to the policy, the chief financial officer will
determine weekly if any portfolio securities have appreciated in value above 25%
such that additional purchases would be prohibited.
TEMPORARY DEFENSIVE POSITIONS
In response to unfavorable market conditions, the Fund may commit up to
100% of its assets to temporary defensive investments in (i) high-grade debt
securities of all types, (ii) U.S. government securities, and (iii) repurchase
agreements. While the Fund believes that these temporary defensive
7
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investments are consistent with the Fund's investment objective, the rate of
return on such investments tends to be lower and may have an adverse effect on
Fund performance. If the Fund makes substantial temporary defensive investments,
the Fund may not achieve its investment objective.
PORTFOLIO TURNOVER
The use of the principal investment strategies discussed above can
produce portfolio turnover of 100% or more per year. The portfolio turnover for
the year ended June 30, 1999 was 0%. High portfolio turnover (100% or more)
increases the Fund's brokerage costs and increases the likelihood that the Fund
will experience short-term gains and losses.
PORTFOLIO RISKS
GENERAL. Because of its investment policy, the Fund may or may not be
suitable or appropriate for all investors. The Fund is not a money market fund
and is not an appropriate investment for those whose primary objective is
principal stability. The Fund will normally have substantially all of its assets
in equity securities (E.G., common stocks). This portion of the Fund's assets
will be subject to all of the risks of investing in the stock market. There is
risk in all investments. The value of the portfolio securities of the Fund will
fluctuate based upon market conditions.
The Fund is not diversified across a large number of industries.
Although the Fund seeks to reduce risk by investing in a diversified portfolio,
such diversification does not eliminate all risk. Unlike other funds that may
invest in substantially more industry segments, the Fund is subject to increased
portfolio risk.
SECURITIES OF FOREIGN (NON-U.S.) ISSUERS. The Fund may invest in U.S.
dollar-denominated and non-U.S. dollar-denominated securities of foreign
(issuers. There are special risks in foreign investing.
Individual foreign economies of certain countries differ favorably or
unfavorably from the United States' economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. The internal politics of
certain foreign countries are not as stable as in the United States. Governments
in certain foreign countries continue to participate to a significant degree,
through ownership interest or regulation, in their respective economies. Action
by these governments could have a significant effect on market prices of
securities and payment of dividends. The economies of many foreign countries are
heavily dependent upon international trade and are accordingly affected by
protective trade barriers and economic conditions of their trading partners. The
enactment by these trading partners of protectionist trade legislation could
have a significant adverse effect upon the securities markets of such countries.
With respect to certain foreign countries, especially developing and
emerging ones, there is the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the Fund, political or
social instability, or diplomatic developments which could adversely affect
investments by the Fund in those countries.
OPTIONS. The Fund may engage in a variety of investment strategies
relating to the use of options including the following:
O WRITING CALL OPTIONS. The Fund may write (sell) American or European
style "covered" call options and purchase options to close out options
previously written by the Fund. In writing covered call options, the Fund
expects to generate additional premium income which should serve to enhance the
Fund's total return and reduce the effect of any price decline of the security
or currency involved in the
8
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option. Covered call options will generally be written on securities or
currencies which, in the Fund's opinion, are not expected to have any major
price increases or moves in the near future but which, over the long term, are
deemed to be attractive investments for the Fund.
A call option gives the holder (buyer) the "right to purchase"
a security or currency at a specified price (the exercise price) at expiration
of the option (European style) or at any time until a certain date (the
expiration date) (American style). So long as the obligation of the writer of a
call option continues, the writer may be presented with an exercise notice by
the broker-dealer through whom the option was sold, requiring the writer to
deliver the underlying security or currency against payment of the exercise
price. This obligation terminates upon the expiration of the call option, or
such earlier time at which the writer effects a closing purchase transaction by
repurchasing an option identical to that previously sold. To secure the writer's
obligation to deliver the underlying security or currency in the case of a call
option, a writer is required to deposit in escrow the underlying security or
currency or other assets in accordance with the rules of a clearing corporation.
The Fund will write only covered call options. This means that the Fund
will own the security or currency subject to the option or an option to purchase
the same underlying security or currency, having an exercise price equal to or
less than the exercise price of the "covered" option, or will establish and
maintain with its custodian for the term of the option, an account consisting of
cash, U.S. government securities, other liquid high-grade debt obligations, or
other suitable cover as determined by the Securities and Exchange Commission
("SEC") having a value equal to the fluctuating market value of the optioned
securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Fund will not
do), but capable of enhancing the Fund's total return. When writing a covered
call option, the Fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities or currencies, because it may be presented with
an exercise notice at any time prior to the expiration of its obligation as a
writer. If a call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security or currency during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security or currency.
The premium the Fund will receive from writing a call option will
reflect, among other things, the current market price of the underlying security
or currency, the relationship of the exercise price to such market price, the
historical price volatility of the underlying security or currency, and the
length of the option period. Once the decision to write a call option has been
made, the Fund, in determining whether a particular call option should be
written on a particular security or currency, will consider the reasonableness
of the anticipated premium and the likelihood that a liquid secondary market
will exist for those options. The premium received by the Fund for writing
covered call options will be recorded as a liability of the Fund. This liability
will be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of the Fund
is computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration of
the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
9
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Closing transactions will be effected in order to realize a profit on
an outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to sell
a particular security or currency from its portfolio on which it has written a
call option, or purchased a put option, it will seek to effect a closing
transaction prior to, or concurrently with, the sale of the security or
currency. There is, of course, no assurance that the Fund will be able to effect
such closing transactions at favorable prices. If the Fund cannot enter into
such a transaction, it may be required to hold a security or currency that it
might otherwise have sold. When the Fund writes a covered call option, it runs
the risk of not being able to participate in the appreciation of the underlying
securities or currencies above the exercise price, as well as the risk of being
required to hold on to securities or currencies that are depreciating in value.
This could result in higher transaction costs. The Fund will pay transaction
costs in connection with the writing of options to close out previously written
options. Such transaction costs are normally higher than those applicable to
purchases and sales of portfolio securities.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to time,
the Fund may purchase an underlying security or currency for delivery in
accordance with an exercise notice of a call option assigned to it, rather than
delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Fund.
The Fund will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities or currencies covering
written call or put options exceeds 25% of the market value of the Fund's net
assets. In calculating the 25% limit, the Fund will offset, against the value of
assets covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
O PURCHASING CALL OPTIONS. The Fund may purchase American or European
style call options. As the holder of a call option, the Fund has the right to
purchase the underlying security or currency at the exercise price at any time
during the option period (American style) or at the expiration of the option
(European style). The Fund may enter into closing sale transactions with respect
to such options, exercise them or permit them to expire. The Fund may purchase
call options for the purpose of increasing its current return or avoiding tax
consequences that could reduce its current return. The Fund may also purchase
call options in order to acquire the underlying securities or currencies.
The Fund will not commit more than 5% of its assets to premiums when
purchasing call and put options. The Fund may also purchase call options on
underlying securities or currencies it owns in order to protect unrealized gains
on call options previously written by it. A call option would be purchased for
this purpose where tax considerations make it inadvisable to realize such gains
through a closing purchase transaction. Call options may also be purchased at
times to avoid realizing losses.
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DEBT SECURITIES. Although at June 30, 1999, all of the Fund's assets
were invested in common stocks, the Fund may invest in convertible securities,
corporate debt securities, and preferred stocks which hold the prospect of
contributing to the achievement of the Fund's objectives. Yields on short-,
intermediate-, and long-term securities are dependent on a variety of factors,
including the general conditions of the money and bond markets, the size of a
particular offering, the maturity of the obligation, and the credit quality and
rating of the issuer. Debt securities with longer maturities tend to have higher
yields and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower yields. The
market prices of debt securities usually vary, depending upon available yields.
An increase in interest rates will generally reduce the value of portfolio
investments, and a decline in interest rates will generally increase the value
of portfolio investments. The ability of the Fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the debt
securities in which the Fund invests to meet their obligations for the payment
of interest and principal when due. The Fund's investment program permits it to
purchase below investment-grade securities. Because investors generally perceive
that there are greater risks associated with investment in lower-quality
securities, the yields from such securities normally exceed those obtainable
from higher-quality securities. However, the principal value of lower-rated
securities generally will fluctuate more widely than higher-quality securities.
Lower-quality investments entail a higher risk of default; that is, the
nonpayment of interest and principal by the issuer than higher-quality
investments. Such securities are also subject to special risks, discussed below.
Although the Fund seeks to reduce risk by portfolio diversification, credit
analysis, and attention to trends in the economy, industries and financial
markets, such efforts will not eliminate all risk. There can, of course, be no
assurance that the Fund will achieve its investment objective.
After having been purchased by the Fund, a debt security may cease to
be rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event will require a sale of such security by the Fund.
However, the Fund will consider such event in its determination of whether the
Fund should continue to hold the security. To the extent that the ratings given
by Moody's Investor Services or Standard & Poor's may change as a result of
changes in such organizations or their rating systems, the Fund will attempt to
use comparable ratings as standards for investments in accordance with the
investment policies contained in the Prospectus.
The Fund may invest in low-quality bonds commonly referred to as "junk
bonds." Junk bonds are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments. Because
investment in low- and lower-medium-quality bonds involves greater investment
risk, to the extent the Fund invests in such bonds, achievement of its
investment objective will be more dependent on the Fund's credit analysis than
would be the case if the Fund were investing in higher-quality bonds. Junk bonds
may be more susceptible to real or perceived adverse economic conditions than
investment-grade bonds. A projection of an economic downturn, or higher interest
rates, for example, could cause a decline in high-yield bond prices because the
advent of such events could lessen the ability of highly leveraged issuers to
make principal and interest payments on their debt securities. In addition, the
secondary trading market for high-yield bonds may be less liquid than the market
for higher-grade bonds, which can adversely affect the ability of a Fund to
dispose of its portfolio securities. Bonds for which there is only a "thin"
market can be more difficult to value inasmuch as objective-pricing data may be
less available and judgment may play a greater role in the valuation process.
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES. These are
obligations issued or guaranteed by the United States government of one of its
agencies or instrumentalities, such as the Government National Mortgage
Association ("Ginnie Mae" or "GNMA"), the Federal National Mortgage Association
("Fannie Mae" or "FNMA") the Federal Home Loan Mortgage Corporation ("Freddie
Mac" or "FHLMC"), and the Federal Agricultural Mortgage Corporation ("Farmer
Mac" or "FAMC"). FNMA, FHLMC, and FAMC obligations are not backed by the full
faith and credit of the U.S. Government as
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GNMA certificates are, but they are supported by the instrumentality's right to
borrow from the United States Treasury. U.S. Government Agency Mortgage-Backed
Certificates provide for the pass-through to investors of their pro-rata share
of monthly payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans. Each of GNMA,
FNMA, FHLMC, and FAMC guaranties timely distributions of interest to certificate
holders. GNMA and FNMA guarantee timely distributions of scheduled principal.
FHLMC has in the past guaranteed only the ultimate collection of principal of
the underlying mortgage loan; however, FHLMC now issues mortgage-backed
securities (FHLMC Gold PCS) which also guarantee timely payment of monthly
principal reductions.
Prepayments on the underlying mortgages and their effect upon the rate
of return of a mortgage-backed security, is the principal investment risk for a
purchaser of such securities, like the Fund. Over time, any pool of mortgages
will experience prepayments due to a variety of factors, including (1) sales of
the underlying homes (including foreclosures), (2) refinancing of the underlying
mortgages, and (3) increased amortization by the mortgagee. These factors, in
turn, depend upon general economic factors, such as level of interest rates and
economic growth. Thus, investors normally expect prepayment rates to increase
during periods of strong economic growth or declining interest rates, and to
decrease in recessions and rising interest rate environments. Accordingly, the
life of the mortgage-backed security is likely to be substantially shorter than
the stated maturity of the mortgages in the underlying pool. Because of such
variation in prepayment rates, it is not possible to predict the life of a
particular mortgage-backed security, but FHA statistics indicate that 25- to
30-year single family dwelling mortgages have an average life of approximately
12 years. The majority of Ginnie Mae Certificates are backed by mortgages of
this type, and, accordingly, the generally accepted practice treats Ginnie Mae
Certificates as 30-year securities which prepay in full in the 12th year. FNMA
and Freddie Mac Certificates may have differing prepayment characteristics.
REAL ESTATE INVESTMENT TRUST (REIT). A real estate investment trust,
commonly referred to as a REIT, is an entity that receives special tax benefits
under the Internal Revenue Code for maintaining a specific percentage of its
assets in real estate and real estate related assets. Investors in the Fund may
experience many of the same risks involved with investing in real estate
directly because of investments made by the Fund in REITs. These risks include:
declines in real estate values, risks related to local or general economic
conditions, particularly lack of demand, overbuilding and increased competition,
increases in property taxes and operating expenses, changes in zoning laws,
heavy cash flow dependency, possible lack of availability of mortgage funds,
obsolescence, losses due to natural disasters, condemnation of properties,
regulatory limitations on rents and fluctuations in rental income, variations in
market rental rates, and possible environmental liabilities. REITs can be
affected by rising interest rates that may cause investors to demand a high
annual yield from future distributions which, in turn, could decrease the market
prices for the REITs. In addition, rising interest rates also increase the costs
of obtaining financing for real estate projects. Because many real estate
projects are dependent upon receiving financing, this could cause the value of
the REITs in which the Fund invests to decline. REITs may hold mortgages that
the mortgagors elect to prepay during periods of declining interest rates which
may diminish the yield on such REITs. In addition, borrowers may not be able to
repay mortgages when due which could have a negative effect on the Fund.
NON-DIVERSIFICATION OF THE PORTFOLIO
The Fund has elected to qualify as a "non-diversified investment
company" so that the Fund may invest its assets in the securities of a small
number of issuers. This subjects the value of the Fund's portfolio directly to
the increase or decrease in the particular investment. Thus, the opportunity for
gain and the risk of loss are not spread over as broad a base as would be the
case in a "diversified" company. While diversification spreads the risk of loss
over a broader base, it also restricts the ability of the Advisor
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to take maximum advantage of investment opportunities that it determines are in
the best interest of the Fund.
The Fund will limit its investments in the securities of a small number
of issuers only when the investment advisor determines that it is in the best
interest of the Fund to do so.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
PERFORMANCE GRAPH
The following graph provides a comparison of the change in the value of
a $10,000 investment in the Fund and same investment in the S & P 500 Index for
each fiscal year from October 1, 1988 to September 30, 1994, the nine month
fiscal period ended June 30, 1995, and the fiscal years from July 1, 1995 to
June 30, 1999.
[GRAPH APPEARS HERE]
[PLEASE INSERT PLOT POINTS]
Period Percent Status of Percent Status of
Ended Change $10,000 Change $10,000
Investment Investment
- ----------------------------------------------------------------------------
10/1/88 0.00% 10,000 0.00% 10,000
9/30/89 47.50% 14,750 32.97% 13,297
9/30/90 -32.27% 9,990 -9.23% 12,070
9/30/91 17.51% 11,739 31.17% 15,832
9/30/92 -4.47% 11,214 11.05% 17,582
9/30/93 35.88% 15,237 13.00% 19,867
9/30/94 -17.24% 12,611 3.68% 20,598
6/30/95** 1.39% 12,786 20.19% 24,757
6/30/96 -4.36% 12,226 26.00% 31,194
6/30/97 8.89% 13,313 34.69% 42,015
6/30/98 21.40% 16,162 30.16% 54,687
6/30/99 46.33% 23,659 22.76% 67,134
* Past Performance is not predictive of future performance.
** Not annualized. The Fund's fiscal year was changed to June 30 in 1995.
*** S & P 500 Index is adjusted to reflect the reinvestment of dividends.
From time to time the Fund may quote its total return in advertisements
or in reports or other communications to shareholders. A mutual Fund's total
return is a measurement of the overall change in value, including changes in
share price and assuming reinvestment of all distributions, of an investment in
the Fund. Cumulative total return shows the Fund's performance over a specific
period of time. Average annual total return is the average annual compounded
return that would have produced the same cumulative total return if the Fund's
performance had been constant over the entire period. The returns shown are
based on historical results and are not intended to indicate future performance.
The investment return and principal value of an investment in the Fund will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Average annual returns, which differ from actual
year-to-year results, tend to smooth out variations in a fund's returns.
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COMPARISON OF FUND PERFORMANCE FOR THE FISCAL YEARS ENDED JUNE 30, 1999 AND 1998
During its fiscal year ended June 30, 1999, the Fund's net asset value
per share increased 46.33% to $1.35 at June 30, 1999 from $0.93 at June 30,
1998. The Standard & Poor's Composite Index of 500 stocks, a recognized
indicator of market conditions, gained 22.76% (including reinvestment of
dividends) during the same period. The Fund had a net realized gain from
investment transactions of $109,570 and unrealized appreciation of investments
of $1,934,937, offset by a net investment loss of $309,465. The net assets of
the Fund increased to $5.2 million at June 30, 1999 from $3.9 million at June
30, 1998 after redemptions.
The portfolio turnover rate declined to 0% for the fiscal year ended
June 30, 1999 from 48% for the fiscal year ended June 30, 1998. The decline in
the portfolio turnover rate was primarily the result of management's philosophy
of selecting and holding securities for longer terms rather than frequently
trading. Reductions made in the portfolio were to provide liquidity for
operating expenses and redemptions. During fiscal 1999, the Fund maintained an
aggressive trading position with its assets almost fully invested in equity
securities and as of June 30, 1999, the Fund's assets were 100% invested in
equity securities. The Fund's net investment loss of $309,465 resulted from
expenses after taking into account the Fund's investment income from dividends
and interest of $22,000. Although the Fund's primary goal is seeking current
income and capital appreciation is secondary, it was the latter that produced
the increase in net assets from operations.
For the year ended June 30, 1999, the Fund's expenses as a percentage
of average net assets was 7.24% compared to 9.85% for the year ended June 30,
1998. The decrease in the expense ratio is primarily the result of a decrease in
expenses of $77,000 and an increase in average net assets of $425,000 for the
year ended June 30, 1999. Expenses decreased primarily as a result of a decrease
in personnel, the termination of merger activities, and a decrease in the number
of shareholder accounts due to redemptions.
During the fiscal year's ended June 30, 1999 and 1998, the Fund made no
distributions to shareholders.
YEAR 2000 ISSUE
Many computer programs use two digits to identify the year. These
programs, if not adapted, will not correctly handle the change from "99" to "00"
on January 1, 2000, and will not be able to perform the necessary functions. The
Year 2000 issue affects virtually all companies and organizations.
Investment companies, such as the Fund, are highly dependent on
computer systems to communicate with its investment advisor as well as third
parties, such as brokers and custodians. In order for the investment advisor to
manage the Fund's portfolio, calculate net asset values, keep accurate account
statements, process shareholder purchases and redemptions, and timely deliver
disclosure documents and account statements, the Fund and the investment adviser
must continuously exchange information with each other and their service
providers. Any breakdown in this exchange of information could interfere with
the day-to-day operations of the Fund, delay shareholder transactions, and
compromise record keeping and other compliance systems.
The Fund has identified six steps for the preparation of the Fund to
remedy any Year 2000 problems. These steps are (1) the identification of
potential Year 2000 problems; (2) the assessment of steps that must be taken to
avoid those problems; (3) the implementation of the steps to avoid Year 2000
problems; (4) internal testing of software to avoid Year 2000 problems; (5)
point-to-point testing of software designed to avoid the problems (i.e., testing
with service providers such as broker-dealers and custodians); and (6) the
implementation of tested software that will avoid the Year 2000 problem.
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The Fund, working closely with its investment advisor, has completed
all the steps and has identified and assessed potential Year 2000 problems.
Internal testing of mission-critical systems was completed on April 15, 1999.
Point-to-point testing of mission-critical systems was completed on May 31,
1999. Final implementation of tested software was completed by June 30, 1999.
An expected reasonable "worst case" scenario is that, notwithstanding
the testing and certification of all the Fund's and the investment advisor's
critical systems beforehand, a problem is discovered in the year 2000 that
impacts the core systems. In this event, the Fund and the investment advisor
would be required to perform many business functions manually until such time as
the Fund, or an outside vendor, as applicable, corrects the problem. Such manual
processing of functions is provided for in the Fund's contingency plans, which
are currently being reviewed by the Fund. The contingency plan provides for
changing outside vendors if current vendors cannot meet their schedules to be
year 2000 compliant and for manual processing and other action by the Fund in
the event a problem is not discovered in a critical system that has previously
been tested and certified as compliant.
The Fund has utilized both internal and external resources to reprogram
or replace, and test hardware and software for Year 2000 compliance. The total
costs of the Year 2000 project to the Fund was approximately $30,000.
Finally, companies, organizations, government entities, and markets
which the Fund invests could be affected by the Year 2000 issue, but at this
time the Fund cannot predict the degree of impact. To the extent the effect is
negative, the Fund's returns could be reduced.
MANAGEMENT, ORGANIZATION, AND CAPITAL STRUCTURE
INVESTMENT ADVISOR
The Fund has entered into an investment advisory agreement (the
"Advisory Agreement") with Ameritor Financial Corporation which has its
principal offices at 1730 K Street, N.W., Washington, D.C. 20006. All voting
stock of Ameritor Financial Corporation is owned by United Securities, Inc., a
Maryland corporation whose sole shareholders are Carole S. Kinney and Charles
T.W. Steadman.
Since commencing business through its predecessor, William Allen
Steadman & Company, in 1932, the advisor has principally engaged in the business
of providing continuous investment supervision for the Fund. Under the terms of
the Advisory Agreement, the advisor manages the investments of the Fund and is
responsible for overall management of its business affairs subject to
supervision of the Trustees. Max Katcher, President of the Fund and a consultant
to the Advisor, is primarily responsible for the day-to-day management of the
Fund's portfolios. Dr. Katcher became portfolio manager in December 1997 and has
been in mutual fund management for the past 26 years as an executive officer of
Ameritor Financial Corporation. As compensation for its services, the Fund pays
to the Advisor a monthly advisory fee at the annual rate of 1% of the first
$35,000,000 of the average daily net asset value of the Fund, 7/8 of 1% on the
next $35,000,000 and 3/4 of 1% on all sums in excess thereof. The advisory fee
is higher than that paid by many other investment companies. The Advisor also
receives certain other fees, which are described in the Statement of Additional
Information.
The Advisor also receives reimbursement from the Fund for salaries and
benefits of its employees who perform directly attributable functions to the
Fund other than investment advisory and shareholder services. These functions
include: fund accounting, reviewing the Fund's internal financial reports;
coordinating the editing, printing and mailing of reports to the Fund's
shareholders; compliance with SEC regulation, including registration;
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<PAGE>
preparation of materials for Trustees' meetings; legal and other administrative
functions; and clerical assistance related to the above.
ORGANIZATION AND CAPITAL STRUCTURE
The Fund is organized as a common law trust under the laws of the
District of Columbia and has outstanding only one class of shares of beneficial
interest. All shareholders have equal voting rights, and all shares participate
equally in dividends and other distributions by the Fund, and in the residual
assets of the Fund in the event of liquidation. Fractional shares have the same
rights proportionately as do full shares, except that, pursuant to the trust
indenture, fractional shares do not have the right to vote. Shareholders of the
Fund have no preemptive rights and no conversion or subscription rights. The
Fund does not hold regularly scheduled annual shareholders' meetings. Special
meetings are called when required by applicable laws and regulations. No
shareholder of the Fund shall be subject to any liability to any person in
connection with the property or affairs of any such Fund.
In addition, the governing documents of the Fund contain several other
provisions relating to shareholders' rights that are uncommon to most other
mutual funds including: (a) trustees hold office for a term of unlimited
duration, (b) shareholders are entitled to vote for or against any amendments to
the Trust Indenture, only in very limited circumstances, (c) shareholders are
not entitled to vote for or against a termination of the Fund, and (d) except as
otherwise required by law, shareholders may call special meetings only upon a
vote of 90% of the outstanding shares.
Shareholders of the Fund have certain rights with respect to removal of
Trustees. Under these provisions, shareholders may remove one or more Trustees
by declaration or vote of two-thirds of the Fund's outstanding shares. The
Trustees will promptly call a meeting of shareholders for the purpose of voting
upon the question of removal of Trustees when requested to do so by the record
holders of not less than 10% of the outstanding shares of the Fund.
SPECIAL PROVISIONS OF THE TRUST INDENTURE OF THE FUND
The following discussion is a general summary of the material
provisions of the Amended and Restated Trust Indenture of the Fund. The
description of these provisions is necessarily general and reference should be
made in each case to the complete document.
1. Election and Removal of Trustees. Trustees are chosen for a term of
unlimited duration. Trustees may only be removed by a vote of 90% of
the remaining Trustees or a vote of two-thirds of the shareholders.
2. Meetings of Shareholders. Special meetings of the Shareholders may
be called at any time by the Chairman or by a majority of the Trustees,
and shall be called upon written request of shareholders holding in the
aggregate not less than ninety percent (90%) of the outstanding shares
having voting rights. The Trustees shall promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of
Trustees when requested to do so by the record holders of not less than
10% of the outstanding shares of the Fund.
3. Absence of Cumulative Voting. The Amended and Restated Trust
Indenture provides that there shall not be cumulative voting by
shareholders for the election of Trustees. The absence of cumulative
voting rights means that holders of a majority of the shares voted at a
meeting of shareholders may, if they so choose, elect all Trustees to
be selected, thus precluding minority shareholder representation among
the Trustees. Other than a provision of the Act requiring every
shareholder to have equal voting power, no provision of the Act
requires cumulative voting.
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4. Possible Limitation on Acquisition. The trust indenture of the Fund
permits the Trustees to limit the amount of Fund shares owned at any
one time by any one person to 5% of Fund shares. The purpose of this
provision is to allow the Trustees to prevent a person from becoming an
affiliated person within the meaning of Section 2 of the 1940 Act.
There is no provision of the Act that limits the percentage ownership
one person may have in an open-end investment company.
LEGAL PROCEEDINGS
There are no material legal proceedings to which the Fund is a party. The
Investment Advisor is involved in a legal proceeding in the Superior Court of
the District of Columbia, Consuelo M. Steadman v. Steadman Security Corporation
and Ameritor Financial Corporation, Case # 98 CA 009193, filed on December 3,
1998. The Plaintiff is suing Steadman Security Corporation and Ameritor
Financial Corporation for breach of an employment contract which entitled the
plaintiff to compensation and benefits after the death of her late husband,
Charles W. Steadman, former president of the Defendant Corporation. The
plaintiff is seeking an amount of not less then $115,000 per year for 3 years,
and $50,000 for each year thereafter until plaintiff's death, plus any
additional monies due pursuant to the employment contract.
SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
The Fund's net asset value per share is determined at the close of
trading on the New York Stock Exchange (currently 4:00 p.m., New York Time) on
days when the New York Stock Exchange is open for business. The New York Stock
Exchange is open for business Monday through Friday, except holidays. Fund
shares are bought and sold at the net asset value next calculated after the buy
or sell order is placed. It is computed by dividing the value of net assets
(i.e., the value of the assets less liabilities) by the total number of shares
outstanding. Portfolio securities are valued at the last sale price on the
national securities exchange or national securities market on which the
securities are primarily traded. Securities not listed on an exchange or
national securities market or securities for which there were no transactions
are valued at the mean between the most recent reported bid and asked prices.
Any securities or other assets for which market quotations are not readily
available are valued at fair value as determined in good faith by the Trustees.
Debt securities having remaining maturities of less than 60 days are valued by
the amortized cost method, unless the Trustees determine this is not fair value.
Expenses and fees, including the management fee, are accrued daily and taken
into account for the purpose of determining the net asset value.
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PURCHASE OF FUND SHARES
The Fund is currently in the process of registering Fund shares for
sale in certain states. The Fund will offer the shares at net asset value
without payment of any sales fee (load) or commission when purchases are made
directly from the Fund. Shares purchased through registered broker-dealers may
incur a transaction fee.
To make an initial investment and open an account, complete the
attached application and forward it with a check or money order for $1,000 or
more, made payable to Ameritor Security Trust, 1730 K Street, N.W., Washington,
D.C. 20006. Initial investments of less than $1,000 will not be accepted.
After an account has been established, a confirmation will be issued
indicating the amount invested, the number of shares purchased, and the purchase
price per share (net asset value per share). The confirmation will include a
deposit stub, which may be used to make an additional investment of $100 or more
at any time by completing the form and mailing with a check in the appropriate
amount. Additional investments of less than $100 will not be accepted.
Investments received prior to the closing of the New York Stock
Exchange (currently 4:00 p.m., New York Time) and which are in good order will
be credited at the net asset value determined at the close of the exchange on
that day. Investments received after closing will be credited at the net asset
value on the next subsequent day in which the net asset value of the Fund is
calculated.
All investments are subject to the Fund's acceptance and subject to
compliance with state and federal securities laws. The Fund may decline to
accept an investment when in the judgment of the Fund's investment advisor, the
acceptance of such investment would not be in the interest of existing
shareholders or after consultation with counsel, such investment would violate
any state or federal securities law. This determination is made upon receipt of
the purchase order or as soon thereafter as reasonably practicable. The
prospective investor whose order is not accepted will have his or her check or
money order returned as soon as possible thereafter. This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
securities offered hereby to any person in any jurisdiction in which such offer
or solicitation would be unlawful.
Stock certificates for shares are ordinarily not issued, as they are
not necessary and complicate redemption.
REDEMPTION OF FUND SHARES
Money may be withdrawn from an account at any time by following the
procedures set forth herein. Shares will be redeemed at the net asset value next
calculated after the request has been received in good order and the proceeds
are paid by check within seven days after receipt of a redemption request.
Accounts without share certificates - A signed request (all joint
owners must sign) stating the amount to be withdrawn must be made to Ameritor
Financial Corporation, 1730 K Street, N.W., Washington, D. C. 20006. For amounts
over $1,000 it will be necessary to obtain a "signature guarantee" from a
commercial bank or trust company. Signature guarantees shall be accepted from
all eligible guarantor institutions, which include domestic banks, brokers,
dealers, credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings associations.
Instant Liquidity (by telephone) - Any amount may be withdrawn by
telephone by calling 1-(800)-424-8570 on any business day if telephone
withdrawals have been previously authorized on the Investment Application.
Telephone instructions from any person representing himself or herself to be you
or your representative, and believed by Ameritor Financial Corporation, as
Transfer Agent for the Fund, to be genuine will be acted upon. The Fund or the
Transfer Agent will not be liable for executing unauthorized instructions
communicated by telephone that they reasonably
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believe to be genuine. The Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine.
Accounts with share certificates - The signed share certificates (all
joint owners must sign) together with a "signature guarantee" from an eligible
guarantor institution (see "Accounts without share Certificates," above) and a
written request that the certificates be redeemed, must be submitted to Ameritor
Financial Corporation, 1730 K Street, N.W., Washington, D. C. 20006.
Requests for redemption by corporations, executors, administrators,
trustees or guardians may require further documentation.
The proceeds of redemptions are paid by check within seven days after
receipt of a request for redemption that complies with the procedures set forth
above. Proceeds may also be wired to a bank or trust company if wire transfers
have been previously authorized on the Investment Application. When a personal
or corporate check was used to purchase the shares, redemption proceeds will be
released only when bank clearance on the check has been received. This procedure
could take up to seven days after the purchase date and can be avoided by
submitting a certified check along with the purchase order. Also, there may be a
charge if a shareholder uses a broker-dealer to repurchase the Fund's shares.
The right of redemption may be suspended during any period when: (a)
trading on the New York Stock Exchange is restricted as determined by the SEC or
such Exchange is closed for other than weekends and holidays; or (b) as
permitted by the SEC.
For cost reasons we may close an account upon 30 days written notice
when the net asset value of the shares in an account is less than $100 as a
result of redemptions. Involuntary redemption may be avoided if additional funds
are added to the account during the 30-day period.
SYSTEMATIC WITHDRAWAL PLAN. The Fund has a Systematic Withdrawal Plan
under which shareholders who own at least $5,000 (at current net asset value)
worth of the Fund, may receive a fixed distribution amount at monthly intervals
by redeeming a portion of their shares equal to the specified dollar amounts on
a monthly basis. A sufficient number of shares will be liquidated at the then
current net asset value attributable to such shares on the date of liquidation
to meet withdrawals specified. Systematic withdrawals are processed on the
twenty-fifth day of the month. Shareholders who wish to exercise this election
should request and complete the Systematic Withdrawal Application.
SHAREHOLDER RETIREMENT PLANS. Taxes on current income can be deferred
by investing in Keogh Plans, Individual Retirement Accounts (IRAs), Simplified
Employee Pensions (SEPs), 401(k), pension, profit sharing, employee benefit,
deferred compensation and other qualified retirement plans. The federal tax law
governing these tax-deferred retirement plans must be complied with to avoid
adverse tax consequences.
The Fund does not directly sponsor any retirement plans. However,
shareholders may fund their own self-directed IRA or other qualified plan with
Ameritor Security Trust shares. You should contact the Adviser for specific plan
documentation and any additional information you may require. You should also
consult your tax adviser before investing.
DIVIDENDS AND DISTRIBUTIONS
The Fund has not paid a dividend or made a capital distribution since
1989. See "Financial Highlights." The Fund does not anticipate paying any cash
dividends or distributions in the foreseeable future. If, at some future time,
the Fund does determine to pay a cash dividend or make a capital distribution,
unless an election to the contrary is made in writing to the Fund at 1730 K
Street, N.W., Washington, D. C. 20006, all income dividends and all capital gain
distributions payable on shares of the Fund will be reinvested in additional
shares at the net asset value in effect on
19
<PAGE>
the dividend or distribution record date. The Fund's investment adviser also
serves as the agent to reinvest dividends and distributions in additional
shares. A change of election may be made at any time as to whether or not to
receive dividends and distributions in cash or have them reinvested in
additional shares. Such changes of election apply to dividends and distributions
the record dates of which fall on or after the date that the Fund receives such
change of election.
TAX STATUS AND CONSEQUENCES
Distributions from the Fund are taxable under the normal corporate tax
rules because the Fund is not a regulated investment company ("RIC") for federal
income tax purposes. Non-redemption cash distributions to shareholders
constitute ordinary dividend income if such distributions are out of the
corporation's current or accumulated earnings and profits. Thereafter, the
distributions are a non-taxable return of basis to the extent of the recipient's
tax basis for the recipient's shares. Any distributions in excess of earnings
and profits and in excess of such tax basis constitute gain from a deemed sale
or exchange of the shares.
Redemption distributions may be taxable under the rules described
above, or such redemptions may be treated for federal income tax purposes as a
sale or exchange of the redeemed shares. Such characterization depends upon the
application to the recipient of Section 302(b) of the Code. A redemption
distribution may be a sale or exchange of the redeemed shares for tax purposes
if it is not essentially equivalent to a dividend, is a substantially
disproportionate redemption, is in complete termination of a shareholder's
interest in the corporation, or is a redemption from a non-corporate shareholder
in partial liquidation of the distributor (all within the technical meanings of
Section 302(b)). Such determinations are highly individualized. Shareholders
must consult with their own tax advisors concerning the effect to them of any
redemption distribution from the Fund.
Special rules apply for federal income tax purposes if the Fund makes a
distribution of its assets in kind (which could be a liquidating distribution
from the Fund or a non-liquidating distribution). Other special tax rules apply
if the Fund makes a distribution of its shares or rights to acquire its shares
to its shareholders with respect to their Fund shares. No such distributions are
contemplated currently by the Fund so an explanation of these rules is beyond
the scope of this discussion.
The foregoing discussion relates solely to U.S. federal income tax law
as applicable to U.S. persons (I.E., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). Each shareholder who
is not a U.S. person should consult his or her tax advisor regarding the U.S.
and foreign tax consequences of ownership of shares of the Fund, including the
likelihood that such a shareholder would be subject to a U.S. withholding tax at
a rate of 30% (or at a lower rate under a tax treaty) on amounts constituting
ordinary income to him or her, where such amounts are treated as income from
U.S. sources under the Code.
In addition to federal taxes, shareholders of the Fund may be subject
to state and local taxes on distributions from the Fund. Shareholders should
consult their own tax advisors with respect to the tax status of distributions
from the Fund in their own state and localities. For more information on
taxation, see the section entitled "Taxation of the Fund" in the Statement of
Additional Information."
CONDENSED FINANCIAL INFORMATION OF THE FUND
The financial highlights table is intended to help you understand the
Fund's financial performance for the past 10 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Fund (assuming reinvestment of all dividends and distributions). The
Fund's financial statements for the year ended June 30, 1999 are included in the
Fund's annual report, which is available upon request. The information for the
years ended June 30, 1999, 1998 and 1997 has been audited by Reznick Fedder &
Silverman, P.C., whose report, along with the Fund's financial statements, are
included in the Fund's annual report, which is available upon request. The
information for the year ended June 30,
20
<PAGE>
The information for the year ended June 30, 1996 and the six previous years has
been audited by other auditors, whose report thereon is not included herein.
<TABLE>
<CAPTION>
AMERITOR SECURITY TRUST
FINANCIAL HIGHLIGHTS
For the period
For the years October 1, 1994 For the years ended
ended
June 30 through June 30 Sept. 30
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995* 1994 1993 1992 1991 1990 1989
--------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value, beginning of
period $ 0.93 $ 0.76 $ 0.70 $ 0.73 $ 0.72 $ 0.87 $ 0.64 $ 0.67 $ 0.57 $ 0.84 $ 0.60
--------------------------------------------------------------------------------------
Net investment income (loss) (.22) (.09) (.11) (.17) (.03) (.08) (.05) (.03) (.02) (.03)
Net realized and unrealized gain
(loss) on investments .64 .26 .17 .14 .04 (.07) .28 - .12 (.24) .27
--------------------------------------------------------------------------------------
Total from Investment operations .42 .17 .06 (.03) .01 (.15) .23 (.03) .10 (.27) .27
Dividends and distributions paid:
From realized gains -- -- -- -- -- -- -- -- -- --
From net investment income -- -- -- -- -- -- -- -- -- -- (.03)
From capital -- -- -- -- -- -- -- -- -- --
--------------------------------------------------------------------------------------
Total distributions -- -- -- -- -- -- -- -- -- -- (.03)
--------------------------------------------------------------------------------------
Net asset value, end of period $1.35 $ .93 $ .76 $ .70 $ .73 $ .72 $ .87 $ .64 $ .67 $ .57 $ .84
======================================================================================
Ratio/Supplemental Data:
Total Return (1) 46.33% 21.40% 8.89% (4.38)% 1.39% (17.24)% 35.94% (4.47)% 17.51% (32.27)% 47.50%
Net Assets, $ 5,169 $ 3,903 $4,397 $4,581 $5,735 $6,307 $8,844 $7,254 $8,539 $8,392 $16,035
end of period (000's)
Ratio of expenses to avg. net 7.24% 9.85% 12.42% 8.14% 8.17%** 7.76% 5.79% 6.92% 7.16% 6.08% 6.65%
assets
Ratio of net investment income(loss)
to average net assets (6.76)% (8.95)%(11.82)%(7.48)% (7.23)%**(6.09)%(4.63)% (5.14)% (3.29)%(4.54)% (.24)%
Portfolio turnover 0% 48% 193% 231% 505%** 241% 300% 301% 267% 87% 208%
</TABLE>
(1) Total return on the changes in net value of a share during the
period and assumes reinvestment of distributions at net asset
value. Total return has not been annualized for the period
from October 1, 1994 through June 30, 1995.
* The Fund's fiscal year-end was changed to June 30.
** Annualized.
21
<PAGE>
AMERITOR SECURITY TRUST
This Prospectus contains information you should know before making an investment
decision. Please keep it for future reference.
A Statement of Additional Information about the Fund, date November 16, 1999,
has been filed with the SEC and is legally regarded as part of this Prospectus.
Further information about the Fund is available in the annual and semi-annual
shareholder reports of the Fund. To obtain a free copy of the Statement of
Additional Information or an annual or semi-annual report, or for any other
inquiries regarding the Fund, please call Shareholder Services at 202-223-1000
or 1-800-424-8570.
Fund reports and the Statement of Additional Information are also available from
the SEC by calling 1-800-SEC-0330 or writing the SEC's Public Reference Section,
Washington, DC 20549-6009 (you will be charged a duplicating fee). You may also
visit the Public Reference Room at the offices of the SEC or access the SEC's
website at www.sec.gov.
1
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information is
November 16, 1999.
- ------------------
AMERITOR SECURITY TRUST
Mailing Address:
Ameritor Security Trust
c/o Ameritor Financial Corporation
1730 K Street, N.W.
Washington, DC 20006
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the Fund's prospectus dated November 16, 1999. You may
obtain a copy of the Fund's prospectus by writing to Ameritor Financial
Corporation, 1730 K Street NW, Washington DC 20006 or calling Shareholder
Services at 202-223-1000 or 1-800-424-8570. A prospectus with more complete
information, including management fees and expenses, will be sent to you. Please
read it carefully before investing.
TABLE OF CONTENTS
Fund History........................................1
Description of the Fund and its Investments
and Risks...........................................1
The Fund...................................1
Investment Strategies......................1
Investment Risks...........................1
Fund Policies..............................4
Temporary Defensive Positions..............6
Portfolio Turnover.........................6
Management of the Fund..............................6
Board of Trustees Responsibilities.........6
Management.................................6
Control Persons and Principal Holders of
Securities..........................................8
Investment Advisory and Other
Services............................................8
Investment Advisor; Services
Provided............................................8
Principal Underwriter..........................9
Brokerage Allocation and Other
Practices..........................................10
Brokerage Transactions and
Selection.................................10
Directed Brokerage........................10
Description of Fund Shares.........................11
Purchase and Pricing of Shares.....................12
Purchase of Fund Shares...................12
Offering Price of Fund Shares.............12
Taxation of the Fund...............................13
Calculation of Performance Data....................13
Financial Statements...............................13
2
<PAGE>
FUND HISTORY
The Fund, originally named the Associated Fund Trust, is a common law trust and
was organized under the laws of the District of Columbia pursuant to a trust
indenture on February 23, 1939. The Fund's name was changed in 1969 to the
Steadman Associated Fund, in January 1997 to the Steadman Security Trust, and in
September 1998 to the Ameritor Security Trust.
DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
THE FUND
The Fund is a no-load, non-diversified, open-end investment company. The Fund is
registered under the Investment Company Act of 1940, as amended (hereinafter
referred to as the 1940 Act).
INVESTMENT STRATEGIES
The following information supplements the discussion of the Fund's investment
strategies discussed in the Fund's prospectus.
Although not the Fund's principal investment strategies, the Fund may also use
the following:
o The sale of securities pursuant to repurchase agreements.
o The purchase and sale of put options. This is primarily to
achieve premium income but may also be used for hedging
purposes.
o Borrowing to increase the amount of money available for the
Fund to invest.
o The purchase and sale of restricted or illiquid securities.
o Short sales.
o Lending securities in the Fund's portfolio.
o The purchase and sale of real estate and real estate related
loans and securities, other than U.S. Government agency
mortgage-backed securities.
INVESTMENT RISKS
The following information supplements the discussion of the Fund's investment
strategies discussed in the Fund's prospectus.
REPURCHASE AGREEMENTS. The Fund may enter into a repurchase agreement
through which an investor (such as the Fund) purchases a security (known as the
"underlying security") from a well-established securities dealer or a bank that
is a member of the Federal Reserve System. Any such dealer or bank will be on
the Fund's approved list and must have a minimum credit rating with respect to
its short-term debt by Standard & Poor's Corporation or by Moody's Investors
Services, Inc.. At that time, the bank or securities dealer agrees to repurchase
the underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will be
treated as illiquid securities. The Fund will only enter into repurchase
agreements where (i) the underlying securities are of
1
<PAGE>
the type (excluding maturity limitations) which the Fund would be allowed to
purchase directly, (ii) the market value of the underlying security, including
interest accrued, will be at all times equal to or exceed the value of the
repurchase agreement, and (iii) payment for the underlying security is made only
upon physical delivery or evidence of book-entry transfer to the account of the
custodian or a bank acting as agent. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying security and losses, including: (a)
possible decline in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto; (b) possible subnormal levels of
income and lack of access to income during this period; and (c) expenses of
enforcing its rights.
OPTIONS.
o WRITING COVERED PUT OPTIONS. The Fund may write American or European
style covered put options and purchase options to close out options previously
written by the Fund. A put option gives the purchaser of the option the right to
sell, and the writer (seller) has the obligation to buy, the underlying security
or currency at the exercise price during the option period (American style) or
at the expiration of the option (European style). So long as the obligation of
the writer continues, the writer may be presented with an exercise notice by the
broker-dealer through whom such option was sold, requiring the writer to make
payment to the exercise price against delivery of the underlying security or
currency. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call options.
The Fund would write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash, U.S. government
securities, other liquid high-grade debt obligations, or other suitable cover as
determined by the SEC, in an amount not less than the exercise price or the Fund
will own an option to sell the underlying security or currency subject to the
option having an exercise price equal to or greater than the exercise price of
the "covered" option at all times while the put option is outstanding. (The
rules of a clearing corporation currently require that such assets be deposited
in escrow to secure payment of the exercise price.)
The Fund would generally write covered put options in circumstances
where the Fund wishes to purchase the underlying security or currency for the
Fund's portfolio at a price lower than the current market price of the security
or currency. In such event, the Fund would write a put option at an exercise
price which, reduced by the premium received on the option, reflects the lower
price it is willing to pay. Because the Fund would also receive interest on debt
securities or currencies maintained to cover the exercise price of the option,
this technique could be used to enhance current return during periods of market
uncertainty. The risk in such a transaction would be that the market price of
the underlying security or currency would decline below the exercise price less
the premiums received. Such a decline could be substantial and result in a
significant loss to the Fund. In addition, the Fund, because it does not own the
specific securities or currencies which it may be required to purchase in
exercise of the put, cannot benefit from appreciation, if any, with respect to
such specific securities or currencies.
The Fund will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Fund's net assets. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
o PURCHASING PUT OPTIONS. The Fund may purchase American or European
style put options. As the holder of a put option, the Fund has the right to sell
the underlying security or currency at the exercise price at any time during the
option period (American style) or at the expiration of the option
2
<PAGE>
(European style). The Fund may enter into closing sale transactions with respect
to such options, exercise them or permit them to expire. The Fund may purchase
put options for defensive purposes in order to protect against an anticipated
decline in the value of its securities or currencies.
The Fund may also purchase put options at a time when the Fund does not
own the underlying security or currency. By purchasing put options on a security
or currency it does not own, the Fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price during
the life of the put option, the Fund will lose its entire investment in the put
option. In order for the purchase of a put option to be profitable, the market
price of the underlying security or currency must decline sufficiently below the
exercise price to cover the premium and transaction costs, unless the put option
is sold in a closing sale transaction.
The Fund will not commit more than 5% of its assets to premiums when
purchasing put and call options. The premium paid by the Fund when purchasing a
put option will be recorded as an asset of the Fund. This asset will be adjusted
daily to the option's current market value, which will be the latest sale price
at the time at which the net asset value per share of the Fund is computed
(close of New York Stock Exchange), or, in the absence of such sale, the latest
bid price. This asset will be terminated upon expiration of the option, the
selling (writing) of an identical option in a closing transaction, or the
delivery of the underlying security or currency upon the exercise of the option.
o DEALER (OVER-THE-COUNTER) OPTIONS. The Fund may engage in
transactions involving dealer options. Certain risks are specific to dealer
options. While the Fund would look to a clearing corporation to exercise
exchange-traded options, if the Fund were to purchase a dealer option, it would
rely on the dealer from whom it purchased the option to perform if the option
were exercised. Failure by the dealer to do so would result in the loss of the
premium paid by the Fund as well as loss of the expected benefit of the
transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which the Fund originally wrote the option. While the Fund will seek to enter
into dealer options only with dealers who will agree to and which are expected
to be capable of entering into closing transactions with the Fund, there can be
no assurance that the Fund will be able to liquidate a dealer option at a
favorable price at any time prior to expiration. Until the Fund, as a covered
dealer call option writer, is able to effect a closing purchase transaction, it
will not be able to liquidate securities (or other assets) or currencies used as
cover until the option expires or is exercised. In the event of insolvency of
the contra party, the Fund may be unable to liquidate a dealer option. With
respect to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, because the
Fund must maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement may
impair a Fund's ability to sell portfolio securities or currencies at a time
when such sale might be advantageous.
The Staff of the SEC has taken the position that purchased dealer
options and the assets used to secure the written dealer options are illiquid
securities. The Fund may treat the cover used for written OTC options as liquid
if the dealer agrees that the Fund may repurchase the OTC option it has written
for a maximum price to be calculated by a predetermined formula. In such cases,
the OTC option would be considered illiquid only to the extent the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
3
<PAGE>
LENDING OF PORTFOLIO SECURITIES. Securities loans are made to
broker-dealers or institutional investors or other persons, pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash, U.S. government
securities, letters of credit or such other collateral as may be permitted under
its investment program. While the securities are being lent, the Fund will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Fund has a right to call each loan
and obtain the securities, within such period of time which coincides with the
normal settlement period for purchases and sales of such securities in the
respective markets. The Fund will not have the right to vote on securities while
they are being lent, but it will call a loan in anticipation of any important
vote. The risk in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral or
in the recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to firms deemed by
the Fund to be of good standing and will not be made unless, in the judgment of
the Fund, the consideration to be earned from such loans would justify the risk.
MORTGAGE-RELATED SECURITIES. Mortgage-related securities, other than
U.S. Government agency mortgage-backed securities, in which the Fund may invest
include, but are not limited to, those described below.
o MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities
representing an interest in a pool of mortgages. The mortgages may be of a
variety of types, including adjustable rate, conventional 30-year fixed rate,
graduated payment, and 15-year fixed rate. Principal and interest payments made
on the mortgages in the underlying mortgage pool are passed through to the Fund.
This is in contrast to traditional bonds where principal is normally paid back
at maturity in a lump sum. When a mortgage in the underlying mortgage pool is
prepaid, an unscheduled principal prepayment is passed through to the Fund. This
principal is returned to the Fund at par. As a result, if a mortgage security
were trading at a premium, its total return would be lowered by prepayments, and
if a mortgage security were trading at a discount, its total return would be
increased by prepayments. Unscheduled prepayments of principal shorten the
securities' weighted average life and may lower their total return. The value of
these securities also may change because of changes in the market's perception
of the creditworthiness of the entity that issued them. In addition, the
mortgage securities market in general may be adversely affected by changes in
governmental regulation or tax policies.
FUND POLICIES
POLICY ON ISSUANCE OF SENIOR SECURITIES. The Fund, as an open-end,
management investment company registered under the 1940 Act, is prohibited from
issuing senior securities. The Fund may not issue preferred stock or debt
securities of any kind, nor may the Fund borrow from any entity other then a
bank.
BORROWING POLICY. The Fund's current borrowing policy is that the Fund
may borrow from banks for investment purposes not to exceed 33 1/3% of the value
of the Fund's total assets, less its liabilities other than such borrowings.
This borrowing, which is a speculative technique known as leveraging, generally
will be unsecured, except to the extent the Fund enters into reverse repurchase
agreements described below. The 1940 Act requires the Fund to maintain
continuous asset coverage (that is, total assets including borrowings, less
liabilities exclusive of borrowings) of 300% of the amount borrowed. If the 300%
asset coverage should decline as a result of market fluctuations or other
reasons, the Fund is 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
4
<PAGE>
that time. Leveraging may exaggerate the effect on net asset value of any
increase or decrease in the market value of the Fund's portfolio. Money borrowed
for leveraging will be subject to interest costs which may or may not be
recovered by appreciation of the securities purchased. The Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate.
Among the forms of borrowing in which the Fund may engage is the entry
into reverse repurchase agreements with members of the New York Stock Exchange
(or subsidiaries thereof), members of the Federal Reserve System, recognized
primary U.S. government securities dealers, or institutions which the investment
adviser of the Fund has determined to be of comparable creditworthiness. These
transactions involve the transfer by the Fund of an underlying debt instrument
in return for cash proceeds based on a percentage of the value of the security.
The Fund retains the right to receive interest and principal payments on the
security. At an agreed upon future date, the Fund repurchases the security at
principal, plus accrued interest. In certain types of agreements, there is no
agreed-upon repurchase date and interest payments are calculated daily, often
based on the prevailing overnight repurchase rate. The Fund will maintain in a
segregated custodial account cash, cash equivalents, or U.S. government
securities or other high quality liquid debt securities at least equal to the
aggregate amount of its reverse repurchase obligations, plus accrued interest,
in certain cases, in accordance with releases promulgated by the Securities and
Exchange Commission. The Securities and Exchange Commission views reverse
repurchase transactions as collateralized borrowings by the Fund. These
agreements, which are treated as if reestablished each day, may provide the Fund
with a flexible borrowing tool.
CONCENTRATION POLICY. The current concentration policy of the Fund
states that it is not the policy of the Fund to invest 25% or more of the value
of its total assets in any one industry. An industry is determined by looking at
the standard industry classification (SIC) code (i.e., if two companies have the
same SIC code, the companies would be in the same industry). However, when
securities of a given industry come to constitute 25% or more of the value of
the Fund's total assets by reason of changes in value of either the concentrated
securities or other securities, the excess need not be sold. The Fund has also
instituted policies and procedures to assist in preventing a violation of the
concentration policy of the Fund. The policy provides that prior to the
investment advisor making a purchase of a security, the chief financial officer,
or designee thereof, must confirm that the purchase will not result in a
violation of the concentration policy. In addition, pursuant to the policy, the
chief financial officer will determine weekly if any portfolio securities have
appreciated in value above 25% such that additional purchases would be
prohibited.
POLICY ON PURCHASING AND SELLING REAL ESTATE AND COMMODITIES. The Fund
may purchase and sell real estate, including land and buildings and securities
of companies whose assets consist of real property and interests therein.
Although the Fund may purchase commodities, the Fund does not purchase or intend
to purchase commodities, and has no policy governing its purchase of
commodities.
POLICY ON MAKING LOANS. The Fund may make both long and short-term
loans to others, including the purchase of non-publicly offered debt securities
on a case-by-case basis.
LIMITATIONS ON FUND POLICIES. The Fund's Trust Indenture provides that
the Fund may, in the sole discretion of the investment advisor and to the
maximum extent permissible by the applicable laws and regulations, engage in all
lawful investment activities. Without limitation on any other investment
activities, the Fund reserves freedom of action to engage in the foregoing types
of activities specified in Section (8)(b) of the 1940 Act. The extent to which
the Fund intends to engage in the foregoing activities is entirely dependent
upon the market conditions and the economic environment in which the Fund must
5
<PAGE>
operate. Thus it is not practical to predict the extent to which the Fund will
or may engage in such activities. The Fund intends to engage in these activities
to the maximum extent permissible under applicable laws and regulations when, in
the judgment of the investment advisor, such activities appear to be beneficial
to the Fund and its shareholders. Accordingly, the risks involved in an
investment in the Fund may be greater than the risks generally associated with
many other mutual funds.
TEMPORARY DEFENSIVE POSITIONS
In response to unfavorable market conditions, the Fund may commit up to 100% of
its assets to temporary defensive investments in (i) high-grade debt securities
of all types, (ii) U.S. government securities, and (iii) repurchase agreements.
While the Fund believes that these temporary defensive investments are
consistent with the Fund's investment objective, the rate of return on such
investments tend to be lower and may have an adverse effect on Fund performance.
PORTFOLIO TURNOVER
The portfolio turnover rate during the year dropped significantly from prior
years as a result of a new management philosophy. For the years ended June 30,
1999, 1998, 1997, 1996, and 1995, the portfolio turnover rate was 0%, 48%,
193%, 231%, and 505%, respectively.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES RESPONSIBILITIES
Pursuant to the Trust Indenture of the Fund, the Trustees possess full,
exclusive and absolute power, control and authority over the Fund property and
the business of the Fund to the same extent as if the Trustees were the sole and
absolute owners of the Fund property and business in their own right. This
authority is exercised free from any power or control on the part of the
shareholders of the Fund, except as may be required by law. The Trustees may
also delegate certain functions as may be permitted by the Trust Indenture.
MANAGEMENT
TRUSTEES AND OFFICERS. The following table sets forth certain
information concerning the Trustees and officers of the Fund.
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name, Address, and Age Age(1) with the Fund During Past 5 Years
- ---------------------------- --------- ----------------------------- ------------------------------
<S> <C>
PAUL F. WAGNER 81 Chairman of the Board of Chairman:
1006 Waynewood Blvd Trustees Wagner, Hines & Avery, a
Alexandria, VA 20036 Washington, DC Public Affairs firm
PAUL A. BOWERS, M.D. 87 Trustee Retired from private medical practice
9 Sandringham Road and as a Professor, Obstetrics and
Bala-Cynwyd, PA 19004 Gynecology Jefferson Medical College,
Philadelphia, Pennsylvania
W. MARK CRAIN 47 Trustee Professor of Economics and Research
9603 Concerto Circle Associate with the Center for Study of
Vienna, VA 22182 Public Choice George Mason
University Fairfax, Virginia
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name, Address, and Age Age(1) with the Fund During Past 5 Years
- ---------------------------- --------- ----------------------------- ------------------------------
<S> <C> <C> <C>
RICHARD P. ELLISON 68 Trustee President and CEO, Intervest Financial
1410 Coventry Lane Corporation. Formerly President, Boat
Alexandria, VA 22304 America Corporation. Director, Potomac
Group Homes, Inc. and Boat America
Corporation
RICHARD O. HAASE 64 Trustee Vice President: Maiden, Hasse & Smith,
7026 Elizabeth Drive a Washington DC real estate valuation
McLean, VA 22101 company
MAX KATCHER 69 Trustee and President of the Consultant to and former President of
8408 Carlynn Drive Fund Ameritor Financial Corporation. Former
Bethesda, MD 20034 Executive Vice President of the Fund,
Ameritor Industry Fund, Ameritor
Investment Fund, and Steadman
Technology and Growth Fund
CAROLE S. KINNEY (2) 53 Trustee and Secretary of the Chairman of the Board of Ameritor
8020 Thornley Court Fund Financial Corporation, National
Bethesda, MD 20817 Association of Securities
Dealers-Agent, Former stock broker with
Solomon-Smith Barney
JEROME KINNEY 70 Treasurer of the Fund
8020 Thornley Ct. President of Ameritor Financial
Bethesda, MD 20817 Corporation
JOHN T. TURNER 65 Trustee Senior Vice President, SYNTEK
1125 Trotting Horse Lane Technologies, Inc.
Great Falls, VA 22066
</TABLE>
- -------------
(1) As of March 31, 1999.
(2) Interested person as defined by Section 2(a)(19) of the Investment Company
Act.
COMPENSATION. The following table sets forth the compensation of the
members of the Board of Trustees for the fiscal year ended June 30, 1999.
Trustees are paid $300 per meeting attended plus reimbursement for certain
expenses of attending the meeting. No officer received compensation from the
Fund exceeding $60,000. The Fund, the other Ameritor funds, and Ameritor
Financial Corporation do not provide any pension or retirement benefits.
<TABLE>
<CAPTION>
Total Compensation from Fund
Aggregate Compensation and Fund Complex Paid
Name and Position from the Fund (1) to Trustees (1)
- ------------------------------------- -------------------------------------- ---------------------------------------
<S> <C> <C>
PAUL F. WAGNER $ 600 $2,000
Chairman of the Board of Trustees
PAUL A. BOWERS, M.D. $ 600 $2,000
Trustee
7
<PAGE>
Total Compensation from Fund
Aggregate Compensation and Fund Complex Paid
Name and Position from the Fund (1) to Trustees (1)
- ------------------------------------- -------------------------------------- ---------------------------------------
W. MARK CRAIN $ 600 $ 600
Trustee
RICHARD P. ELLISON(2) -- --
Trustee
RICHARD O. HAASE $ 600 $ 600
Trustee
$ 74,000
MAX KATCHER (2) $ 49,000
Trustee and President of the Fund
$4,000 $ 6,000
CAROLE S. KINNEY (2)
Trust and Secretary of the Fund
JOHN T. TURNER (2) -- --
Trustee
- -------------
</TABLE>
(1) Includes compensation for serving on the Boards of Trustees of the
Fund, as well as the Ameritor Industry Fund and the Ameritor Investment
Fund.
(2) Became a member of the Board of Trustees on June 16, 1999.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
At June 30, 1999, no person beneficially owned of record, or to the knowledge of
the Fund, beneficially owned, more than 5% of the then outstanding shares of the
Fund. Furthermore, no person has exerted himself or herself as a party in
control of the Fund and there has been no adjudication under section 2(a)(9) of
the 1940 Act that control exists.
At June 30, 1999, the Trustees and officers of the Fund, as a group beneficially
owned no shares in the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISOR; SERVICES PROVIDED
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Ameritor Financial Corporation which has its principal offices
at 1730 K Street, N.W., Washington, D.C. 20006. All voting stock of Ameritor
Financial Corporation is owned by United Securities, Inc., a Maryland
corporation whose sole shareholders are Carole S. Kinney and Charles T.W.
Steadman.
Since commencing business through its predecessor, William Allen Steadman &
Company, in 1932, the advisor has principally engaged in the business of
providing continuous investment supervision for the Funds. Under the terms of
the Advisory Agreement, the advisor manages the investments of the Fund and is
responsible for overall management of its business affairs subject to
supervision of the Trustees. Max Katcher, consultant to Ameritor Financial
Corporation and President of the Fund, is primarily responsible for the
day-to-day management of the Funds' portfolios. As compensation for its
services, each Fund pays to the advisor a monthly advisory fee at the annual
rate of 1% of the first $35,000,000 of the average daily net asset value of the
Fund, 7/8 of 1% on the next $35,000,000 and 3/4 of 1% on all
8
<PAGE>
sums in excess thereof. The advisory fee is higher than that paid by many other
investment companies.
The Fund paid investment advisory fees during the last three fiscal years as
follows: June 30, 1999, $44,520; June 30, 1998, $41,538; June 30, 1997, $45,410.
Under an agreement with the Fund which is contained in the approved minutes of
the Fund, Ameritor Financial Corporation also serves as Transfer and Dividend
Disbursing Agent and Agent for Administration of Shareholder Accounts
(hereinafter "delegated services") for the Fund. The fee for such services is
computed on the basis of the number of shareholder accounts calculated as of the
last business day of each month at $1.35 per account, per month. The last
increase in fee amount was made on May 21,1986 (effective retroactive to May 1,
1986) and renewed annually by the Trustees since that date. The Fund paid fees
for delegated services for the last three fiscal years ending as follows: June
30, 1999, $25,664; June 30, 1998, $28,299; and June 30, 1997, $36,859.
Ameritor Financial Corporation also receives reimbursements from the Fund for
salaries and benefits of its employees who perform directly attributable
functions to the Fund other than investment advisory and shareholder services.
These functions include: fund accounting, reviewing the Fund's internal
financial reports; coordinating the editing, printing and mailing of reports to
the Fund's shareholders; internal audit of the Fund's books, transactions, and
daily pricing; compliance with SEC regulation, including registration;
preparation of materials for Trustees' meetings; legal and other administrative
functions; and clerical assistance related to the above. Additionally, Ameritor
Financial Corporation receives reimbursements from the Fund for rent computer
expenses. Reimbursements for the fiscal year ending June 30, 1999 totaled
$153,282.
Ameritor Financial Corporation assumes no responsibility under the Advisory
Agreement other than to render the services called for thereunder, in good
faith, and is not responsible for any action of the Fund in following or
declining to follow any advice or recommendation. It is not liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Advisory Agreement relates, except for a loss
resulting from willful misfeasance, bad faith, gross negligence or reckless
disregard in the performance of its duties under the Advisory Agreement.
Directors, officers and employees of the investment advisor have the unlimited
and unrestricted right to engage in any other business or to devote time and
attention in part to the management or other aspects of any other business,
whether of a similar or dissimilar nature.
The Advisory Agreement also provides that the Fund will pay all of its ordinary
expenses of operation except specifically excepted, such expenses of operation
including, but not being limited to, the following: (i) the expenses of
maintaining its own books of accounts; (ii) the expenses of its custodian, the
transfer agent and dividend disbursing agent; (iii) the expenses of computing
the daily net asset value of the shares; (iv) the fees and expenses of the
Trustees including, contrary to most other funds, the fees of those Trustees who
also may be directors of the investment advisor or its subsidiary corporation;
(v) the expenses of meetings of shareholders; (vi) the expenses of printing and
mailing of all shareholder reports and other required reports and documents
provided shareholders, including the cost of printing and mailing prospectuses
to shareholders; (vii) taxes of any kind assessed against the Fund; (viii)
interest and commissions; (ix) Securities and Exchange Commission registration
fees; (x) state registration fees; (xi) the expenses of trust existence; (xii)
all or part of the salaries of the fund officers and other employees who also
may be directors or officers or employees of the Adviser or its subsidiaries;
(xiii) the fees of auditors; (xiv) the fees of legal counsel; (xv) travel,
entertainment, publication, telephone, telegraph, office space rent; and (xvi)
all other ordinary expenses of operation. The Fund also will pay all
extraordinary expenses of whatever kind unless such expenses have been
specifically assumed by the investment advisor.
9
<PAGE>
PRINCIPAL UNDERWRITER
The Fund currently has no principal underwriter.
BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE TRANSACTIONS AND SELECTION
Ameritor Financial Corporation makes decisions as to buying and selling
investment securities, subject to supervision by the Fund's Board of Trustees.
It is the practice of the Fund to seek the most favorable prices and execution
of orders for the purchase or sale of portfolio securities, taking into
consideration the facilities and services of a particular broker or dealer.
Subject to these considerations, the Fund has authorized the investment advisor
to place a portion of such business on a principal or agency basis with eligible
brokers who have provided statistical, quote, and research material to Ameritor
Financial Corporation. Research services include written and oral advice,
analyses and reports concerning issuers, industries, securities, markets,
economic factors and trends and portfolio strategy. The Fund has been informed
that, to the extent brokerage is allocated to obtain statistical, investment,
research, or quotation services, the investment advisor will be assisted in
providing to the Fund more thorough and complete advisory material. Although
such services may tend to reduce the expenses of the investment advisor in
rendering investment advice to the Fund, the value of the services is not
determinable. Ameritor Financial Corporation's investment personnel determine
the overall reasonableness of commissions paid by rating brokers or dealers on
such general factors as execution capabilities, quality of research and
financial condition, and net results of specific transactions in such terms as
price, promptness, size of order, and difficulty of execution.
The Fund's investment adviser, acting on behalf of the Fund, is authorized to
pay a brokerage commission in excess of that which another broker might have
charged for effecting the same transaction, in recognition of the value of
brokerage or research services. The investment adviser and the Trustees consider
the above allocation of brokerage to be consistent with the Fund's brokerage
policy. Brokers do not exercise investment discretion as to the Fund's portfolio
securities, hence no brokerage is allocated for such service.
The following table sets forth the amount of brokerage paid by the Fund and the
total volume of transactions for the periods indicated.
<TABLE>
<CAPTION>
For the fiscal year ended June 30,
----------------------------------
1999 1998 1997
---------------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
Transactions.............. $748,000 $4,888,372 $16,916,669
Brokerage................. $3,790 $18,730 $88,713
</TABLE>
As the above table indicates, during the year ended June 30, 1999, the total
amount of transactions and the brokerage paid thereon decreased substantially.
Brokerage decreased 79.8%, while the amount of transactions decreased 84.7% from
fiscal 1998 to fiscal 1999. This decrease is consistent with a new management
philosophy that has also resulted in a portfolio turnover rate that has
decreased significantly.
DIRECTED BROKERAGE
During the Fund's fiscal year ended June 30, 1999, Ameritor Financial
Corporation directed brokerage
10
<PAGE>
transactions and paid brokerage commissions as follows because of research
services provided by Dean Witter Reynolds, Inc. of $300 on transactions of
$2,500 and Fahnestock & Co. Inc. of $3,490 on transactions of $745,500.
The following table details transaction amounts and commissions paid to brokers
during the last fiscal year for the Fund as well as the percentage of
transactions and commissions as related to the total for the Fund.
<TABLE>
<CAPTION>
Amount of Percent of Total Percent of Total
Broker Transactions Transactions Commissions Commissions
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Fahnestock & Co. $745,500 99.60% $3,490 92.00%
Dean Witter $ 2,500 .40% $ 300 8.00%
Total $748,000 100.00% $3,790 100.00%
======= ====== ===== ======
</TABLE>
DESCRIPTION OF FUND SHARES
The Fund is organized as a common law trust under the laws of the District of
Columbia and has outstanding only one class of shares of beneficial interest.
All shareholders have equal voting rights, and all shares participate equally in
dividends and other distributions by the Fund, and in the residual assets of
such Fund in the event of liquidation. Fractional shares have the same rights
proportionately as do full shares, except that fractional shares do not have
voting rights. Shares of the Fund have no preemptive rights and no conversion or
subscription rights. The Fund does not hold regularly scheduled annual
shareholders' meetings. Special meetings are called when required by applicable
laws and regulations. No shareholder of any Fund shall be subject to any
liability to any person in connection with the property or affairs of any such
Fund. The shares of the Fund are not subject to mandatory redemption and or
subject to a sinking fund.
In addition, the governing documents of the Fund contain several other
provisions relating to shareholders' rights that are uncommon to most other
mutual funds including: (a) trustees hold office for a term of unlimited
duration, (b) shareholders are entitled to vote for or against any amendments to
the Trust Indenture only under limited circumstances, (c) shareholders are not
entitled to vote for or against a termination of the Fund, and (d) except as
otherwise required by law, shareholders may call special meetings only upon a
vote of 90% of the outstanding shares.
As interpreted by the staff of the Securities and Exchange Commission, the 1940
Act provides shareholders of the Fund with certain rights with respect to
removal of Trustees. Under these provisions, shareholders may remove one or more
Trustees by declaration or vote of two-thirds of each Fund's outstanding shares.
The Trustees will promptly call a meeting of shareholders for the purpose of
voting upon the question of removal of Trustees when requested to do so by the
record holders of not less than 10% of the outstanding shares of the Fund. The
Fund will comply with these procedures.
The Trust Indenture of the Fund provides that there shall not be cumulative
voting by shareholders for the election of Trustees. The absence of cumulative
voting rights means that holders of a majority of the shares voted at a meeting
of shareholders may, if they so choose, elect all Trustees to be selected, thus
precluding minority shareholder representation among the Trustees. Other than a
provision of the Act requiring every shareholder to have equal voting power, no
provision of the Act requires cumulative voting.
11
<PAGE>
Finally, a provision of the Trust Indenture of the Fund permits the Trustees to
limit the amount of Fund shares owned at any one time by any one person to 5% of
Fund shares. This provision allows the Trustees to prevent a person from
becoming an affiliated person within the meaning of Section 2 of the 1940 Act.
There is no provision of the Act that limits the percentage ownership one person
may have in an open-end investment company.
PURCHASE AND PRICING OF SHARES
PURCHASE OF FUND SHARES
The Fund is currently in the process of registering Fund shares for sale in
certain states. The Fund will offer the shares at net asset value without
payment of any sales fee (load) or commission when purchases are made directly
from the Fund. Shares purchased through registered broker-dealers may incur a
transaction fee.
To make an initial investment and open an account, complete the attached
application and forward it with a check or money order for $1,000 or more, made
payable to Ameritor Security Trust, 1730 K Street, N.W., Washington, D.C. 20006.
Initial investments of less than $1,000 will not be accepted.
After an account has been established, a confirmation will be issued indicating
the amount invested, the number of shares purchased, and the purchase price per
share (net asset value per share). The confirmation will include a deposit stub,
which may be used to make an additional investment of $100 or more at any time
by completing the form and mailing with a check in the appropriate amount.
Additional investments of less than $100 will not be accepted.
Investments received prior to the closing of the New York Stock Exchange
(currently 4:00 p.m., New York Time) and are in good order will be credited at
the net asset value determined at the close of the exchange on that day.
Investment received after closing will be credited at the net asset value on the
next subsequent day in which the net asset value of the Fund is calculated.
All investments are subject to our acceptance and subject to compliance with
state and federal securities laws. The Fund may decline to accept an investment
when in the judgment of the Fund's investment advisor, the acceptance of such
investment would not be in the interest of existing shareholders or after
consultation with counsel, such investment would violate any state or federal
securities law. This determination is made upon receipt of the purchase order or
as soon thereafter as reasonably practicable. The prospective investor whose
order is not accepted will have his or her check or money order returned as soon
as possible thereafter. This Prospectus does not constitute an offer to sell, or
the solicitation of an offer to buy, any securities offered hereby to any person
in any jurisdiction in which such offer or solicitation would be unlawful.
Stock certificates for shares are ordinarily not issued, as they are not
necessary and complicate redemption.
OFFERING PRICE OF FUND SHARES
Fund shares are bought and sold at the net asset value next calculated after the
buy or sell order is placed. The Fund's net asset value per share is determined
at the close of trading on the New York Stock Exchange (currently 4:00 p.m., New
York Time) on days when the New York Stock Exchange is open for business. It is
computed by dividing the value of net assets (I.E., the value of the assets less
liabilities) by the total number of shares outstanding. Portfolio securities are
valued at the last sale price on the national
12
<PAGE>
securities exchange or national securities market on which the securities are
primarily traded. Securities not listed on an exchange or national securities
market or securities for which there were no transactions are valued at the mean
between the most recent reported bid and asked prices. Any securities or other
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by the Trustees. Debt securities having
remaining maturities of less than 60 days are valued by the amortized cost
method, unless the Trustees determine this is not fair value. Expenses and fees,
including the management fee, are accrued daily and taken into account for the
purpose of determining the net asset value.
TAXATION OF THE FUND
Currently, the Fund does not qualify as a regulated investment company ("RIC")
taxable under the rules of Sections 851 through 855 of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). The Fund is taxed under
the normal corporate tax rules under Subchapter C of the Code. It is anticipated
that such tax status as a non-RIC shall continue indefinitely. While not being
qualified as a RIC will permit the Fund to utilize certain loss carryforwards,
which at June 30, 1999 totaled approximately $4,974,000, it will not be able to
take advantage of certain potentially favorable tax rules applicable to electing
qualified regulated investment companies.
In the event the Fund qualifies as a RIC in the future, distributions of any
taxable net investment income and of any excess of net short-term capital gain
over net long-term capital loss and capital loss carryovers, if any, will be
taxable to shareholders as ordinary income. Further, in qualifying years, to the
extent that long-term capital gains exceed short-term capital losses and any
capital loss carry forwards, they may be distributed to shareholders and, if
distributed, will be taxable to the shareholders as long-term capital gain.
Under the federal income tax law, the Fund is required to report to the Internal
Revenue Service all dividend distributions. Under the backup withholding
provisions, all distributions by the Fund may be subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish the Fund with their correct taxpayer identification numbers and
with required certifications regarding their status under federal income tax
laws. If the withholding provisions are applicable, any such distributions will
be reduced by the amounts required to be withheld. Investors should consult
their tax advisors about the applicability of the backup withholding provisions.
CALCULATION OF PERFORMANCE DATA
The Fund will calculate its total rate of return for certain periods by
determining the average annual compounded rates of return over these periods
that would cause an investment of $10,000 (with all dividends and distributions
reinvested) to reach the value of that investment at the end of the periods. The
Fund may also calculate total rates of return, which represent aggregate
performance over a period or year-by-year performance. The average annual total
rate of return for Fund shares for the one year, five year, and ten year periods
ended June 30, 1999 are 46.33%, 13.40%, and 5.72%, respectively.
FINANCIAL STATEMENTS
The Fund's Financial Statements and related notes for the fiscal year ended June
30, 1999 are incorporated herein by reference to the Fund's Form N-30D filed
with the Securities and Exchange Commission on October 1, 1999 (SEC File Number:
811-00018).
13
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
Exhibit Description
------- -----------
(a) Amended and Restated Trust Indenture of Ameritor Security
Trust (1)
(c) Specimen share certificate (1)
(d) Ameritor Security Trust Amended and Restated Investment
Advisory Agreement (1)
(g) Custodian agreement and depository contract with Crestar
Bank N.A. (1)
(i) Opinion of Manatt, Phelps & Phillips, LLP as to the
legality of the securities being registered (1)
(n) Financial Data Schedule (2)
(x)(i) Power of Attorney of John T. Hayward (3)
(x)(ii) Power of Attorney of Paul A. Bowers (3)
(x)(iii) Power of Attorney of Paul F. Wagner (3)
(x)(iv) Power of Attorney of W. Mark Crain (3)
(x)(v) Power of Attorney of Richard O. Haase (3)
(x)(vi) Power of Attorney of Carole S. Kinney (3)
(x)(vii) Power of Attorney of John T. Turner (3)
(x)(viii) Power of Attorney of Richard P. Ellison (3)
------------
(y)(i) Consent of Reznick Fedder & Silverman, P.C.
(y)(ii) Consent of Manatt, Phelps & Phillips, LLP (contained in
exhibit (i))
------------
(1) Incorporated by reference to the Exhibits to the Registration Statement on
Form N-14 originally filed with the SEC on January 1, 1997 (SEC File Number:
333-20889).
(2) Contained in electronically filed version only.
(3) Incorporated by reference to the signature page of the Post-effective
Amendment No 15 to the Registration Statement on Form N-1A filed with the SEC on
June 30, 1999.
14
<PAGE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
None.
ITEM 25. INDEMNIFICATION
Not applicable.
Section 5.3 of the Amended Restated Trust Indenture of Ameritor
Security Trust and Declaration of Trust (the "Trust Agreement"), provides that
the Fund shall indemnify each of its trustees, advisors, officers, employees,
and agents (including any person who serves at the request of the Fund as a
director, officer, partner, trustee or the like of another organization in which
the Fund has any interest as a shareholder, creditor or otherwise) against all
liabilities and expenses, including amounts paid in satisfaction of judgments,
in compromise, as fines or penalties and as counsel fees, reasonably incurred by
such person in connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, in which the person may be involved
or with which the person may be threatened, while acting as a trustee or
advisor, or as an officer, employee, or agent of the Fund or the trustees, or
thereafter, by reason of the person being or having been a trustee, advisor,
officer, employee or agent. However, indemnification shall not be available with
respect to any matter as to which such person has been adjudicated to have acted
in bad faith or with willful misconduct or reckless disregard of such person's
duties or gross negligence or not to have acted in good faith in the reasonable
belief that such person's action was in the best interest of the Fund. If the
matter is disposed of by a compromise payment, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other expenses
shall be provided unless such compromise shall have been approved as in the best
interests of the Fund by a majority of the disinterested trustees or the Fund
has received a written opinion of independent legal counsel to the effect that
the person to be indemnified appears to have acted in good faith in the
reasonable belief that such person's action was in the best interests of the
fund. A provision of this section of the Trust Agreement also provides that the
Trust Agreement is not the sole means of indemnification and that the Fund may
indemnify persons as provided by applicable law.
The District of Columbia Code does not contain a provision relating to
the indemnification of trustees, officers, employees, or agents of a trust.
However, under general common law trust principles, a trustee is normally
entitled to reimbursement from the trust for all necessary and reasonable
expenditures made in the execution of the trust if the trustee acted in good
faith for the benefit of the trust. However, under common law trust principles,
property of the trust cannot be used to reimburse the trustee for losses or
expenses incurred by the trustee, unless the trustee has exercised good faith
and common prudence.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISOR
The Investment Adviser provides transfer agent and fund accounting
services to the Copley Fund, Inc. of Fall River, Massachusetts and the
Ehrenkrantz Trust of New York City, New York.
ITEM 27. PRINCIPAL UNDERWRITERS
Not Applicable. The Fund does not have a principal underwriter.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
Each account, book, or other document required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, is maintained
by the Ameritor Financial Corporation at 1730 K Street, N.W., Washington, D.C.
20006.
15
<PAGE>
ITEM 29. MANAGEMENT SERVICES
Not applicable. There are no management-related service contracts to
which the Fund or the investment advisor are a party.
ITEM 30. UNDERTAKINGS
16
EXHIBIT (Y)(I)
[GRAPHIC]
REZNICK FEDDER & SILVERMAN
Certified Public Accountants o A Professional Corporation
4520 East West Highway o Suite 300 o Bethesda, Maryland 20814-3319 o Phone
(301) 682-9100 o Fax (301) 652-1846
CONSENT OF INDEPENDENT AUDITORS
To the Board of Trustees of
Ameritor Security Trust
We consent to the inclusion in Post-Effective Amendment No. 16 to the
Registration Statement under the Securities Act of 1933 and Amendment No. 22 to
the Registration Statement under the Investment Company Act of 1940 of Ameritor
Security Trust, (the "Fund") on Form N-1A (File Number 811-18) of our report
dated August 6, 1999, on our audit of the financial statements and financial
highlights of the Fund, which report is included in the Annual Report to
Shareholders as of June 30, 1999. We also consent to the reference to our firm
in the Condensed Financial Information of the Fund.
/s/ Reznick Fedder & Silverman
------------------------------
Reznick Fedder & Silverman
Bethesda, Maryland
November 11, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Two Hopkins Plaza 212 S. Tryon Street 74 S. Atlantic Avenue 5607 Glenridge Drive
Suite 2100 Suite 1180 Suite 800 Suite 500
Baltimore, MD 21201-2911 Charlotte, NC 28281-8100 Boston, MA 02111-2735 Atlanta, GA 30342-1376
Phone (410) 723-4900 Phone (704) 332-9100 Phone (617) 433-5855 Phone (404) 847-9447
Fax (410) 727-0460 Fax (704) 332-6444 Fax (617) 423-6631 Fax (404) 847-9295
</TABLE>
